The recent decision of the Court of First Instance in Shine Grace Investment Limited v Citibank NA(1) confirms the conventional thinking that a relationship between a bank and a customer does not of itself give rise to a duty of care to advise on the part of the bank.(2) The court dismissed the claimant investor's mis-selling claim against the bank on the basis that neither the terms of the relevant contracts entered into with the bank nor the circumstances of the case suggested that there had been an assumption of a duty to advise by the bank. The court also observed that even if the bank had (contrary to its finding) assumed a duty to advise and been in breach, the claim would have failed as the sole controlling director of the investor company was a strong-minded individual who would have proceeded with her investment decisions regardless of the bank's advice.
The Code of Conduct issued by the Securities and Futures Commission provides that, effective from 9 June 2017, it is mandatory to have a 'suitability clause' in relevant client agreements between banks or financial intermediaries on the one hand and investors on the other, as set out in its code. This provision requires that recommendations of investment products by intermediaries be reasonably suitable in the circumstances – for example, by taking into account the financial strength, investment experience and objectives of the investor.(3) While this provision offers important protection for investors in similar types of transaction, it is important to note that the relevant contracts in this case were entered into before the provision came into force; therefore, they did not incorporate a suitability clause.
The claim in this case arose out of certain equity accumulator contracts entered into between Shine Grace Investment Limited ('the company') and the bank in October 2007 (just before the height of the 2008 financial crisis). The company alleged that it had suffered significant losses as a result of the accumulator contracts. The sole beneficial owner and controller of the company passed away in October 2007, after the contracts had been executed. The claims continued to be pursued by relatives of the deceased.
The company's allegations were briefly as follows:
- the bank was in breach of a duty to advise on the suitability of the accumulator contracts;
- the bank was in breach of an intermediate common law duty of explanation to provide (for example) reasonable, fair, accurate and honest advice and a duty not to mislead; and
- the bank had allegedly misrepresented to the company the risks of entering into the contracts in light of the market conditions in October 2007.
At trial, the bank successfully defended each of the three main allegations.
Central to the company's claim was that the bank had allegedly breached its duty of care in recommending investments to the company. The court first assessed whether the bank owed a duty of care to the company. The court ruled that, in assessing mis-selling type claims between banks and claimant investors, the normal position is that the relationship between bank and investor does not give rise to a common law duty to consider the prudence of an investment transaction from the investor's perspective or to warn them of the risks involved.
Although it is possible for a bank to assume responsibility to provide advice to an investor, the mere provision of advice does not necessarily mean that the bank has assumed such responsibility. Instead, the court should construe the terms and conditions set out in the relevant contracts, as well as the factual circumstances surrounding the dealings between the parties, to determine whether a duty to advise has arisen and, if so, the scope of that duty.
In this case, the court found that the bank had included clauses in the relevant contracts which effectively disclaimed a duty to advise the company. As such, the claim based on a duty to advise failed and, therefore, the issue of breach of duty also fell away. The third allegation (as regards misrepresentation) was dismissed on factual grounds.
The court also noted that the evidence showed that the deceased (in effect, the alter ego of the company at the material times) was a strong-minded investor who was unlikely to have been swayed by any advice by the bank even if it had recommended the accumulator contracts to the company. In effect, she would have allowed the company to enter into the relevant contracts anyway. Therefore, even if a duty to advise had existed and been breached, that breach would not have been the cause of the company's alleged loss.
This case is one of several involving (among other things) mis-selling type claims that have gone to trial in recent years in Hong Kong.(4) It confirms that the assessment of whether a duty to advise exists (and the scope of that duty) rests on the interpretation of the terms of the relevant contracts entered into between the parties.(5) As with most previous mis-selling claims that have gone to trial, the decision in this case is broadly positive for banks and financial intermediaries as it means that they should be able to continue relying on contractual disclaimers (and the like) in similar disputes insofar as investments entered into prior to 9 June 2017 are concerned.
However, since 9 June 2017, the Securities and Futures Commission's Code of Conduct requires that written agreements entered into between a bank or financial intermediary and an investor must include a suitability clause. Therefore, more contractual protection now exists in respect of investments entered into since 9 June 2017 by retail and certain professional investors than was previously the case in respect of negligent advice given by banks and financial intermediaries. Clauses in relevant client agreements which seek to limit or exclude liability imposed by such a suitability clause will not be enforceable. Going forward, banks and financial intermediaries may be more open to considering early settlement of disputes.
For further information on this topic please contact Adrian Chang or David Smyth at RPC by telephone (+852 2216 7000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.
Endnotes
(1) [2018] HKCFI 1737, 30 July 2018.
(2) This general position is set out in Chang Pui Yin v Bank of Singapore (HCCL 12/2013).
(3) See paragraph 6.2 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.
(4) For example, DBS Bank (Hong Kong) Ltd v Sit Pan Jit (HCA 382/2009, CAV 91/2015, FAMV 45/2016), Li Kwok Heem v Standard Chartered International (USA) Ltd (HCA 498/2010) and Chang Pui Yin v Bank of Singapore (HCCL 12/2013). For further details please see "Still no joy for investors' mis-selling claims", "Investor's claim sets up advisory duty", "'Mis-selling' claim fails on appeal", "Claimant investors establish advisory duty against bank" and "Investor's mis-selling claim comes to an end".
(5) The company is entitled to appeal the decision as of right (ie, without the need to seek permission from the court). At the time of writing (and allowing for the High Court's so-called 'August vacation'), it remains to be seen whether the company will do so.
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