HSBC advice ruling raises questions that no-one is asking
Commentary has become erroneously fixated on the culpability of the adviser for not predicting the financial crisis.
Of all the issues that are currently taxing the minds of the financial advice fraternity, that of broadly-applied claims relating to mass consumer detriment perhaps sits not-so-proudly at the top.
From FSA consumer redress schemes spiralling into vertiginous sums and that threaten the very existence of many firms, to compensation scheme levies that seem to be on an exponential upward trajectory due to a fallacious interpretation of what an ‘intermediary’ even is, advisers would be forgiven for feeling they are getting the thin end of a steep wedge.
The recent Court of Appeal verdict in a high-profile case involving the advice arm of HSBC will have done little to ameliorate this visceral discontent.
The case relates to advice given to a high flying lawyer, Adrian Rubenstein, to invest the £1.25m proceeds from his house sale into an AIG bond in September 2005. Mr Rubenstein had intended to invest the money for “about a year” and had told the adviser, Matthew Marsden, that he could not “afford to accept any risk in the investment of the principal sum”.
The recommendation to commit to a given investment is a different proposition from one year to the next. How long should foresight last?
The investment was left for a period of three years during which Mr Rubenstein struggled with the vagaries of the property market, before the financial crash claimed the scalp of Lehmans and the bond suffered “exceptional levels of withdrawal requests” as panic spread.
Mr Rubenstein eventually pulled his money from the fund in October 2008, suffering a £186,613 loss in the process.
The case was originally heard in the High Court last year, where Judge Havelock-Allan returned the interesting verdict that the advice process was definitively negligent but that the bank should pay damages of just a nominal £2.
This idiosyncratic ruling reflect the judge’s opinion that the advice process was incontestably flawed - notably due to Mr Marsden failing to conduct a ‘know your customer’ analysis or to properly explain the “market risks” within the bond, which included an allocation to sub-prime mortgage paper - but that the losses were cause by an unforeseeable market crash that occurred after the investment should have ended.
Skip to two weeks ago and in a highly anticipated ruling the Court of Appeal upheld the view of negligent advice, but overturned the decision to apply only nominal damages. Cue the scaremongering.
Among the press coverage of the case was an insidious smattering of testimony from law firms and other advice industry commentators that advisers should pay heed to the ruling as it amounted to a legal precedent that they can be “found negligent for losses caused by unprecedented market conditions”, according to one email in my inbox.
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