The English Court of Appeal has recently awarded damages to a client of an investment adviser after finding that the losses he suffered in the aftermath of a period of unprecedented market turmoil was caused by the negligence of a financial adviser.

Mr Rubenstein had made it clear to the advisor at HSBC Bank that he wanted a risk-free investment for £1.25 million and that he couldn’t risk the loss of the capital which was to be used to buy a new family home. The adviser identified and recommended an AIG Premier Access Bond and confirmed that the investment “…was the same as cash deposited in one of our accounts”.

As a result of the market volatility at the time of the Lehman Brothers’ collapse there was a run on AIG. When Mr Rubenstein withdrew his money he lost approximately £180,000 of his initial capital.

English High Court

The High Court held that the advice was negligent and breached the UK Financial Services Authority ‘Conduct of Business’ rules. The product was unsuitable and exposed Mr Rubenstein to capital losses due to market fluctuations. However the court found that the loss was caused by “extraordinary and unprecedented market turmoil” and could not have been a foreseeable event at the time the advice was given.

The Appeal

The English Court of Appeal disagreed and found that the loss was foreseeable. The connection between the negligent advice and the loss was the combination of putting Mr Rubenstein into a fund which was subject to market fluctuations while at the same time misleading him by saying that the investment was the same as a cash deposit with the bank. In this case there was a more suitable alternative product which would have suffered no loss during the same period.

Impact

This UK judgment, which may be of persuasive value to the courts in Ireland, shows that a financial adviser may expose itself to liability for a client’s loss on an investment, if it misleads the client as to the nature of its recommended investment, and puts its client into an investment which is unsuitable for him, when it could have recommended something more suitable, which would have avoided the loss in question.

Contributed by Judith Roche.

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