What is investment advice? And was AIG’s collapse reasonably foreseeable?

Rubenstein v HSBC: What constitutes advice, and foreseeability of loss

UPDATE 25 September 2012: The Court of Appeal has overturned the first instance decision discussed below. The Court of Appeal found that the loss suffered by Mr Rubenstein was reasonably foreseeable; he had expressly stated that he wanted to avoid any risk of loss of capital, but the product sold by HSBC (the AIG bond) was a product on which capital could be lost through market movements. So the loss was of a type that was in the reasonable contemplation of the parties and, contrary to the first instance decision, not too remote.

In short: HSBC were advising Mr Rubenstein; their instruction was that there was to be no risk to the capital invested; it was reasonable foreseeable that there could be capital loss on  the AIG bond; so HSBC were in breach of duty and negligent in their advice. More discussion of the Court of Appeal decision in this Taylor Wessing note. And a good summary from Littleton Chambers here.

First instance decision

Mr Rubenstein sold his house in 2005.  He wanted to safeguard the sale proceeds whilst he and his wife looked for a new property. Initially, he intended to place the monies into a conventional deposit account.  But, following the advice of an HSBC financial adviser, the monies were placed into an AIG “Premier Access Bond”.  In correspondence, Mr Rubenstein told the HSBC adviser that “we can’t afford to accept any risk in the investment of the principal sum”.  The adviser replied, “we view this investment as the same as cash deposit in one of our accounts”.

A substantial amount of the principal was lost in the collapse of AIG.  Mr Rubenstein took proceedings against HSBC on the basis that he had been incorrectly advised, in breach of the Financial Services Authority Conduct of Business Rules. The High Court judgment is here.

“Execution-only”, or advice?

As the judge observed, the “issue, in a nutshell, is whether the transaction was an “execution-only” one, or an advisory one”.  HSBC’s contention was that it had simply been executing Mr Rubenstein’s instructions, and so its actions were not governed by the statutory and regulatory regime governing the conduct of investment business.  But if HSBC had been advising Mr Rubenstein and that advice has caused the loss, then the bank would have to compensate Mr Rubenstein.

On the facts, the judge found that HSBC had been giving investment advice and, in doing so, formulated a broad test for distinguishing between an advice and an execution-only service:

“The key to the giving of advice is that the information is either accompanied by a comment or value judgment on the relevance of that information to the client’s investment decision, or is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision of the recipient. In both these scenarios the information acquires the character of a recommendation.”

The test is an objective one; it is irrelevant whether the adviser or Mr Rubenstein thought he was providing only information or whether Mr Rubenstein thought he was being given advice:

“The question is whether an impartial observer, having due regard to the regulatory regime and guidance, and to what passed between the parties, would conclude that advice had been given. Adopting that approach, I am in no doubt that [HSBC] gave advice to Mr Rubenstein.”

And that advice was found to be negligent, as the AIG bond could not be considered as being the same as a cash deposit with minimal risk to the principal sum.

But was the loss foreseeable?

However, Mr Rubenstein was awarded only nominal damages.  The judge held that the negligent advice has not caused the caused.  That loss, incurred because of the collapse of AIG, was not reasonably foreseeable.  The judge agreed with HSBC’s counsel that:

“…the concept of a run on AIG was “so remote that no financial adviser would have been required to point it out as posing a risk to capital”. In my judgment [counsel] was right. What happened to the [AIG bond] on 15 September 2008 and the days following was wholly outside the contemplation of the bank or any competent financial adviser in September 2005.”

I find that the loss was not caused by any negligence on the part of [HSBC] in making the recommendation. I also find that the loss was not reasonably foreseeable by HSBC and is too remote in law to be recoverable as damages for breach of contract or in tort.”

In effect, the court held that the collapse of a major financial institution was not reasonably foreseeable in 2005.  Presumably the court would reach a different conclusion on foreseeability with regard to advice given in 2011.

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