Mis-selling of Unsuitable Financial Products: Credit Suisse Loses S138D FSMA Litigation Case

In Abdullah and others v Credit Suisse (UK) Limited and Credit Suisse Securities (Europe) Limited [2017] EWHC 3016 (Comm), the High Court has given judgment in favour of private person claimants in their mis-selling action for damages against a major bank. Credit Suisse lost the claim because they were judged to have mis-advised and mis-sold complex financial instruments (structured products) causing a USD $30 million loss to the Haider Abdullah family.

Mr Justice Andrew Baker determined this claim for breach of statutory duty under s.138D(2) of the Financial Services  and Markets Act 2000 (FSMA) by the bank in advising the Claimants to invest in three structured capital at risk products (SCARPs) sold under an advisory agreement that were unsuitable because it should have known that the Claimants were “low-risk investors unwilling to contemplate anything more than minimal risk of loss of capital”. The Claimants were judged to be entitled to damages to reflect the position they would have been in had they not purchased one of the complex structured products.

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Abdullah v Credit Suisse: Summary of the Facts 

The Claimants are a wealthy Kuwaiti family who held a joint private banking account with Credit Suisse. During 2008, following the advice of the bank, they invested in three SCARP Notes net of borrowing for approximately USD $26 million:

  1. Note 18 (the first Note mis-sold by the bank) was a USD $20 million 3-year equity barrier SCARP bet on major stock indices (referenced to the Eurostoxx 50, S&P 500 and Nikkei 225 indices as well as the Swiss Market Index) purchased in May 2008.
  2. Note 19 (the second Note) was a USD $2.4 million 1-year bet on the stock prices of three major international banks.
  3. Note 20 (the final Note) was bought during the fiscal turmoil following the collapse of Lehman Brothers in October 2008. The contemporary market volatility caused the in-built barriers of some of the Claimant’s other Notes with the bank to be breached and as such Note 20 was issued as a “switch” trade where their existing portfolio was subject to “jumbo” restructuring into a consolidated Note.

Immediately after the final Note settled in October 2008, the Claimants decided not to meet a margin call issued by Credit Suisse and refused to deposit further securities to cover potential losses (they were assured that the switch would not require additional funds) resulting in the liquidation of their USD $30 million investment and leaving them overdrawn by over USD $300,000.

Credit Suisse Breached Statutory Duties Owed under FSMA

The Claimants sought damages under s.138D of FSMA 2000 which provides that a private person who suffers financial loss as a result of breach of the regulatory rules may bring a statutory claim for compensation.

“contravention by an authorised person of a rule made by the FCA is actionable at the suit of a private person who suffers loss as a result of the contravention”

– Section 138D of FSMA 2000

The Claimants then argued that the bank owes them the duties enshrined in the FCA’s Conduct of Business Sourcebook (COBS) rules:

The products were unsuitable for the Claimants

  • [Credit Suisse] did not take reasonable steps to ensure that any personal recommendation was suitable for the client (in breach of COBS 9.2.1R).
  • [Credit Suisse] did not have a reasonable basis for believing that the transaction recommended met the client’s investment objectives nor that the client had the necessary experience and knowledge to understand the risks involved (in breach of COBS 9.2.2R); and

The Claimants were mislead

  • [Credit Suisse] did not ensure that a communication or financial promotion was fair, clear and not misleading (in breach of COBS 4.2.1R).

Overall, they alleged that the bank did not ensure that the communication or financial promotion was “fair, clear and not misleading”.The Claimants argued that they were “low risk investors” and it was clear from their long relationship with the bank that they were only willing to invest on the basis of very limited risk of loss of capital. They alleged that Credit Suisse gave “bad positive advice” and the bank failed to take reasonable steps to ensure the personal recommendation of a high-risk product was suitable for the clients. This advice neither met their “investment objectives” nor did they ascertain whether their clients had the necessary knowledge to understand the risks involved. The crux of their claim- like many customers who have been mis-sold derivatives- was that the bank “under-estimated the magnitude of risks” involved to them and as such the bank’s bad advice created an ill-conceived willingness in the Claimants to run those risks.

When is a Bank Considered to have Breached its Statutory Duties?

Note 18: This product was unsuitable for their “low risk appetite” and the sale of the product was misleading

  • It was misleading for the bank to convey to the Claimants that the structured product was a low risk investment and that it was very unlikely that the Note barriers would be breached.
  • Their advisor at the bank told them that there was “only a small chance of loss” and “pushed them” into investing. He wrongly assured them that the product was suitable for their “conservative risk appetite”.
  • The advisor coerced them into purchasing by assuring them that his own family had invested on the same terms presented and moreover the judge worryingly found that the Claimants were most likely not even shown an indicative term sheet at their meeting.
  • In fact, the judge agreed with expert evidence that Note 18 was taking a “50:50 bet” on having no capital protection and therefore leaving the Claimants exposed: that is not what the Claimants thought they were buying and not what the bank could reasonably have believed they wanted to buy.

Note 19: The product was not unsuitable as the Claimants knew they were “making a bold, risky investment” and the bank did not mislead them into believing it to be a safe investment

  • Unlike for Note 18, the reason why the bank was not in breach of its duties here was because the Claimant chose on an “informed basis” to take a real risk on what was a relatively small investment of USD $2.4 million for potentially high returns in a volatile market.
  • On this occasion, Credit Suisse did make it very clear that it would be a bold and hazardous investment with a view to a very high return.
  • Therefore, the crux of whether the bank is in breach of its duties comparing the two findings on the Notes is that the “nature of the recommendation” was different. The bank is at fault if it recommends a risky product to a conservative client and misleads them as to the nature of the risk. The bank is not at fault if it recommends a risky product to a client that is well aware of that risk.

Note 20: The product was not unsuitable as the Claimants knew about the risk but the bank did make misleading assurances to induce the purchase of the switch trade

  • The claim for suitability breaches under COBS Rules 9.2.1R and 9.2.2R failed as it was obvious that the investment was highly risky whilst the markets were in turmoil following the collapse of Lehman Brothers. The bank was not in breach as it was reasonable for Credit Suisse to have believed that Note 20 met the clients’ objectives at that particular time.
  • The judge found that the Claimants were well aware of the risk as Note 20 “was obviously not a Note to be buying if you had only a conservative appetite for risk.” The difference with Note 18 and the reason why the Claimants could not demonstrate that they were misled was quite simply that they were aware of the risks.
  • However, Credit Suisse did breach COBS 4.2.1 by asserting that the switch trade would not require further funds. Although the bank was correct in claiming that the switch trade would not require a net purchase price payable for the trade (to buy Note 20 in return for giving up their previous Notes)- due to the different basis for the mark-to-market pricing used for Note 20 and its lower LTV ratio- as soon as the Note was issued the bank assessed the account to suffer from a large collateral shortfall with the margin call that followed leading to the closing of the account.
  • Therefore, there was a breach of COBS 4.2.1 because the assurances given by the bank that the switch trade would not result in needing further investment from them was inaccurate and misleading. This reading of the COBS rule demonstrates that the court applies subtlety in determining whether a Claimant has been induced to buy in a misleading way by taking a wide interpretation. This is promising for future Claimants.
Click to Download Haider Abdullah v Credit Suisse – Commercial Court Judgment

Resounding Rejection of Credit Suisse’s Defence

Credit Suisse attempted to persuade the court that the family were “aggressive investors” looking for high returns who accepted the significant risk of loss of capital and as such were not badly advised. In addition, the bank argued that the losses were not caused by their breach of duty but resulted from the financial crash. The bank also tried to pin the blame on the Claimants by claiming they had committed “financial suicide” when they chose to close their investments after Note 20, which it alleged was so unreasonable a decision that is was the exclusive cause of their loss.  The three main arguments in the Bank’s defence were:

(1) Credit Suisse loses their defence that the Claimants committed “financial suicide” which broke the chain of causation

  • The court did not accept that the Claimant’s refusal to meet the margin call was so unreasonable as to amount to a failure to mitigate loss/was the sole cause of the loss. The judge stated that the family’s decision to close their portfolio was not “irrational” but out of concern that the worst may not be over and “they also felt let down and misled” by the bank.
  • The court robustly rebuked the “financial suicide” defence and therefore provided welcome reassurance to customers that a bank will not be permitted to pin the blame on them for leaving an investment early if the decision is not irrational.

 (2) Credit Suisse loses their defence that the loss was too remote as it was caused by the severity of the financial crash

  • The court did not accept the bank’s contention that the losses were not caused by any breach of duty on its part as they resulted from the extreme nature and severity of the 2008 crash. The essence of the duty of a financial advisor is precisely to protect clients from major market falls by assessing with “due care” that any capital protection barriers were highly unlikely to be breached.
  • Although the loss was exacerbated by the market crash, the resulting loss was still within the scope of the duty broken.
  • Banks will not be permitted to completely abdicate their duties owed to customers by blaming resulting losses solely on extreme fluctuations in the financial market.  

 (3) Credit Suisse loses their defence that the Claimants were contributory negligent

  • The court rejected the bank’s weak defence claiming that the investors failed to read the terms and conditions; failed to take adequate steps to understand the investments and failed to complete a customer profile form (to ensure Credit Suisse had no doubt as to their investment objectives).
  • Judge Davis said: “[The investors took] adequate steps to understand their investments given that they were relying on [Credit Suisse] for risk evaluation. They were simply let down… in respect of that evaluation”.
  • Unsophisticated customers will not be penalised for a lack of due diligence when agreeing to purchase a complex structured product.

Relevance to those Mis-sold Complex Derivative Products?

This is one of very few cases that consider the practical meaning and effect of the FCA’s Conduct of Business Sourcebook rules governing the sale of complex derivatives and the extent of duties owed by banks to their customers. It elucidates the rules concerning the suitability of structured product sales and provides a useful barometer of the court’s future reasoning on when a product is considered to have been sold in a misleading way and how suitability issues will be interpreted under the COBS rules.

Our senior partner, M Ali Akram said:

“This judgment should go some way in encouraging smaller claimants considering or facing litigation against major banks not to abandon their cause of action under s.138D FSMA 2000. It demonstrates that litigation for private persons is a potentially meritorious option with an arguable chance of success either at trial or via alternative dispute resolution settlement. A successful outcome is of course dependent on the facts of any individual case.”

Those with cases against major banks and other financial services institutions should contact our Financial Services Litigation Team to book a preliminary consultation.

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