Zaki and Zeid v Credit Suisse: Bank breached statutory duty of suitability of advice, but claimant would have done what he did anyway
The financial crisis continues to produce a decent crop of actions against banks for alleged misselling of financial investments. Amongst these is the 2010 leading case of Springwell v JP Morgan Chase Bank – where the investor was contractually estopped from claiming against the bank for misrepresentation – and the more recent case of Rubenstein v AIG, where the investor was negligently advised but the loss suffered was found not to be reasonably foreseeable. We discussed the Rubenstein case in this post.
The High Court on 4 October 2011 gave judgment in Zaki and Zeid v Credit Suisse (UK) Limited. This is another alleged misselling case against a bank. Again, the court found in favour of the bank. This time because – although the bank breached its statutory duty to ensure its advice was suitable for its client – the court found that the client would have bought the investment products concerned anyway.
Facts in brief
Mr Zeid was a prosperous Egyptian businessman. Between February 2007 and June 2008 Mr Zeid purchased 10 structured investment products (the Notes) from Credit Suisse (CSUK), through its employee Mr Zaki. In October 2008 – at the height of the financial crisis involving Lehman Brothers – CSUK issued a margin call which was not met by Mr Zeid. As a result, CSUK liquidated certain of the products, causing Mr Zeid to suffer a loss of £69.4 million. Mr Zeid having died in 2010, the case was continued by his widow and daughters.
The claim at trial was advanced on the basis that CSUK had breached its statutory duty to comply with the Financial Services Authority’s Conduct of Business Rules (COB) until 1 November 2007, and then with the FSA Conduct of Business Sourcebook Rules (COBS) from 1 November 2007.
COB and COBS are made by the FSA under the Financial Services and Markets Act 2000. Section 150 of that Act provides that a person “who suffers loss as a result of the contravention” can seek compensation for a breach of the COB/COBS rules.
What was needed for the claim to succeed?
The parties agreed that Mr Zeid was to be regarded as a “private customer ” under COB and a “retail client” under COBS. Therefore, CSUK was under an obligation, when making a personal recommendation to Mr Zeid concerning an investment, to take reasonable steps to ensure that its advice was suitable (COB 5.3.1 – 5.3.5) and to take reasonable steps to ensure that a personal recommendation was suitable for its client (COBS 9.2.1). So to succeed, the claimants would have to show that:
- CSUK gave Mr Zeid advice.
- That advice was in breach of CSUK’s statutory duty i.e. it was not suitable for the client.
- That breach caused the loss suffered.
1. Did CSUK give Mr Zeid advice?
The court found that CSUK did give Mr Zeid advice. What would advice constitute, asked the judge? Answering his own question:
“Advice on the merits of purchasing a structured product must, I think, refer to the advantages and disadvantages of purchasing the product…”advice on the merits” is to be distinguished from the mere giving of information…Advice requires an element of opinion on the part of the adviser.”
And the judge concluded that on the balance of probabilities and applying that test, CSUK did make recommendations to purchase each of the ten Notes.
2. Was the advice suitable?
Applying the three factors in COBS 9.2 about which information should be gathered to enable a determination of suitability to be made – the client’s knowledge and experience in the investment field relevant to the investment, the client’s financial situation and the client’s investment objectives – the judge found that the first seven Notes sold to Mr Zeid were suitable.
However, the last three Notes sold were not suitable. Those three Notes were sold in 2008; they were linked to equity markets or to individual banking stocks. (The previous seven Notes had been principally rates-based products.) The judge observed:
“By May/June 2008 much had happened in the financial world: UBS, Citigroup and Merrill Lynch had announced substantial losses, central banks had attempted to forestall the resulting credit crunch, global stock markets had suffered substantial falls, Northern Rock had been nationalised and Bear Stearns had been acquired by a rival. To invest in any product linked to equities at such a time was a brave action…I consider that, notwithstanding Mr. Zeid’s appreciation of the risks and his ability to bear the consequences of them materialising, the line had been crossed in May/June 2008. Notes 8-10 were unsuitable…There was therefore a breach of COBS 9.2.1 in that CSUK…recommended the purchase of notes 8-10 and such recommendation was made without taking reasonable steps to ensure that it was suitable for Mr. Zeid.”
3. Did the breach of statutory duty cause the loss?
To answer this question, the judge adopted this test: To show that the breach caused loss, the claimants would need to establish that Mr Zeid would not have acted as he did if the recommendation had not been made.
The judge did not consider that this was established:
“I do not consider that the Claimants have established their case. Mr. Zeid was a successful and wealthy business man. On the evidence…he was a man with his own views on the markets and what was an appropriate investment. Mr. Zaki described Mr. Zeid as “very formidable, he would like to get his own way.” It is likely that Mr. Zeid made his investment decisions on the basis of his own views and unlikely that he relied upon Mr. Zaki’s recommendations…To invest in products linked to equity markets in May/June 2008 one had to have had a serious appetite for investing and to be bullish, brave and confident. Mr. Zeid was, it seems to me, all of those and was determined to get an enhanced return on his money. Mr. Zaki described Mr. Zeid as having an “appetite for continuing to purchase…….He was a pro, he was bullish about the market and he wanted to take advantage.” In deciding to purchase notes 8-10 it is more likely than not that Mr. Zeid relied on his own judgment and not on advice from Mr. Zaki.
If Mr. Zeid had not received advice on the merits from Mr. Zaki he would still have bought the notes and suffered loss when they were liquidated. Put another way, if Mr. Zaki had advised that notes 8-10 were unsuitable, it is more probable than not that Mr. Zeid would still have purchased them and suffered loss when they were liquidated.”
Accordingly, the breach of duty did not cause the loss, and so the claim was dismissed.
Friendly Corporate PSL
To subscribe for our free weekly update e-mail, click here.
