Introduction

In a recent case in the Court of First Instance, the Bank of Singapore Limited (“the Bank”) has been found liable for breaching its advisory duty owed to two of its private banking clients in the sale of structured financial products. The case has illustrated what duties are owed by a bank to its clients in an “advisory account” and what steps may be taken by the bank to limit such liability.

Background

The clients, Mr and Mrs Chang (“the Changs”), were an unsophisticated and elderly couple who worked various modest jobs and were 70 and 60 years old respectively when they opened their accounts with the Bank in 2004.

Mr Chang is a cousin to the family which owns Shiu Wing Group, the Pongs. However, he was not in any way connected with the Shiu Wing Group prior to 1997. The Changs had little investment experience and only bought some Hong Kong-listed shares and a small quantity of US Treasury bonds as part of an employees’ pension scheme. However, in 1997, after the Shiu Wing Group sold the Rennie’s Mill plant to land developers for a sum in excess of $12 billion, the Pongs decided to gift 1% of the shares in Shiu Wing Group to Mr Chang and he received approximately $120 million as a result. Also, due to the Pongs’ family connection, the Changs knew a Mrs Li, a relationship manager of Standard Chartered (“SCB”) and started to invest in various low to medium risk financial products with SCB including time deposits, currency linked deposits, mutual funds and insurance. When Mrs Li moved from SCB to the Bank in 2004, the Changs followed her and opened private banking accounts with the Bank out of their trust in Mrs Li.

In their account opening forms and profiles with the Bank, the Changs were classified as medium risk investors. However, during the course of their banking relationship with the Bank, Mrs Li consistently advised the Changs to invest in high risk structured products such as accumulators, equity linked notes, foreign currency options and also provided margin financing for the Changs to carry on carry trade. These are derivative products associated with significant investment risks and sophisticated financial structures. The risks are so significant that a small movement in the price of products can result in huge losses unless the position is hedged appropriately.

The Court’s Ruling

Reliance on Advice of Mrs Li

During the course of their banking relationship, it is apparent that Mrs Chang would wholly trust the advice of Mrs Li. After offering a high risk financial product like an accumulator, Mrs Li would immediately seek the Changs’ approval to invest in such product, sometimes in less than a minute. She did not even explain the nature and associated risks of such products, for example, the current price of the reference asset, the strike price, the duration of the contract and the counterparty in the accumulator contract. The Changs did not notice the problems with their investments or their risk profiles at the Bank until subsequent turmoil in international financial market in 2008 when their son read the statements and became aware of the high risk products they were holding.

Breach of Contractual Duties

The Court held that the Bank was in breach of their contractual duties in their banking agreements. The accounts the Changs opened with the Bank were held to be a non-discretionary account. The Bank argued that it owed no advisory duty to the Changs because it merely provided them with information and expressed views in relation to investments but it did not assume any duty to advise the client, despite the fact that the Changs’ accounts were “established on an advisory basis only (non-discretionary accounts)”. The court, upon a proper construction of the clause, held that as a “non-discretionary account” does not mean it is an execution account where the Bank would not be under any advisory duty and would only execute the instructions of the clients without providing any advice. Thus, the Bank did assume advisory duty to the Changs under the banking agreements.

The Scope of the Advisory Duty

The court has held that are 3 components to the bank’s advisory duty:

• the advisor has to ascertain and have regard to the investor’s investment objectives and risk appetite;
• the advisor must only offer products which are suitable to the investment objectives and risk appetite of the investor; and,
• the advisor has to warn of the risks inherent in the investments that are being offered.

The Court held that the Bank breached its advisory duty to properly advise the Changs. Mrs Li (acting on behalf of the Bank) failed to provide any proper explanation of risks and disadvantages of the investment products to the Changs with regard to their investment objectives and risk appetite, thereby depriving the Changs’ opportunity to make an informed investment decision. Thus, the Bank was in breach of the contractual duty to exercise reasonable care and skill in the performance of the service. Thus, the Bank was held to be liable for the losses of the Changs.

The Implications

Due to the much more stringent regulations introduced by the Securities and Futures Commission and the Hong Kong Monetary Authority in relation to the sale of investment products after the global financial crisis, it is much less likely that a bank would find itself in a similar situation where its employees have failed to explain the terms of the investment products offered and the risks involved. However, banks should review their banking agreements with their customers to ascertain whether they have assumed an advisory duty in their banking relationships. They should also ensure that sufficient limitation and exclusion of liability clauses are included in their banking agreements to limit the banks’ exposure in a mis-selling claim.

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: regcom@onc.hk

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.