This article looks at a specific, and very serious, complaint by a rich investor against a bank, and considers the implications.

Editor's notes: The following article is by Andrew Wass, a partner at law firm Withers, on a claim by a prominent UK businessman against Credit Suisse. As always, this publication does not necessarily agree with all the comments expressed here, but is pleased to share these insights. 

Richard Desmond, the media mogul whose empire includes Express Newspapers, OK! and Channel 5, has issued a claim against Credit Suisse International (authorised by the Financial Services Authority) for allegedly mis-selling him a £50 million ($78.5 million) derivative instrument, which he argues he did not understand. Credit Suisse has until 14 September in which to file and serve its defence. 

Mr Desmond’s claim comes shortly after eleven banks reached deals with the FSA to compensate SMEs [small and medium-sized enterprises] who were sold (or in some cases even compelled to buy, in order to receive finance) interest rate hedging products which were of questionable value (and in some cases posed a disastrous risk) to their business. The payment protection insurance (PPI) scandal has also exposed the fact that mis-selling was happening on a large scale before the financial crisis.

Are we therefore likely to see Credit Suisse roll over and accept liability? This seems highly unlikely. In the first instance, Richard Desmond has several large hurdles to overcome in order to establish a good claim against Credit Suisse.

Unlike the SMEs (including a patisserie and a fish and chip shop) which were mis-sold complex and expensive hedging products that they did not understand or need, or individuals taking out a credit card with PPI that they did not know about, Mr Desmond is the chairman of Northern & Shell (and has been since he found the company in 1974). His company now has an annual turnover of over £700 million (around $1.1 billion) and is advised by leading law and accountancy firms. Mr Desmond’s personal wealth was estimated by the Sunday Times in 2011 to stand at around £950 million (although apparently the papers filed at court estimated his wealth at a mere £200 million). 

As such, the level of knowledge and experience which might be expected of him could be sufficient to justify him having signed an “elective professional client” declaration. Certainly he would qualify as a "high net worth" investor. We do not know if Mr Desmond did in fact elect to be treated as a professional client. However, if he did, he should have received a warning from Credit Suisse that being treated as a professional client would mean that he could receive promotions of riskier types of investments (which are not available to ordinary retail clients) and that he would not be entitled to the same level of protection as a retail client.

In particular, professional clients are considered to be more experienced, knowledgeable and sophisticated and able to assess their own investment risk. A line of recent case law since the Court of Appeal decision in Springwell v JP Morgan Chase Bank has confirmed that commercial parties must look to their own interests when entering into financial transactions.

Professional

Even if Mr Desmond did not elect to be treated as a professional client (and was therefore treated by Credit Suisse as a retail client), he would need to show that the instrument which he bought was actually unsuitable for him. A particular investment may be unusual, complicated or expensive, but it does not follow that the investment therefore must be unsuitable. Mr Desmond is an extremely high net worth individual. His financial needs and risks will not be the same as ordinary investors and certain more esoteric investments may have been suitable for him, where they would not be suitable for another type of investor.  

Finally, even if it is found that the instrument was indeed not suitable for him and that Credit Suisse had negligently mis-sold the instrument, in order for Mr Desmond to recover against Credit Suisse he must establish that the mis-selling actually caused him loss (and that the loss was foreseeable). In relation to showing causation, the recent case of Zaki v Credit Suisse shows that it can be very difficult, even where mis-selling is shown to have occurred, in proving that it caused the investor loss. That case also involved a wealthy businessman, Mr Zeid, (who was deceased by the time of the action) whose family alleged that he had been mis-sold an instrument by Credit Suisse.

The claimants argued that Mr Zeid did not understand the structured notes which he had been sold, but the court found that on the balance of probabilities Mr Zeid did understand the basic structure of the notes. Credit Suisse had breached the FSA rules on suitability and made a recommendation to its customer, Mr Zeid without taking reasonable steps to determine whether it was suitable for him. However, notwithstanding that, the court found that Mr Zeid was an experienced businessman who made investment decisions on the basis of his own views and was unlikely to rely on the bank’s advice. Consequently, the court held that Mr Zeid would have bought the investments regardless of the bank’s advice. The claim that Credit Suisse had caused the loss therefore failed. Mr Desmond has a similar reputation for being a forceful businessman who relies on his own judgment. 

Regarding the question of foreseeability, Mr Desmond apparently bought the instrument in 2007, just before the biggest financial crisis in nearly one hundred years. Mr Desmond’s legal team will be delighted to have heard the news on 12 September 2012 (after they had issued their claim against Credit Suisse) that the Court of Appeal has overturned the High Court’s decision in Rubenstein v HSBC Bank Plc. The High Court had held that even though in that case HSBC had acted negligently and mis-sold a life assurance bond to Mr Rubenstein in breach of its regulatory duties, the market turmoil in September 2008 was not foreseeable and the loss was therefore too remote for Mr Rubenstein to recover. The Court of Appeal held that the loss which Mr Rubenstein had suffered was of a sort which was foreseeable and awarded Mr Rubenstein damages.  

Contractual claim

There is usually a six-year limitation period in which to bring a contractual claim under English law. This means that Mr Desmond was facing the prospect of being time-barred from bringing a claim if he did not do so by the end of 2013. Many other investors who were potentially mis-sold investments before the financial crisis (which has tended to expose certain unsuitable investments) will be in a similar position. 

Interestingly, even though the claimants in Zaki were ultimately unsuccessful, the FSA launched its own investigation into Credit Suisse’s selling of structured capital at risk products to wealthy private banking advisory customers in 2011. The FSA fined Credit Suisse £5.95 million for the mis-selling. The FSA also brokered an agreement with Credit Suisse, under which Credit Suisse agreed that where a customer had been advised to purchase an unsuitable product, redress will be paid out to ensure that they have not suffered financially as a result. 

This agreement would seem to dispense with any requirement for the customer to show causation or foreseeability (and of course, avoid the need for the customer to take Credit Suisse to court in the first place). Mr Desmond may have difficulty persuading the courts that he should recover for his loss. He may find that the best prospects for recovery would be under a settlement brokered by the regulator. However it is difficult to mobilise the FSA to take action on behalf of a single investor - complaints directly to the regulator will often be met with the standard response that “the FSA does not deal with individual complaints”.