Causing a stir

Posted 24/01/2013

A recent decision has caused quite a stir within the sphere of practitioners dealing with claims against Independent Financial Advisors. In 2005, a Mr Rubenstein was looking to invest the proceeds of the sale of his property in a risk free investment. He approached an IFA at HSBC and specifically stated that he was looking for a risk free investment. He was advised by HSBC to invest in an AIG fund, which was apparently as secure as a bank deposit. In 2008, of course, the banking system almost reached meltdown, with particular damage being sustained by AIG. Mr Rubenstein lost just under £200,000 from his investment as a result. Mr Rubenstein pursued HSBC to recover those losses and was successful. Why should this have caused such a stir? The established principle set out in great detail by the House of Lords in the case of South Australia Asset Management Corporation -v- York Montague Limited, made clear that professional advisers cannot be liable for losses arising from a general fall in the market. The Rubenstein case seemed to fly in the face of this general principle, because AIG was nothing if not a victim of the extraordinary circumstances in the market in 2008. Was Rubenstein therefore a marked deviation from this general principle? The answer to that question is an emphatic “no”. In the Rubenstein’s case, specific advice was requested on a ‘risk free’ investment. HSBC had recommended an investment vehicle, but had not properly explained the risks to Mr Rubenstein. That failure to explain the risk was negligent. The court rightly found that the advice was negligent. It was not necessary for the parties to be able to foresee the exact nature of the crisis which might cause the investment to slump. Mr Rubenstein had to show that he was negligently advised to invest in a product where he was exposed to risks of that investment falling, and that risk came to pass causing him to suffer loss.The general message is that it is perfectly possible to bring claims against financial advisers and the banks even if those losses appear to have been caused in general by a fall in the market, but it is essential in all of those claims to be able to establish that specific advice has been given and that the specific advice fell below the standard of what one might reasonably expect from a competent Independent Financial Advisor.

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