When should a bank be liable for bad advice? What about mis-selling or insufficient warning about the risks inherent in a course of action? As the editors of this volume observe, in recent years more and more claims concerning these matters have been filed against banks, sparked in part by the financial crisis of 2007–12; and with increasingly complicated products on offer to both consumers and institutional investors it seems likely that the questions that legal systems will need to address around the scope of the duties banks owe to their customers and counterparties are only set to increase.
This volume contains a number of essays, detailing how eight European jurisdictions (Germany, Austria, France, Italy, Spain, the Netherlands, England and Wales, Ireland) and the US have dealt with a bank's duty of care to date, and how each national legal system answers the above questions. Also included is a chapter on the European Markets in Financial Instruments Directive (MiFID, which sets out EU-wide provisions), and a comparative chapter pulling together threads from the national chapters and placing “a bank's duty of care in a European and comparative law perspective” (p. 3).
The introductory chapter to the volume explains that the legal systems covered were chosen with a focus on European jurisdictions with a large domestic banking sector, striking a balance between common and civil law systems. In some cases, the existence of specific substantive national legal reasons also provided the justification for inclusion (Austria, Spain and the Netherlands). Although such a focus is understandable, it would have been equally interesting to include the Nordic countries. For example, the banking system in Sweden both dominates the financial system and is heavily concentrated. Does that affect bank liability and the approach of regulators and legislators to the scope of bank duties of care? As the editors observe, this topic is both novel and in a state of flux, and so is perhaps something to consider in future work in this field.
The book is principally concerned with duties of care in connection with the provision of investment services, being execution-only services, investment advice and asset management, although in many jurisdictions the duty of care extends beyond this scope. The editors focused their interests on the duty to investigate, duties to disclose or warn of risks, and duties to refuse to provide services, regardless of the legal source of such duties.
The volume is divided into two parts. The first includes the chapters on individual, national legal systems, looking at the scope of a bank's duty of care from the viewpoint of those jurisdictions. The second contains the comparative analyses, looking at these national viewpoints from a European and transnational perspective.
The chapters focusing on national legal systems are informative and thought provoking. The reviewer found particularly interesting some of the suggestions for the future of European legal rules and norms around duties of banks to their customers. For example, in his chapter on MiFID, Professor Busch posits that it would have been better for MiFID II not to have distinguished between independent and non-independent advice, and instead to have provided that all forms of advice should meet certain basic requirements. This seems a valid critique; the average retail investor will not necessarily appreciate the difference between these two categories of advice regardless of the disclosures advisers are required to make, nor understand what that distinction means in relation to the quality of advice provided. The solution that the author suggests is that all advice should comply with the standards of independent advice. As acknowledged by the author, however, that is a relatively high bar for all advisers to meet. One of the requirements for independent advice discussed in this chapter is the requirement to define and implement a selection process to assess and compare a sufficient range of financial instruments. The suggested approach leaves open the question: where this is not possible, would the adviser simply be unable to provide their service? Whilst imposing high standards of investor protection is an important goal, imposing the standards required for independent advice, unamended, across all advisory models could unintentionally limit the access of investors to advice by confining the scope of possible advisory business models.
The chapter covering England and Wales includes some interesting discussion on the scope of claims for payment protection insurance (PPI) mis-selling and the role of the financial ombudsman in determining consumer complaints and ordering redress. One unfortunate omission is that the chapter discusses the case of Harrison v Black Horse Ltd. [2011] EWCA Civ 1128, [2012] Lloyd's Rep. I.R. 521, but does not take into account the subsequent Supreme Court decision in Plevin v Paragon Personal Finance Limited [2014] UKSC 61, [2014] Bus. L.R. 1257. In Plevin, the UK Supreme Court held that Harrison was wrongly decided, overruling it, and in fact found an unfair relationship pursuant to section 140A of the Consumer Credit Act 1974 as a result of a failure to disclose PPI commission. That latter judgment resulted in the UK Financial Conduct Authority issuing new rules and guidance for UK banks on how to handle PPI complaints and how to assess commission disclosures (in March 2017): a point for further consideration in any future edition.
The concluding comparative section does an admirable job of drawing together the threads from the previous chapters. The editors address the themes raised in the earlier national chapters across five topics: scope and content of duties, mistake and fraud, impact of MiFID, the role of financial regulators and broader picture and reform.
In relation to the first two – covering the scope, content and intensity of duties of care, and the doctrines of mistake and fraud – whereas France, Germany, Italy and the Netherlands typically resolve disputes by reference to duties to investigate and duties to disclose or warn, in Spain and Austria disputes with banks are often resolved by reference to the doctrine of error or fraud. In the Netherlands, by contrast, the Dutch Supreme Court has developed a “special” duty of care of banks towards consumers.
Both England and Wales and Ireland tend to favour banks and impose a heavy burden on clients to prove breach of any duty. The absence of any substantive duty of good faith in the relevant legislation for England and Wales, and the principal of freedom of contract (meaning that banks and their clients can generally contract out of any duty of care), are cited as factors safeguarding banks from a high volume of successful claims. That said, in England and Wales breaches of certain regulatory rules are directly actionable at the suit of private persons; in Ireland a similar right of action also covers commercial parties.
Meanwhile, in the US the legal system draws a distinction between investment advisers (who are subject to statutory fiduciary duties to act for the benefit of clients, and duties to investigate and disclose all material factors and avoid misleading clients) and broker-dealers (who are subject to anti-fraud provisions prohibiting misleading omissions or statements, and fraudulent or manipulative conduct). Litigation to enforce these standards is generally limited to regulatory action, and private damages claims are a matter of state legal provision.
Interestingly, and perhaps unexpectedly, the jurisdictions surveyed also do not, as a whole, distinguish between consumers and professionals but instead focus on the circumstances of the case and whether the client had sufficient knowledge to understand that financial product provided. In this respect, as the editors point out, the relevant courts have taken a fairly pragmatic approach and “find and shape the tools in their national legal system to achieve the outcome they deem to be fair, just and reasonable” (p. 373).
Perhaps the most interesting point for the present reviewer was the articulation of differences in how MiFID has affected banks’ duties in the different European jurisdictions, which is also addressed in the final comparative chapter. In France, a violation of a regulatory duty constitutes actionable fault, be it in contract or delict. In Italy, breach of regulatory duty directly triggers private law liability under general rules of civil liability, and in the Netherlands a bank's violation of regulatory duties is tortious on the ground that it constitutes a breach of statutory duty. In England and Wales and Ireland a client's claim for damages is based directly on the bank's violation of MiFID conduct rules, a breach of MiFID conduct of business rules is directly actionable. In England and Wales this right of action is available to private investors (under section 138D of the Financial Services and Markets Act 2000), whilst in Ireland it applies for a broader set of customers (including commercial clients) and breaches (any failure to comply with requirements, not just a conduct of business rules). A similar position is achieved in Austria and Germany; there a breach of conduct of business rules directly constitutes a breach of a private law duty, even though regulatory duties are not ordinarily considered to be of a private law nature.
The editors also discuss the potential for breach of MiFID rules to indirectly impact on a bank's private law liabilities. In Germany, there is increasing academic support for regulatory duties to influence the construction of the banks’ contractual duties, and in the Netherlands the courts frequently specify a bank's duty of care by reference to regulatory duties imposed on the bank, particularly conduct of business rules. The authors also note the potential for a similar baseline in Spain, England and Wales and Ireland. Whether the law will develop in this direction remains to be seen, but this volume shows that there is a huge amount going on in this area, and much thinking that remains to be done. It is encouraging to see sustained comparative analysis of the topic that treats each system as its own and seeks, from this range of approaches, some common threads.
All in all, this books is a fascinating read and is recommended for generalists and specialists alike. Specialists should look forward, one hopes, to a further edition in due course.
