Large-scale retail misselling claims
This brochure deals with large-scale misselling claims by retail investors
that financial institutions may face in a number of key jurisdictions.
It follows our June 2010 brochure, which focused on misselling claims
by institutional investors.
Unlike with institutional misselling claims, which are particularly concentrated in the UK
and US for choice-of-forum and choice-of-law reasons, financial institutions run the risk
of being faced with retail misselling disputes in all major jurisdictions.
The characteristics of such claims may vary from jurisdiction to jurisdiction depending
on a number of features, such as the cost of civil litigation, the possibility of class or
collective actions, the involvement of investor defence organisations, and the enthusiasm
of regulatory and criminal authorities to investigate and enforce retail banking practices.
Several global trends have nonetheless become apparent.
First, the tightened financial and regulatory framework following the 2008 financial
crisis will also greatly affect the financial sector in the retail area. In jurisdictions
across the world, consumer protection in the area of financial services is high on the
political and regulatory agenda. Regulators everywhere, including in jurisdictions
that traditionally focused more on market conduct than on retail practices, are stepping
up their enforcement activity vis-à-vis banking practices that, directly or indirectly,
Second, as part of strengthening consumers’ rights generally, various jurisdictions have
introduced, or envisage introducing, measures to facilitate collective or class actions by
consumers. Such measures will undoubtedly also have an impact on the claims brought
by retail investors against financial institutions.
We hope that you find this brochure informative. We look forward to seeing you at one of
the events that will be organised in various Linklaters offices around the world which will
address in more detail the legal and policy issues of misselling disputes in that region,
be it by retail clients or institutional investors.
Klaus Saffenreuther, Alan Walls
Banking litigation sector leaders.
Belgium and Luxembourg:
A mix of collective civil action, regulatory enforcement and
Large-scale misselling claims by retail investors in Belgium and Luxembourg typically
involve allegations that misleading or insufficient information was provided prior to the
transaction being entered into.
Not only contract and financial law are relevant in such disputes. An issue that
increasingly arises is the tension between financial and consumer protection legislation.
Retail investors argue that, even if a financial institution has complied with all the
information obligations that are contained in financial legislation (e.g. under MiFID or
prospectus law), it may still be liable under consumer protection legislation for having
misrepresented the information provided to them. In certain areas, such as the public
offer of financial instruments, the legislator has adopted statutory rules that exclude
such argument. Such rules unfortunately do not exist in every area where financial
law requirements might conflict with consumer protection considerations. Also, while
Belgian and Luxembourg misselling legislation is driven by EU law, it often goes beyond
a mere one-to-one implementation of the EU law requirements. Investor-friendly rules
are often added, for instance to remove the evidentiary burden from claimants.
US-style class actions are not possible in Belgium and Luxembourg. Retail misselling
disputes are nonetheless increasingly initiated by groups of investors that act collectively,
usually on the basis of initiatives by investor advocacy organisations who offer, on a
for-pay basis, to represent their interests. Such disputes typically consist of a mixture of
large-scale civil litigation, criminal proceedings and/or regulatory investigations, which
are pursued in parallel.
Legal entities can be criminally prosecuted in Belgium and Luxembourg. Practice in
Belgium shows that also financial institutions are criminally prosecuted for banking
practices, either with or without their directors or senior managers.
In Belgium, settlements of misselling claims with the regulatory and criminal authorities
are possible, but must be separately negotiated and entered into. They typically require
that the financial institution concerned either recognise the facts underlying the dispute
or satisfactorily indemnify the investors. This requirement constitutes a significant
impediment to settlements as many banking practices may have a criminal dimension.
Having to recognise the facts can therefore have far-reaching consequences at the
criminal level for both the financial institution and its directors and senior management.
The Belgian criminal authorities have traditionally been more active than the financial
regulators in enforcing and sanctioning practices that affect retail investors. The
significant enforcement and sanctioning powers that regulators have recently obtained,
together with the changed regulatory and policy environment following the 2008
financial crisis, have, however, led to an increased activism by regulators to challenge
certain banking practices, especially vis-à-vis retail investors. This trend is expected
Compliance procedures as evidence in retail
While there are no class actions as such in France, the French Monetary and Financial
Code (Code monétaire et financier) allows for the initiation of a representative action.
Thus, at least two individuals who, as investors in financial products, claim to have
suffered damages that have a common origin through the actions of the same person
may instruct an investor defence organisation to represent their interests in court.
To date, no such action has been taken, and misselling litigation almost exclusively
concerns civil disputes between individual retail clients and investment firms. This may
change in view of the increased enforcement activity and focus by the French Financial
Markets Authority (Autorité des Marchés Financiers or “AMF”) on the quality of the
information provided to retail investors.
Abundant case law exists on misselling claims, which focuses on three general duties for
financial institutions towards retail clients who invest in financial instruments:
> The information duty requires financial institutions to provide their clients with fair
and clear information that is not misleading. French courts particularly examine
the content of the documents provided to the client and whether the risks were
> The warning duty obliges financial institutions to specifically draw the attention
of their clients to the risk of loss if two cumulative conditions are met: (i) the
transaction is risky (e.g. case law considers a futures transaction risky, but not
an interest swap transaction); and (ii) the client is not an informed investor in
respect of the transaction.
> A financial institution’s duty of advice used to be a key notion in misselling claims but
is now of residual importance. Today, French courts refer to either the warning duty
or the rules that implement MiFID, pursuant to which investment firms that provide
investment services other than investment advice or portfolio management have an
obligation to advise their clients when a product or a service is not appropriate.
Over the years, French courts have become more demanding towards financial
institutions offering investment services. Financial institutions must prove that they
have complied with their above-mentioned duties. To limit their legal risks, most banks
implement standard procedures that enable them to evidence this compliance. This
is all the more important as they cannot contractually limit their liability towards retail
clients with whom they enter into securities transactions.
The increasing use of criminal investigations in civil
In Germany, the usual basis for misselling claims is the breach of an investment
advice contract. According to established case law, such contract is concluded
implicitly or by way of implied intent if a retail investor approaches a financial institution
in the course of a potential investment decision, unless the transaction is of the
execution-only type. In that case and notwithstanding the absence of an investment
advice contract, financial institutions still have a limited number of duties in accordance
with the MiFID requirements.
If the relationship with the retail investor is of an advisory nature, then the nature and
extent of the duties of the financial institution depend on a variety of factors, such as the
personal situation of the investor, his or her investment aims and the subject matter of
the investment. Generally speaking, investment advice is only rendered properly if the
retail investor’s investment strategy – especially his or her willingness to take risks – and
specialised knowledge in the investment business have been reasonably considered by
the financial institution. In addition, in the course of advisory services being rendered,
all circumstances and risks that might be decisive for the investment decision have to be
addressed correctly and comprehensively.
For instance, with respect to advising on the subject matter of the investment, recent
case law establishes a duty for financial institutions to inform their retail clients about:
> retrocessions and rebates for distributors of financial products; it is debated whether
there is also a duty to disclose the profit margin;
> the lack of deposit protection coverage for the investment;
> negative press reports about the investment from reputable sources; and
> how the financial instrument functions, particularly in terms of the potential risk of
total investment loss, the existence of early termination rights for the issuer and the
possibly speculative character of the instrument (e.g. in the case of swaps).
As a rule, retail investors have the burden of proving that the financial institution did not
render proper advice. In practice however, German courts have developed various rules
for the allocation of the burden of proof to either the investor or his financial institution.
These rules are designed for situations in which the party bearing the burden of proof
has to prove facts that are typically outside its sphere of knowledge, whereas the other
party has this knowledge and it is reasonable to require this other party to provide these
facts. In the context of misselling claims, a retail investor then only has to coherently
allege that the financial institution did not fulfil its duties and that only the institution has
information to show the contrary. The financial institution then has to substantially assert
that it did in fact respect its duties.
In Germany, investors are not entitled to initiate a class action in respect of misselling
disputes. However, if the dispute concerns the incorrect disclosure to the public of
information affecting the capital markets, German law allows for a so-called “pilot
procedure” to be initiated. The effect of such procedure is that all other pending
procedures that are similar to this pilot procedure are stayed and that the legal and
factual findings of the pilot procedure are binding upon the stayed procedures.
Discovery does not exist under German law. To circumvent this, some investors allege
a breach of tort law in connection with a misselling claim in order to try to collect
information that cannot be obtained through civil litigation. In this way they aim to have
the public prosecutor conduct a criminal investigation, which would give investors
access to the criminal file with the prosecutor’s findings. This strategy is increasingly
used by retail investors, including in the area of misselling disputes.
The increased activity of the regulators in initiating and settling
large-scale misselling disputes
Financial headlines in Hong Kong in the past year have been dominated by stories
concerning the alleged misselling of financial products to retail investors. Most
particularly, public attention has been focused on the fall-out from the tens of
thousands of complaints relating to equity and credit-linked notes referencing various
financial institutions which were popular retail alternatives to bonds or even term
deposits until the collapse of Lehman Brothers which wiped hundreds of millions of
US dollars off the value of these investments (rendering some valueless). Aside from
numerous writs alleging misselling and the investigation of thousands of complaints by
the Hong Kong Monetary Authority and the Securities and Futures Commission,
Hong Kong has witnessed mass protests outside bank branches (and outside the
offices of the regulators). The Legislative Council of Hong Kong (“Legco”) has been
conducting a public inquiry into the sale of structured products to retail investors.
Banks and regulators have been summonsed to appear before Legco and have faced
days of questioning.
Two important developments emerged from the fall-out.
First, the regulators have become more demanding in their investigations into misselling
allegations as well as in their scrutiny of new product offerings. An associated trend
has been a marked increase in the number of applications made by the regulators for
court injunctions to freeze assets of implicated persons (in some cases worldwide) and,
in one case, the entire proceeds of a public offering in respect of which they suspect
misleading disclosure or misselling. The Hong Kong courts have so far supported such
applications. Proposed amendments to the law on approval and marketing of structured
products will increase the range of products that are regulated and will remove previous
safe harbours for smaller-scale offerings.
Second, many banks have entered into compromise agreements with the regulators
whereby they have agreed, without admitting liability, to buy back the affected notes
from investors (at 60 to 100% of their notional value) in order to settle regulatory
investigations. Linklaters brokered a 16-bank compromise agreement with the Hong
Kong regulators in July 2009 in relation to Lehman mini-bonds, which might result
in HK$6.3 billion of claims being settled. A judicial review application in respect of
the settlement has recently been rejected by the Hong Kong courts. We have also
concluded two more large-scale settlements for retail banks in relation to other
retail products referencing Lehman. Regulators have insisted that such settlements
incorporate enhanced complaint-handling procedures.
Litigation has also flourished in relation to other products which were popular in the
retail bank arena and were heavily affected by the financial downturn, such as equity
accumulators. A common claimant ploy in such cases is to invoke the regulatory code
of conduct applicable to licensed persons as the absolute standard of care in a tort
claim against the private banking adviser. Our view is that Hong Kong will – and should
– follow the UK trend of enforcing the terms of ‘no duty to advise’ financial services
contracts. However, this line of authority has yet to be properly tested in Hong Kong, in
part because a new compulsory mediation rule has resulted in many such matters being
settled at a relatively early stage.
Statutory bases for misselling claims such as misrepresentation and unfair contracts
provisions, which can reverse the usual burden of proof, have also to be tested in Hong
Kong in cases involving the sale of financial products. It is not yet clear precisely where
the Hong Kong courts will draw the dividing line between ‘consumers’ (to whom certain
protections are afforded) and professionals in this context, nor how they will distinguish
between ‘exemption from liability’ and ‘exclusion of duty’ clauses. Current claimants are
still relying on a precedent from prior to the financial crisis which recognised an advisory
duty of care in tort, in respect of which the applicable standard was found to be the
regulatory code, in the context of an execution-only relationship. Crucially, in that case
there was no contract and, consequently, no attempt had been made to exclude or limit
liability by contractual means.
The simplified indemnification procedure before the
Stock Exchange Commission
Misselling claims by retail investors in Italy are generally based on an alleged breach of
pre-contractual disclosure obligations, a breach of contract and/or a failure to comply
with the applicable regulatory requirements. In practice, such claims are often based on
the following allegations:
> the absence, inaccuracy or incompleteness of a duly approved prospectus;
> the lack of a written form of the investment contract; and
> the breach of the rules of conduct in connection with the provision of investment
services, such as the know-your-customer, conflict of interest and suitability rules.
Italian law has recently adopted new legislation on class actions. While it is not yet
entirely clear whether this new regime is also available to retail investors in connection
with misselling claims, the prevailing view is that it is applicable to such claims as well.
In the context of actions for damages resulting from the inadequate performance of
investment services, the burden of proof is reversed to the benefit of the investor; the
financial intermediary is required to prove that it has acted with due care. Also, the
prospectus liability regime under Italian law is more stringent than is required under the
EU Prospectus Directive 2003/71/EC. In addition to the issuer, offeror and guarantor,
the statutory prospectus liability is also applicable to the lead manager. In case of false
information or omissions that have influenced the investor’s decision, lead managers are
liable for the loss incurred by the investor, unless they prove that they carried out all due
diligence to ensure the completeness and accuracy of the relevant information.
Italian law provides for a simplified arbitration procedure before the Italian Stock
Exchange Commission, by which investors are indemnified for their losses to the extent
that such losses were caused by the financial intermediary’s failure to comply with the
relevant rules of conduct.
The possibility of a binding collective settlement decision
In the Netherlands, misselling claims by retail investors are usually based on a mix
of contractual (e.g. the terms of unit-linked products), regulatory (e.g. the Financial
Supervision Act) and civil law provisions (e.g. the Consumer Protection (Enforcement)
Act and the Unfair Commercial Practices Act).
The Dutch Authority for the Financial Markets (Autoriteit Financiële Markten or “AFM”)
and the Consumer Authority are responsible for the supervision of financial institutions,
including in the area of misselling to retail investors. They can impose penalties for
breaches of the regulatory requirements that financial institutions need to comply
with towards retail investors of up to €4,000,000 (AFM) and €450,000 (Consumer
Authority). The Financial Supervision Act also provides, in certain situations, for the
imposition of criminal sanctions, including imprisonment of a maximum of two years
for serious offences.
Retail investors can act collectively if they have an indemnification claim resulting from
one or more similar acts by the party they consider responsible. The investors can
establish an association to represent their interests through one single claim. Whether
and to what extent the particular investors suffered damages must, however, still be
answered on an individual basis. Such an investor association typically requests the
court to provide a declaratory judgment on liability, which, if established, allows each
investor to bring his or her own claim for compensation.
For a collective settlement of investor claims, the parties – i.e. the investors and the
financial institution concerned – may file a joint petition with the Amsterdam Court of
Appeals to declare the settlement agreement collectively binding. The investors are then
notified of the decision and of the possibility to opt out of the settlement agreement
within a certain period of time (at least six months).
Investor-friendly litigation rules also exist in the Netherlands. For example, for unfair
commercial practices, the burden of proof is shifted to the defendant, who has to prove
that the information was correct and complete. The investors then only have to prove
the causal link between the incorrect and incomplete information and their investment
decision. For instance, in the area of misleading information in a prospectus, the investor
needs to show that he or she read the prospectus and, as a result thereof, decided to
make the investment.
Several collective settlements that have recently been reached for the distribution
of financial instruments to retail investors are testimony that such settlements are
becoming popular. Retail investors also increasingly pool their interests in associations
which publicly challenge financial institutions and require collective settlements for their
members under threat of collective claims.
The importance of consumer protection rules
Spain has recently seen an increase in misselling claims brought by retail investors –
often small and medium-sized corporates – against financial institutions. A number of
these claims are led by investor advocacy organisations. Although Spanish law allows
class actions, no such actions have yet been brought against financial institutions.
A typical basis for misselling claims is that fair, clear and understandable information
was not provided when the transaction was being entered into. This information duty
includes an obligation for financial institutions to make retail investors aware of the risk
of the financial products and, in several situations, to describe how the amount would be
calculated in case of early termination or cancellation of the investment.
Under Spanish procedural law, the burden of proof lies, as a rule, with the claimant.
However, in some circumstances, financial institutions might be obliged to evidence
the fulfilment of their duties by proving that they did provide sufficient pre-contractual
documentation to the investor. Retail misselling claims used to be brought exclusively
before civil courts, where investors would claim a breach of contract and/or regulatory
law. Since the beginning of 2010, retail investors have increasingly brought a number
of their claims before the commercial courts on the basis of these courts’ jurisdiction to
resolve disputes based on consumer protection legislation. This has, in several cases,
resulted in a favourable outcome for investors.
Spanish criminal law lacks specific criminal offences in the area of banking practices. As
a matter of policy, the Spanish legislator prefers to impose regulatory instead of criminal
sanctions on financial institutions that have engaged in non-compliant activities. Such
regulatory sanctions are nonetheless often linked to common law criminal offences,
such as mismanagement of assets and fraud. Retail investors can allege a regulatory
breach in the context of a civil litigation; the regulatory investigation itself is initiated by
public authorities, such as the Spanish Securities Commission (Comisión Nacional del
Mercado de Valores or “CNMV”) and the Central Bank (Banco de España).
Only the civil law dimension of misselling claims can be settled. A settlement with the
criminal authorities for the criminal law dimension is not possible.
Different avenues for collective action
Since the 1990s, Swedish courts have decided a number of cases relating to retail
misselling claims. The liability rules in relation to financial services provided to financial
consumers have been clarified in the Swedish Act on Financial Advisory Services to
Consumers of 2004 (the “Act”). The Act also contains the specific obligations and
liability rules for misselling claims by retail investors. It is to a large extent consistent
with the principles that were developed earlier in case law.
Both under Swedish law generally and the Act specifically, the legal basis for
misselling liability is contractual. According to the Act, a financial adviser is under an
obligation to document what has occurred when the advisory service was performed.
If documentation is lacking and accounts differ as to what happened, then case law
tends to reverse the burden of proof in favour of the investor. The Act is not applicable
to the relationship between a financial institution and a corporate client. In the absence
of departures from explicit provisions, the assessment of whether or not misselling
has occurred is based on the “good advisory service standard”. This standard applies
irrespective of whether the retail investor is a natural person or a corporate. This
standard is based on, among other things, rules in the Swedish Securities Markets Act
that are aimed at protecting retail investors, regulations from the Swedish Financial
Supervisory Authority and case law.
Also in Sweden, civil litigation in respect of misselling claims may run in parallel
with regulatory actions and/or criminal investigations. The outcome of these parallel
proceedings might be relevant when questions of liability in the civil litigation are
Financial institutions operating in Sweden should be aware that, for misselling claims
involving several claimants, different claimant-friendly procedural mechanisms are
available. Thus, class actions regarding retail misselling claims can be brought under
certain conditions set out in the Swedish Group Proceedings Act, which came into
force in 2003. While, as of today, no such actions have reached the courts, a number
of retail investors have recently established non-profit organisations in order to bring
a class action for misselling claims against financial institutions. Consumers may also
refer misselling claims for determination by the national Consumer Complaints Board.
Although the decisions of this Board are not binding, they are in many instances
accepted by the parties, which often obviates further proceedings. Another form of
collective action that is commonly used by investors is to consolidate several individual
cases in a single collective court proceeding. In addition, pilot cases may, under certain
conditions, be tried first, while the proceedings for similar cases are then stayed pending
the outcome of the pilot case.
Contrary to the availability of different options in Sweden to bring collective actions
for misselling disputes, no specific mechanism exists for a collective settlement of
An anticipated greater focus on consumer protection and
retail banking practices
Complaints about the misselling of complex financial products in the wholesale
market have, to date, been resolved almost exclusively through litigation. By contrast,
disappointed retail investors are more often compensated through the regulatory regime.
Civil law claims
Civil law claims may be based on poor advice or on misrepresentations as to the nature
and features of the product sold. Relevant duties exist at common law. Essentially,
professional advisers must give reasonably careful and competent advice and must
take reasonable care in the statements that they make about the products that they sell.
But the standards are better described in the regulatory regime and so it is rare, in the
retail context, to find a freestanding civil claim for poor advice or based on allegations
If a financial product qualifies as a consumer credit, then the Consumer Credit Act
1974 (as amended by the Consumer Credit Act 2006) will apply as well. The rights of
borrowers under the Consumer Credit Act will be even further enhanced following the
implementation in the UK of the 2008 EU Consumer Credit Directive, which is due in
February 2011. The Consumer Credit Act will, amongst other things, contain the duty
for lenders to provide adequate explanations to consumers about the credit on offer to
enable them to decide whether it is suited to their needs and circumstances. This duty
comes in addition to the provision of written pre-contractual information.
Mention should also be made of the possibility for private investors under the Financial
Services Act 2000 to claim for loss suffered as a result of a breach of the rules of the
Financial Services Authority (“FSA”) on the part of an approved person. This can be a
useful cause of action. It is, however, not often seen as a freestanding claim and it is
generally pursued only when there has been a regulatory finding that a particular rule
has been broken (although this is not a precondition to the claim).
Perhaps the main reason why there is not more civil litigation in relation to the misselling
of retail products relates to the dynamics and, particularly, the economics, of civil
litigation in the UK. The amount at stake in most retail misselling claims is relatively
small. UK litigation is not cost effective for such claims, and this jurisdiction has been
slow to recognise a form of class action procedure. When compared with the regulatory
regime, litigation is an unattractive form of dispute resolution for most retail claims.
Civil litigation – the future
It is likely that civil litigation will continue to have a relatively small part to play in
the resolution of retail investors’ complaints about misselling. However, the greater
availability of information on the internet – including pro forma letters of complaint and
claim forms – has been encouraging investors to commence County Court proceedings,
and has considerably facilitated their doing so. What may well make more of a difference
going forward is the introduction of the class action procedure which was anticipated
at the time of the Financial Services Act 2010 but did not at that time make it on to the
statute book. Although this is seen as a last resort in terms of dispute resolution – and
therefore anticipates that compensation through the regulatory regime is not practicable
for some reason – it is typically in relation to widespread cases of retail misselling that
one thinks of class actions as being useful.
The protection of consumers is one of the four regulatory objectives of the FSA. The FSA
has therefore taken a particular interest in the enforcement of the regulatory regime in
so far as it affects consumers.
First, there is the Financial Ombudsman Scheme which allows consumers to claim (up
to a financial limit) in relation to a wide range of complaints. The Ombudsman scheme
is seen as being relatively quick and effective from the consumer’s standpoint, not least
because the Ombudsman is not necessarily limited to legal principles in the resolution of
The FSA has also reacted to what it perceived to be widespread issues of concern to
consumers, for example the misselling of endowment mortgages, payment protection
insurance and other products. It has on occasion mandated industry-wide reviews and
required firms to consider, proactively, whether they had liabilities to retail investors and
to make compensation where due. These schemes have meant that investors have been
compensated in many cases without them having to do much, if anything, in pursuit of
their claim. It is also worth noting that the FSA has concentrated on firms’ approach to
complaint handling itself and has based enforcement actions on what it perceived to be
shortcomings in that regard.
“Treating Customers Fairly” has been a key element of the FSA’s retail agenda since
2004, albeit that the FSA’s own approach to regulation has changed between then and
now as a response to the financial crisis. Interestingly, the FSA has also commented on
consumers’ own responsibilities to understand what they are buying and to ensure that
the product is one which they can afford and which stands a good prospect of meeting
their financial needs.
Finally, the Financial Services Act 2010 enables, with effect as of 12 October 2010,
the FSA to implement a consumer redress scheme in circumstances where it believes
that there has been a widespread or regular failure by relevant firms to comply with
applicable requirements (including the general law) and consumers have suffered as a
result. This could well be relevant in cases of retail misselling, for example. This is a new
role for the FSA – neither rule-making nor enforcement – and would enable the regulator
to award compensation to those it believes were affected.
Regulation – the future
The Retail Distribution Review which the FSA launched in June 2006 is due to be
implemented at the end of 2012. One key objective of this review is to address the
conflicts of interest which are thought to exist in the market for retail investment advice.
New rules on commission will be introduced to counter this.
Part of the FSA’s response to retail misselling concerns is to intervene earlier in the
product chain and to anticipate consumer detriment and scrutinise products at the
design stage. This more proactive approach is one which would have been hard to
imagine before the financial crisis. The FSA will also continue its sector-wide intervention
where it believes that circumstances so demand. The FSA is much concerned by
what it sees as an information imbalance between the firms selling products and the
consumers buying them. This is thought to be particularly acute in the retail market.
The FSA has also stressed that consumers’ attitude to risk may well have changed as
a result of the crisis and that firms will need to take this into account and exercise care
in determining target markets for products. In terms of product focus, important areas
will include sale of structured products, payment protection insurance and mortgage
Finally, it is expected that the future Consumer Protection and Markets Authority
(“CPMA”), which will succeed the FSA and will amongst others regulate firms providing
financial services to consumers, will have an even greater focus on consumer protection
and retail banking practices than the FSA.
Claims of unsuitability in the sale of financial products to
In the US, broker-dealers who recommend the purchase or who purchase on behalf
of retail investors financial products that are unsuitable for the investors may be held
liable to investors for their losses. National Association of Securities Dealers (“NASD”)
Rule 2310 requires that in making investment recommendations, broker-dealers have
“reasonable grounds” to believe that such recommendations are suitable to the investor
on the basis of the facts, if any, disclosed by the investor as to the investor’s other
security holdings, financial situation and needs.
These “unsuitability” claims are typically brought by individual retail investors by way
of arbitration before the Financial Industry Regulatory Authority (“FINRA”), which
regulates broker-dealers and which arbitrates disputes between broker-dealers and
their customers. Unsuitability claims are often asserted along with other federal and
common law claims, including claims under the general antifraud provision of the federal
securities laws (Section 10(b) of the Securities Exchange Act of 1934), common law
fraud, and negligence and breach of fiduciary duties. Although the individual investor
may pursue arbitration before FINRA, FINRA does not provide a forum for pursuing
class action claims, and therefore aggrieved investors who sue as a class
must prosecute their claims in state or federal court.
FINRA may institute disciplinary actions against member broker-dealers under
FINRA Rule 2010, which imposes on members the general requirement of observing
“high standards of commercial honour and just and equitable principles of trade”
in the conduct of their business. Sanctions include fines, censure, suspensions and
expulsions, depending on the seriousness of the case. There has been a general
increase in the numbers of FINRA arbitrations initiated in recent years on the basis of
unsuitability. For example, in 2009 there were 2473 such claims, as against only 1181
such claims in 2008 and 695 in 2007.
Broker-dealers should also be aware that both the US Securities & Exchange
Commission (“SEC”) and the Department of Justice (“DoJ”) may bring enforcement
actions on the basis of unsuitability. While such enforcement actions have been
extremely rare to date, it is expected that the SEC and DoJ will step up their
enforcement activity in the retail area in view of the increased political and regulatory
focus on consumer protection.
In addition, the recently enacted Dodd-Frank Wall Street Reform and Consumer
Protection Act (“Dodd-Frank”) requires the SEC to undertake a study of the
effectiveness of existing legal or regulatory standards of care – including whether there
are gaps or shortcomings in such standards – for brokers-dealers and investment
advisers providing personalised investment advice about securities to retail customers.
The study must be completed by late January 2011. Dodd-Frank also provides the
SEC with discretionary rulemaking authority to require investment advisers and
broker-dealers who provide personalised investment advice to retail customers to act
in the “best interest” of the customer without regard to the financial or other interest of
the adviser. This is a power which, if exercised, may result in additional and substantial
protections to retail investors.
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All Seasons Place One Silk Street Shanghai
87/1 Wireless Road Bangkok 10330 London EC2Y 8HQ Linklaters LLP Shanghai Office
Tel: (+66) 2305 8000 Tel: (+44) 20 7456 2000 16/F Citigroup Tower
Fax: (+66) 2305 8010 Fax: (+44) 20 7456 2222 33 Hua Yuan Shi Qiao Road
Pudong New Area
Linklaters LLP Beijing Office Linklaters LLP
People’s Republic of China
25th Floor China World Tower 1 35 Avenue John F. Kennedy
Tel: (+86) 21 2891 1888
No 1 Jian Guo Men Wai Avenue P.O. Box 1107
Fax: (+86) 21 2891 1818
Beijing 100004 China L-1011 Luxembourg
Tel: (+86) 10 6505 8590 Tel: (+352) 26 08 1 Singapore
Fax: (+86) 10 6505 8582 Fax: (+352) 26 08 88 88 Linklaters Allen & Gledhill Pte Ltd
One Marina Boulevard #28-00
Linklaters LLP Linklaters, S.L.
Reception - Level 30
Potsdamer Platz 5 Calle Zurbarán, 28
Tel: (+65) 6890 7300
10785 Berlin E-28010 Madrid
Fax: (+65) 6890 7308
Postfach 30 18 50 Tel: (+34) 91 399 60 00
10746 Berlin Fax: (+34) 91 399 60 01 Stockholm
Tel: (+49) 30 21496-0 Linklaters Advokatbyrå AB
Fax: (+49) 30 21496-100 Regeringsgatan 67
Studio Legale Associato
Brussels in association with Linklaters LLP
103 98 Stockholm
Linklaters LLP Via Santa Margherita, 3
Tel: (+46) 8 665 66 00
Rue Brederode 13 20121 Milan
Fax: (+46) 8 667 68 83
B - 1000 Brussels Tel: (+39) 02 8839 351
Tel: (+32) 2 501 94 11 Fax: (+39) 02 8839 35201 Tokyo
Fax: (+32) 2 501 94 94 Gaikokuho Kyodo-Jigyo Horitsu Jimusho
Dubai Linklaters CIS
Meiji Yasuda Building 10F
Linklaters LLP Paveletskaya sq. 2, bld. 2
1-1, Marunouchi 2-chome
Suite 4 Moscow 115054
Chiyoda-ku, Tokyo 100-0005
Third Floor, Gate Precinct Building 3 Tel: (+7) 495 797 9797
Tel: (+81) 3 6212 1200
Dubai International Financial Centre Fax: (+7) 495 797 9798
Fax: (+81) 3 6212 1444
PO Box 506516
United Arab Emirates Linklaters T. Komosa i Wspólnicy Spółka
Tel: (+971) 4 369 5800 Komandytowa
Fax: (+971) 4 369 5801 Warsaw Towers
Postfach 80 15 20
ul. Sienna 39
Düsseldorf 81615 München
Linklaters LLP Tel: (+49) 89 41808-0
Königsallee 49-51 Fax: (+49) 89 41808-100
Tel: (+48) 22 526 5000
New York Fax: (+48) 22 526 5060
Postfach 10 35 41
1345 Avenue of the Americas
Tel: (+49) 211 22977-0
New York, NY 10105
Fax: (+49) 211 22977-435
Tel: (+1) 212 903 9000
Frankfurt am Main Fax: (+1) 212 903 9100
Mainzer Landstraße 16
60325 Frankfurt am Main
25 rue de Marignan
Postfach 17 01 11
60075 Frankfurt am Main
Tel: (+33) 1 56 43 56 43
Tel: (+49) 69 71003-0
Fax: (+33) 1 43 59 41 96
Fax: (+49) 69 71003-333
For more information, please contact your usual contact at one of our offices above or visit our website at linklaters.com