Financial Advisers will be reassured by a recent court decision which backed an IFA against claims of misselling by a wealthy client.
The case shows that the courts are willing to listen to advisers who challenge their clients’ protestations of lack of investment experience and allegations that the risks were not properly explained.
The case was brought by Basma Al Sulaiman, a wealthy Saudi Arabian divorcee against Credit Suisse Securities’ private bank and IFA, Plurimi Capital. Mrs Al Sulaiman had received a large divorce settlement from her ex-husband, one of Saudi Arabia’s wealthiest men. She became a customer of Credit Suisse which agreed to provide her with investment recommendations on an advisory basis. Subsequently her Credit Suisse adviser left to set up Plurimi Capital where she also became a client.
Mrs Al Sulaiman wanted an investment that would give her a regular income. The adviser recommended structured notes linked to equity indices and interest rates. These would provide her with a periodic income provided that the underlying index did not drop below a certain level. To increase the level of income, the investment was geared with a loan from Credit Suisse, secured against the notes. The loan was conditional on the loan to value of the portfolio remaining at a level acceptable to the bank.
Between 2005 and 2007 Mrs Al Sulaiman invested in 18 notes. In October 2008, their value dropped significantly as a result of the banking crisis. Mrs Al Sulaiman was required to provide additional collateral to support her account. She failed to meet a subsequent margin call and Credit Suisse liquidated her portfolio at a loss of around US$31 million.
Mrs Al Sulaiman brought a case against her advisers, claiming that they had failed to explain the risk and suitability of the investments under FSA Conduct of Business rules. It was heard in the Commercial Court in 2013 where it failed on every issue, with the Court suggesting that Mrs Al Sulaiman had been dishonest in the way she had pursued the claim.
“In a difficult market for IFAs to secure professional indemnity insurance it is great news that the courts will back them against claims of misselling by their clients,” said James Burgoyne, Director, Brunel Professional Risks. “In particular, the case showed that IFAs can successfully challenge the client’s protestations of lack of investment knowledge if they are accused of negligence when an investment turns sour.”