Lifting the fog on nature of risk
Two years ago, a marketing executive struck a blow for downtrodden investors everywhere. Having lost most of her life savings in a complex scheme, she then decided to gamble her money by taking her investment adviser to court.
In what was seen as a landmark victory, she convinced a judge she had been given negligent advice, winning #219,890.25 ($3.08 million) in damages from investment advisory firm Barber Asia.
Not only was it a rare case of a financial underdog coming out on top in court; it set out the parameters of investment advice in the eyes of the law. Ultimately, advisers are breaching a duty of care when they recommend an investment that is inherently unsuitable.
This summer, however, a tribunal in another corner of Hong Kong shed some new light on the case as Andrew Barber, managing director of Barber Asia, fought a decision by the securities regulator that would have revoked his investment adviser's licence for six months.
While the tribunal echoed the sentiment of the other court in finding the adviser negligent, it was not without a degree of reticence in light of fresh facts presented by Mr Barber. The suspension was reduced to one month.
Although the legal blueprint for what investors should expect by way of advice and professional care remains clear, the premise it is based on is less so.
It has again put the spotlight on the foggier side of financial advice and the potential pitfalls faced by both investors and professionals, as the industry faces increasing pressure to raise the bar amid such client clashes.
Initially, Susan Field had invested #190,000 with Mr Barber in April 1998. Under a new scheme, this was assigned to N.M. Rothschild & Sons as security for a loan to acquire an investment in a Scottish Life policy. In short, she would borrow in yen for an investment in sterling, with a gearing factor of 2.5.
The loan was approved in August 1998. Shortly after, the yen appreciated as the Asian financial crisis began to bite. She was asked to top up the security on a number of occasions, but eventually missed a margin call and the loan was switched into sterling. When she closed out her position in December 1999, Ms Field had lost 75 per cent of her old investment.
She sued Barber Asia, claiming that as an inexperienced investor she had received negligent advice contravening her desire to invest conservatively, and that the currency risk had not been explained.
But Mr Barber claimed that Ms Field's strategy had changed, and that she had expressed an appetite for better returns.
The court sided with Ms Field, finding that Barber Asia had not given her sufficient warning of the nature of the risk, referring to a meeting in which Mr Barber 'dealt with the question of risks associated with currencies at best in a cursory fashion'. The judge agreed that the investment was unsuitable for her.
On June 30 this year, most of the Securities and Futures Appeals Tribunal, chaired by Mr Justice William Stone, shared this view. Asked to review a Securities and Futures Commission (SFC) decision to revoke Mr Barber's licence for six months, the tribunal decided the scheme was 'out of whack' with her new investment ambition, which had been to make her money 'work harder'.
However, one tribunal member disagreed, the judge noted. 'In short, [the minority view is] this demonstrably was not a situation in which the adviser failed to follow the 'know your client' rule.'
Mr Barber had introduced a number of new documents at the tribunal hearing, including computer records showing five meetings with his client. What emerged was a 'significant variation in the recollection of the respective parties,' the judge explained.
For example, Ms Field could not recall a June 3 meeting. Her case was that Mr Barber had called on July 10 out of the blue about the new scheme, that he immediately came over to her office and that before the end of the day she effectively signed up.
She said she was 'quite sure' that she had not received documents explaining the gearing structure; nor had the currency risk been explained.
The judge, with the benefit of Mr Barber's record-keeping and other evidence, decided otherwise. Mr Barber said over the course of the five meetings, he went through the documents step-by-step, explaining margin and risks.
'As is often the case with 'battered investors', in our view Ms Field has been hugely affected by this highly adverse investment experience and we are inclined to think that her recollection of the history ... has been coloured by her very discernible resentment towards Mr Barber,' the judge said.
This sentiment was also aired in relation to Rothschild. On a letter to her from Rothschild demanding repayment, Ms Field had written: 'I'm going to the South China about this company.'
'What is unfortunate and perhaps somewhat disturbing about this letter is not the sentiment therein expressed ... but in the fact that at the trial of this action ... this document, listed in Ms Field's discovery, was produced with the handwritten comment 'tippexed' out,' Mr Justice Stone said.
Yet Alan Linning, executive director of the SFC, believes Mr Barber should have taken more time to understand his client's appetite for risk. 'You have to positively satisfy yourself that the product is suitable for that client. It's not enough to get documents for a product and give it to someone and say 'Here, you read this, you understand this'.'
The nature of the industry is that there is a 'strong inclination to talk up the upside and a disinclination to describe in any detail what the downside could be', Mr Linning said.
Given that advisers receive fees for signing clients to a scheme, there is an in-built incentive to push the product.
The SFC addressed this in a recent consultation, raising the issue of whether fees should be disclosed (Mr Barber revealed his cut).
As Richard Healy, a partner at Oldham, Li & Nie explains: 'Unfortunately there are a number of occasions where I don't think the investment advisers really understand the product they are selling themselves. There's a temptation to be a product-pusher and try to generate commission.'
As Ms Field discovered, there are limits to how much these fees generate for advisers. In what turned out to be a bittersweet victory, it is understood she has not received her damages.