Mis-selling financial products

The terms and conditions in the standard account opening agreements between banks and customers have been the subject of litigation when things go wrong. Some of the most common clauses are looked at today - non-reliance clauses.

What are non-reliance clauses?

Non-reliance clauses describe a set of declarations to the effect that (i) the customer accepts all the risks arising from the making of an investment; (ii) the bank is not offering investment advice to the customer; and (iii) the customer is not relying on the bank's advice or representations (even if provided) and the customer makes an independent judgment when making an investment. They typically exist in banks' standard account opening documentation for execution-only accounts (meaning the bank will simply follow the customer's instructions to execute trades and not act as the customer's investment adviser).

The purposes of non-reliance clauses are to protect the bank against liabilities arising from representations made by the bank during the process of the sales of financial products by preventing the customer from relying on those representations.

Are non-reliance clauses effective?

A recent case from the Hong Kong court has confirmed the effectiveness of non-reliance clauses.

The plaintiff in the case was a private banking customer who sued the bank for breach of contract and duties of care after losing several million US dollars in her investments in hundreds of accumulators and structured financial products, including equity-linked notes, over the course of five years. The plaintiff alleged that the bank failed to explain the contractual documentation to her, among which was a risk disclosure statement that contained the non-reliance clauses, and that she was unsophisticated and simply followed the advice of the relationship manager.

The Hong Kong court dismissed the plaintiff's action and held that since the plaintiff was an adult with full capacity and had signed the contractual documentation containing the non-reliance clauses, she was bound by it, irrespective of whether she had read it or not.

In light of the non-reliance clauses, the court held that the bank did not owe the plaintiff duties to advise and to ensure the suitability of the financial products (as the plaintiff sought to argue). The bank was also able to produce recordings of the conversations between the plaintiff and the relationship manager which showed that the plaintiff understood the mechanics of the financial products she was buying.

Are banks subject to any other regulatory obligations when selling financial products?

In Hong Kong, banks (and financial institutions) are subject to the Code of Conduct for persons licensed by, or registered with, the Securities and Futures Commission (SFC) when selling financial products to customers.

The code requires that banks should, when making a recommendation or solicitation, ensure the suitability of the recommendation or solicitation for that client is reasonable in all the circumstances. These regulatory obligations are known as suitability obligations.

The SFC has also published a FAQ (May 2007) to explain the practical aspects of these suitability obligations, namely that banks should know their clients (their financial situation, investment experience and investment objectives), understand the investment products they recommend to clients (product due diligence), provide reasonably suitable recommendations by matching the risk return profile of each investment product with the personal circumstances of each client, provide all relevant material information to clients and help them make informed investment decisions.

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