Hong Kong: Investment Adviser Held Liable for Negligence in Relation to Investment Losses

Last Updated: 9 December 2004


A recent decision by the High Court in Hong Kong could have a significant impact on independent financial advisers ("IFAs") who may have previously believed they were safe from being held responsible for losses due to market conditions. In this case, the IFA had complied with all his regulatory obligations and the investor had signed the relevant application forms with detailed risk disclosure statements. Nevertheless, the Court held that the IFA had failed to discharge his duty of care to the investor and made him repay the investor’s losses with interest.

Susan Field v Barber Asia Ltd (HCA 7119/2000) – The Facts

In his 41 page judgment, Deputy High Court Judge Barma considered the background of Susan Field and various facts regarding her public relations business, and found that she was an inexperienced investor despite the arguments of her IFA to the contrary that she must have been a sophisticated investor as she ran a successful business.

Having made it clear from her initial meeting that she wanted to invest conservatively and that she had no previous experience of investing, Ms Field eventually invested substantially the whole of her available funds, about US$306,380, in a conservative investment product recommended by the IFA. A few months later, she followed the IFA’s advice to gear up her existing capital-guaranteed portfolio as collateral for a Japanese Yen loan to acquire further Sterling denominated investments, on the understanding that the scheme was a "sure winner", as described by the IFA.

A few months later, she terminated the arrangement prematurely due to huge losses sustained as a result of sharp appreciation of the Yen against Sterling.

Ms Field was adamant that throughout her dealings with the IFA she had never understood the effect of leveraging her investment and had not at any time indicated that she wished to depart from her original instructions for a conservative investment strategy.

The Legal Issues

The major legal issue was whether the IFA owed Ms Field any duty of care, in contract or in tort. The trial judge examined their business relationship and concluded that there was no contract between them and the IFA did not receive any commission from her but only from the company providing the investment product. It follows that the position would have been different, for example, where an investor had engaged the IFA to provide a discretionary investment service.

However, the judge concluded that the IFA had assumed responsibility to provide Ms Field with investment and financial advice. Such advice was clearly provided as part of the IFA’s business and the IFA must have realized that Ms Field would rely on his advice. In the circumstances, the trial judge found the IFA had fallen short of the standard of care to be expected of him in a number of significant respects. Applying the principles set out in Hedley Byrne v Heller, the IFA was held liable in tort for breach of his duty of care owed to the investor, and was ordered to compensate Ms Field for the entire loss of Ł219,890.25 together with interest.

The IFA’s attempt to reduce his liability by alleging contributory negligence on the part of Ms Field was unsuccessful. The judge considered that although Ms Field signed various documents acknowledging the existence of risk, there was no reason for her to think that the risk she was undertaking was inconsistent with the conservative investment objectives communicated to the IFA.

It should be noted that at the time when Ms Field signed the application forms, she was provided with various explanatory documents, declarations and risk disclosure statements. Notwithstanding that, the Court looked into the whole conduct of the financial adviser and the true level of understanding of such complicated financial documents by the investor. Mere compliance with the regulatory requirements by financial advisers may therefore be insufficient, as a higher duty to act with reasonable care and skill in relation to the advice which they tender to investors is imposed on them as a matter of law.

We understand that this case is going to appeal and we will await the outcome with interest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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