Intermediary duties and liability towards investors
A recent ruling from the Tribunale di Roma (Court of Rome) has absolved an investment intermediary from liability to a client who suffered losses on Lehman and Northern Rock shares transactions executed by the intermediary on the client's behalf. The decision is interesting for its discussion of an intermediary's obligations.
The case relates to Lehman and Northern Rock share transactions executed by Banca YYY SpA (a primary Italian bank) on behalf of its client Mr Massimo XXX. In 2004, the claimant had entered into a master agreement in which the bank was appointed as his agent in the “negotiation, receipt and transmissions of orders” for financial services and instruments.
The claimant alleged, inter alia, that the bank had failed to fulfil its information and protection obligations as required by Italian law, in particular:
- Article 21 of the Italian Financial Services Act (Act); and
- Articles 26-31 of CONSOB1 Regulation No 11522/1998.2
Article 21 of the Act provides that an issuer/distributor has to act “with diligence, fairness and transparency to fully serve the interests of clients and for the integrity of markets”; Article 23 (paragraph 6) requires a bank to provide evidence of such “diligent behaviour”;
CONSOB Regulation No 11522/1998 provides more specific rules. Article 26 refers to the general principles and rules set out in the Act (information to be given by the bank to its clients, ie the information contained in a document on the risks of the investments − “Documento sui rischi”). Article 28 provides that an issuer/distributor must request information from an investor about his/her experience of investing in financial instruments and must give an investor written information on the general risks associated with investments in financial instruments. Article 29 provides, inter alia, that an issuer/distributor cannot execute an “unsuitable” transaction (in terms of “type, object, frequency or size”) that is requested by an investor unless with the prior written authorisation from the investor.
The Court of Rome rejected all the claims.The claimant was an experienced investor. Since 2004 he had invested more than EUR 13 million in bonds, shares and bond funds issued by Italian and foreign banks.
At the beginning of the contractual relationship, the claimant had declared to the Bank, in accordance with CONSOB Regulation No 11522/1998, that:
- he had “good experience in investments” as well as a “good knowledge of financial instruments”;
- his investments were “aimed at increasing assets, with a relevant risk to lose up to 50%”; and
- he had understood that, as a consequence of the investments, “the value of his assets may fluctuate”.
The court concluded that the claimant had received from the bank all the information necessary to understand the characteristics of the financial instruments in which he invested. Furthermore, the court noted that, until the date of the default of Lehman Brothers, the rating of its shares provided by prominent rating agencies was very positive so the bank was not able to foresee the imminent default of Lehman Brothers before the date of the default itself.
The bank was also fully compliant with Article 29 of CONSOB Regulation No 11522/1998, since the investment made by the claimant was suitable given his investor profile and was consistent with his former investments.
Most mis-selling decisions issued by Italian courts are pro-investor.3 However, this ruling, which is in line with some other recent decisions,4 can be considered as pro-bank as it acknowledges that an experienced investor will not necessarily obtain the same degree of protection from an Italian court as a less sophisticated investor. This is an important reminder to banks that obtaining information from a potential investor about his/her experience may provide some protection to a bank in any later mis-selling claim. However, even with an experienced investor, a bank must still ensure that it fulfils its information obligations fully with clear, timely and accurate information being provided on potential investments and the risks associated with them. Allen & Overy LLP acted for Banca YYY SpA.
1. CONSOB is the Italian public authority responsible for regulating the Italian securities market.
2. And following amendments No 11745 of 9 December 1998; No 12409 of 1 March 2000; No 12498 of 20 April 2000; No 13082 of 18 April 2001; No 13710 of 6 August 2002; and No 15961 of 30 May 2007. Note that CONSOB Regulation No 11522/1998 was abrogated by CONSOB Regulation No 16190 on 29 October 2007 (and later amendments No 16736 of 18 December 2008 and No 17581 of 3 December 2010) following the implementation in Italy of European Directive 2004/39/EC (MiFID) and related measures to ensure execution contained in Directive 2006/73/EC and Regulation EC 1287/2006. Therefore, the content of the above mentioned Articles 26-31, has changed.
3. For example, Court of Salerno, 20 October 2012.
4. Court of Venice, 30 November 2009; Court of Parma, 18 November 2009; Court of Brescia, 10 March 2010; Court of Napoli, 3 September 2010; Court of Savona, 18 May 2010; and Court of Rome, 7 February 2011.