Individuals may sue based on breaches of conduct rules
Supreme Court ruling, N° 24/15, 26 March 2015
The Luxembourg Supreme Court has quashed a Court of Appeal ruling that denied an individual the right to invoke, against a professional of the financial sector, a violation of its conduct of business rules.1 For many years it has not been possible for an individual to base a civil claim against a bank or other finance party on the basis of a breach of conduct of business rules.2 The Luxembourg Supreme Court’s ruling signals a change in approach.
Financial market professionals must comply with conduct of business rules and organisational rules contained in the law of 5 April 1993 on the financial sector as amended (the Banking Act), the law of 12 November 2004 on the fight against money laundering and terrorist financing (the AML Act), as well as the circulars and regulations of the Commission de Surveillance du Secteur Financier (the Luxembourg supervisory authority of the financial sector – the CSSF).3
These rules are aimed at organising access to the financial sector and establishing a regulatory framework for it. Previous case law held that the rules were not designed to confer individual rights on individuals.
Some (but not all) Luxembourg court decisions slightly softened this approach, stating that even though these rules do not confer direct individual rights on individuals, “nothing precludes the courts, when determining the existence of a wrongdoing of a professional of the financial sector towards an individual, to use them as an inspiration”.4 Thus the conduct of business rules may serve as a reference point against which to measure the conduct of a financial sector professional, and to determine any potential wrongdoing towards a private individual in the context of a civil claim.
In a decision of 25 February 2015 5, the Court of Appeal appeared to take a first step in reversing the traditional case-law approach. It ruled that an individual can rely on the breach of a legal or regulatory obligation (ie rule of conduct) which is designed to protect the individual’s interest. A civil claim against a financial sector professional can be made by the individual on the basis of that breach.
Only one month later, the Luxembourg Supreme Court took a similar approach.
Facts of the case
An individual (the Buyer) bought four jade statuettes for EUR 1,100.000 in a shop in France. The Buyer agreed to pay by a bank transfer to an account at a Luxembourg bank (the Bank) in the name of a car company (the Company). The Buyer ordered his (French) bank to transfer the money, labelling the bank transfers “purchase of works of art”. The Bank, getting suspicious, asked for information about the origin of the money, the identity of the buyer and the transfer itself. The Bank also filed a report of money-laundering suspicions with the public prosecutor. However, the transfers were finally carried out and the Company later withdrew the money at the Bank.
Unfortunately the Buyer was a victim of fraud, the so-called “works of art” were counterfeited.
The Buyer sued the Bank alleging that it should not have transferred the money, nor let the Company withdraw the money. The action was mainly based on an alleged violation of the Bank’s obligations under the Banking Act and the AML Act.
Court of Appeal upholds traditional case law
The Court of Appeal dismissed the claim, stating that “the conduct of business rules enacted by the law of 5 April 1993 on the financial sector (as amended), by the law of 12 November 2004 on the fight against money laundering and terrorist financing as well as by the circulars of the Commission de Surveillance du Secteur Financier are conceived in the public interest, translating on a strictly disciplinary basis the deontological standards to be observed by the professionals of the financial sector and do not constitute a legal basis allowing private individuals to ground legal proceedings on the basis of a violation of these provisions.”6
In relation to the AML rules, the Court of Appeal stated that “The sole purpose of the obligation of vigilance imposed on financial institutions by [the AML Act] is to detect transactions relating to funds originating from drug trafficking or organised crime. The victim of fraudulent acts cannot invoke the failure to abide with the obligations resulting from these provisions to request the payment of damages from the financial institution.”7
Luxembourg Supreme Court allows civil claim based on regulatory rules
The Supreme Court quashed the decision of the Court of Appeal holding that “the fact that a rule is enacted in order to protect the public interest does not exclude in any way that this same rule can, also, protect private interests and give rise to compensation to those individuals who have suffered damages from the violation of this rule.8’9
The Supreme Court returned the case to the Court of Appeal (with a new composition) for a reassessment.
The Luxembourg Supreme Court did not assess if the Bank was actually in breach of its regulatory obligations (as this is not the Supreme Court’s role). The Luxembourg Supreme Court merely stated that regulatory rules may be relied on by individuals and must be considered by the court to determine the existence of a breach, and the liability of the Bank.
This ruling echoes recent views taken by scholars.10 While the rules of conduct were essentially codified in the past in the CSSF circulars (which are not published in an official gazette and do not have the same status as a statuary law or regulation), most of them are now, especially since the implementation of MiFID,11 integrated in statutory laws and regulations.12 They are thus more prominent. In addition, if these rules are without any doubt meant to protect the public interest, they also frequently refer to the interests of the clients.
This reversal of former case law will provide additional ammunition to individuals. However, and in accordance with Luxembourg civil liability principles (either contractual liability (responsabilité contractuelle) or liability in tort (responsabilité délictuelle)), a claimant must also show, in addition to a breach, a loss and a causal link between the breach and the loss. A causal link between a breach of a specific rule of conduct and the alleged loss suffered by the client will not always be easy to show.
Footnotes1 In the case at hand, the rules at stake were the anti-money laundering rules that a professional of the financial sector must comply with. 2 Luxembourg District Court, 10 February 2010; Luxembourg District Court, 2 May 2012, n°131495; Court of Appeal, 22 April 2009, n° 3276; Court of Appeal, 21 July 2009, n° 33494; Court of Appeal, 11 January 2012, n°35990; Court of Appeal, 8 November 2012, n° 37050. 3 The grand-ducal regulation of 13 July 2007 relating to organisational requirements and rules of conduct in the financial sector should also be noted. 4 Court of Appeal, 13 February 2008, n°32019; Luxembourg District Court, 22 December 2010, n°120889. 5 Court of Appeal, 25 February 2015, n°39014. 6 Free translation. 7 Free translation. 8 Free translation. 9 It is worth noticing that – even though the Luxembourg Supreme Court does not make any reference to it – this statement is a word-for-word reproduction of Mr Ravarani’s position in La responsabilité civile des personnes privées et publiques, 2e éd. Pasicrisie luxembourgeoise, 2006, n° 917. 10 See Philippe Bourin, La gestion de portefeuille, Anthemis, 2009, p. 198; Isabelle Riassetto, La violation d’une règle de conduite professionnelle en matière financière, source de responsabilité civile, Pasicrisie luxembourgeoise 36, pages 279 – 308.
11 Directive 2004/39/EC on market in financial instruments.
12 Inter alia, the Banking Act, the grand-ducal regulation of 13 July 2007 relating to organisational requirements and rules of conduct in the financial sector.