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Causal Link: The Italian Court of Cassation returns on the causal link between the failure of the intermediary to fulfil the disclosure obligations and the damages suffered by the investor

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14 September 2020

With the recent Order of 31 August 2020 n. 18153, the Court of Cassation confirmed its precedents, which impose strict compliance with disclosure obligations by intermediaries for investments occurred - between 18 July 1998 and 2 November 2007 - under Regulation No. 11522/1998 (Former Consob Regulation). This regulation was replaced by a new regulation implemented after the introduction of Directive 2004/39/EC (MiFID). In particular, the Court: (i) on the one hand, denies that the investor’s previous investments could exonerate the intermediaries from their disclosure obligations; and (ii) on the other hand, confirms that, pursuant to the Former Consob Regulation, the causal link between the breach of the disclosure obligations by the intermediary and the damages suffered by the investor is presumed.

Factual background

A non-professional investor brought a legal proceeding before the Court of Bologna against a bank claiming: (i) the nullity, ineffectiveness or annulment of a trading agreement on securities and the related implementation transactions; and (ii) the compensation of damages. Both the Court of Bologna and, on appeal, the Court of Appeal of Bologna rejected the investor’s claims. Particularly, the latter stated that, despite the fact that the bank provided a general document on risks, which was not sufficient to fulfil its disclosure obligations, the investor had not provided any evidence of the causal link between the omitted disclosure and the damages. In addition, the Court stated that the investor had significant previous financial experience with securities of equal risk, therefore the investment was sufficient for him. Therefore, even if the bank had fulfilled its disclosure obligations, the investor still would have made the investment. The investor filed an appeal to the Supreme Court against the decision of the Court of Appeal, arguing, among other things, that the bank had not fulfilled its disclosure obligations and therefore asked to overturn the verdict of the Court Of Appeal. The Court of Cassation upheld the investor’s action and annulled the ruling of the Court of Appeal.

Principles

The Court of Cassation stated that, on the assumption of an irreducible situation of asymmetric information between the position of the investor and that of the intermediary, the latter has a primary and non-derogable obligation to supply his client with full “active information” on the nature, returns and every characteristic of the securities being traded, with the consequence that:

i. If the intermediary does not fulfil his disclosure obligations, there is a rebuttable presumption of the causal linkwith regard to the making of an unaware choice by the investor, whose detrimental effects cannot therefore be ascribed to his will”. However, the damages deriving from the breach of the disclosure obligations by the intermediary can never be considered in re ipsa;

ii. The previous or simultaneous experience with other risky securities does not exonerate the intermediary from fulfilling his disclosure obligations established by law; and

iii. For the purposes of disclosure obligations, any assessment of the adequacy of the investment is irrelevant as the failure of the intermediary to comply with the disclosure obligations is a disorienting factor for the investor that influences his investment choices.

However, the Court of Cassation reiterates that the intermediary can in any case give contrary evidence that he acted with the specific diligence required, demonstrating that he has correctly informed his clients about the nature, risks and implications of the investments.

The disclosure obligations of the intermediary

In light of the present Order and the principles expressed by the constant jurisprudence of the Court of Cassation, the intermediary – for all investments carried out under the validity of the Former Consob Regulation – must necessarily demonstrate that the investor has been provided, inter alia, with information:

i. That is specific and appropriate for this particular investment, other than that generally or easily accessible (Court of Cassation, Section VI, 15 June 2020, no. 11549), as the investor’s concrete and previous experience has no relevance;

ii. On the original features of the financial instrument that connote its particular riskiness (such as lack of rating) before the investment and not subsequently (Court of Cassation, Section I, 28 February 2018, Order no. 4727); and

iii. Relating, in particular, to the risk of the effective redemption at maturity of the securities. In this respect, the statement on their low degree of liquidity with clauses like “the not high liquidity” or “not being listed on the Consob market” is not deemed sufficient (Court of Cassation, Section I, 18 May 2017, no. 12544).

Therefore, although these rulings affect investments to which the Former Consob Regulation applied, they nevertheless highlight the Italian Supreme Court’s approach to protect non-professional investors with reference to the strict compliance with disclosure obligations by the intermediary. Moreover, it is extremely likely that this approach will also be taken when the claims on investments carried out under MiFID will be before the Supreme Court. It is evident that this is going to be the trend in Court decisions following a recent decision of an Italian Court of Appeal, which, in the post MiFID regulatory framework, stated that the investor’s previous experience does not relieve an intermediary from its disclosure obligations (Court of Appeal of Milan, 5 February 2019).