The Supreme Court has upheld an appeal from the High Court in Valencia, ruling in favour of a couple who alleged that the respondent Bank has made high risk investments on their behalf even though they had specified that they wanted only low risk investments.
BBVA bank was ordered to pay more than €290,000 to the couple in damages for making investments on their behalf in Lehman preferred stock under a contract that permitted the bank discretion to manage an investment portfolio on behalf of the couple.
The Court of first instance had upheld the couple’s claim on the basis that the bank had managed the investment portfolio in a negligent manner by failing to adjust the investment strategy to conform to the low-risk profile of the clients. The High Court reversed this decision by finding that the bank had provided sufficient information to the couple that they could understand the proposed investment and because the relevant industry rules did not prevent conservative investors from making higher risk investments.
However, the Supreme Court, in reversing the decision of the regional High Court, decided that the risk profile of the bank’s clients and their investment preferences formed an integral part of the contract between the bank and the couple.
It was consequently the bank’s legal obligation to collect information from it’s clients regarding –
I. their financial situation,
II. their investment experience,
III. the client’s financial objectives with regard to their investments, and
IV. to advise in a clear and transparent manner the risks associated with the investments such that the provision of deficient information could mean a negligence that would give rise to an indemnity for the losses occasioned.
In the circumstances before it, the Court considered that such clear and complete information was not provided by the bank nor had it acted in good faith, there being a contradiction between the risk profile of the client which was very low and that of the financial instruments in which the bank invested on their behalf, which was very high; such that, being diligent and acting in good faith, the situation would have demanded that the bank bring-up this inconsistency between risk appetite and the products being added to the portfolio so as to make sure that the information was clear and had been understood.
Accordingly, having not complied with this obligation, the bank was responsible for the losses suffered by their clients.