the increase of professional liability of financial advisors examples of french case law

THE INCREASE OF PROFESSIONAL LIABILITY OF FINANCIAL ADVISORS

Examples of French case law

UIA FLORENCE FROM 29 OCTOBER TO 2 NOVEMBER 2014

SUMMARY


Introduction :

• French and European regulatory convergence on financial instruments distribution

• Review of applicable texts• Increased autonomy of the obligation to provide information

1. General obligation to provide information

2. Duty to advice

3. Duty to warn

Conclusion

INTRODUCTION


• French and European regulatory convergence on financial instruments distribution;

• Review of applicable texts;

• Increased autonomy of the obligation to provide information.

FRENCH AND EUROPEAN REGULATORY CONVERGENCE

French and European regulatory steps towards harmonization of the obligation to provide information owed by the various actors:

• PRIPs Regulation – ongoing: Creation of a general obligation to provide information whatever the nature of the product.

• AIFM Directive – 2011 : Obligation to provide information for alternative investment funds.

• OPCVM IV Directive – 2009 : Obligation to provide information for UCITS to the public.

• MIF Directive– 2004 : Detailed obligation to provide information for investment services providers.


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FRENCH AND EUROPEAN REGULATORY CONVERGENCE


A sector-specific regulation harmonized under French law :

A gradual harmonization of regulation applying to :

• Investment services providers

• Financial investment advisors

• Insurance intermediaries

• Direct marketers

REVIEW OF APPLICABLE TEXTS


Investment services providers :

OBLIGATION TO PROVIDE INFORMATION General regulation of the AMF

Monetary and Financial Code

Accurate, clear and not misleading information

Article 314-10 and 314-11 Article L.533-12

Content of the information Article 314-17 to 214-20

Timing of disclosure Article 314-21 to 314-24 Article L.533-12

Information medium Article 314-25 to 314-28

Disclosure of performance Article 314-12 to 314-16

Conflict of interest Article 313-23 and 313-24

Advertisements Article 314-29 to 314-31 and Article 212-28

Article L. 533-12

Information of providers, services and instruments

Article 314-32 to 314-41

Portfolio management Article 314-40 to 314-41

Information on costs Article 314-42



Investment services providers:

OBLIGATION TO INFORM ITSELF: CLIENTS ASSESSMENT

General Regulation of the AMF Monetary and Financial code

Assessment for : • Collective management• Investment advice

Articles 314-43 and 314-47 Articles L.533-13 and L.533-16

Assessment for other investment services

Article 314-49 and 314-50 Articles L.533-13 and L.533-16

Common provisions Article 314-51 to 314-54

DUTY TO ADVICE

General Regulation of the AMF Monetary and Financial code

Advice adapted to the needs and objectives of clients

Article 314-51 to 314-54 Articles L.533-13 and L.533-16



Financial investment advisors :OBLIGATION TO PROVIDE INFORMATION

General Regulation of the AMF Monetary and Financial Code

Identification of the Financial investment advisor

Article 325-3 Article L.546-1

Content of the reporting information

Article 325-3

Letter of engagement Article 325-4


Article 325-5

Information on risks Article 325-7



Client’s financial position Article 325-7 Article L.541-8-1

DUTY TO ADVICE


Advice adapted to the client’s needs and objectives

Article 325-7 Article L.541-8-1



Insurance intermediaries : OBLIGATION TO PROVIDE INFORMATION

Insurance code Monetary and Financial Code

Identification of the intermediary Article L.520-1

Life insurance contract Article L.132-5

Content of the contract Articles L. 132-5, R.132-4 and A. 132-8

Information brief Article L.132-5-2

Cash value and contract transfer Article L. 132-21


Articles L. 132-27 and R. 520-2

Contract costs Article R. 132-3

Distance contract Article R. 132-5-1OBLIGATION TO INFORM ITSELF: CLIENTS ASSESSMENT

Insurance Code Monetary and Financial Code

Financial position of the investor Articles L. 520-1 and L.132-27-1

Objectives of the subscription Article L. 132-27-1



Insurance intermediaries:

DUTY TO ADVICE

Insurance Code Monetary and Financial Code


Articles L. 520-4 and L.132-27-1



Direct marketers:OBLIGATION TO PROVIDE INFORMATION


Clear and comprehensible information

Articles L.341-11 and L.341-12

Identity of direct marketer’s information


Product offered ‘ information Articles L. 341-12 and R. 341-16

Contractual terms information Articles L. 341-12 and R. 341-16

The form of information appropriate to the distance communication




Information on the client’s financial position

Articles L.341-11

Information on the client’s experience

Articles L.341-11

Information on the client’s objectives Articles L.341-11



Direct marketers:

DUTY TO ADVICEGeneral Regulation of the AMF Monetary and Financial Code


Articles L.341-11

INCREASED AUTONOMY OF THE

OBLIGATION TO PROVIDE

INFORMATION


Failure to meet the obligation to provide information is punishable under Article 1147 of the French Civil Code.

∼ Cass. Com. March 8th , 2011, No. 10-14456: Mr. X / Société Générale

Pursuant to Article 1147 of the Civil Code;

The decision of the Court of Appeal is without a legal basis for not having examined if the bank had not breached its obligation to provide information by failing to mention the less favorable characteristics and the risks attached to the options which can be the quid pro quo of its potential returns.

∼ Paris Court of Appeal, April 1st , 2014, RG No. 2012/09286

Failure of the Bank Gestion Privée Indosuez to its pre-contractual obligation to provide information must be retained and can incur its liability on the basis of the Article 1147 of the Civil Code.

∼ Pau Court of Appeal , March 26th , 2013, RG No. 11/04300;

It is sufficiently established that the Caisse d'Epargne had failed to the obligation to provide advice and information (...), and had committed a fault which could incur its liability to the underwriters pursuant to Article 1147 of the Civil Code.

INCREASED AUTONOMY OF THE

OBLIGATION TO PROVIDE

INFORMATION


The most recent case law clearly distinguishes obligation to provide information from other obligations:

Obligation to provide information Duty to warn.

∼ Paris Court of Appeal, Pôle 5 ch. 7, January 10th , 2012, No. 2010/04686, JurisData 2012-000135.

Considering that the bank justified the accurate, complete and not misleading information to its client, subscriber on the objective characteristics of the proposed product;

The characteristics of the Product BENEFIC are not giving to it a speculative nature, so the bank was not required, to a duty to warn about the risks. "

Obligation to provide information Duty to advice.

∼ Paris Court of Appeal, Pôle 5 ch. 7, October 25, 2011, No. 2010/12514.

In compliance with the obligation to provide information; [...] That therefore, the information appears to be sincere and complete since the reference of the randomness of the products was sufficient [...];

In compliance with the duty to advice; [...] Considering that the investment services provider must provide to his client an advice adapted to its personal situation.

1. GENERAL OBLIGATION TO PROVIDE

INFORMATION


1.1. Scope of the obligation to provide information :

1.2. Content of the information :

• 1.2.1. Information on the product’s characteristics;• 1.2.2. Costs information;• 1.2.3. Information on the advantages/ disadvantages ;• 1.2.4. Risks information.

1.3. Characteristics of the information :

1.4. Regime of the obligation:

1.1 SCOPE OF THE OBLIGATION TO PROVIDE INFORMATION


All financial actors must respect this general obligation to provide information, for all the products and all the investors.

∼ All the actors must give this information

• Investment services providers: Cass. Com. February 15th 2011, n° 10-12.185; Paris Court of first Instance, May 20th 2014, RG n°12/12842

• Financial investment advisors : Nancy court of Appeal, February 24th 2009, n° 04/02940.• Insurance intermediaries : Lyon Court of Appeal , June 26th 2014, RG n°12/00139• Direct marketers

∼ An information given for all the banking and financial products and services.

∼ An information provided for informed and non informed investors.

• Cass. Com. November 9th 2010, n° 09-69.997.

« But expected that Mr X.. [...] was an informed investor [...] the bank was not required to a particular duty to warn the client and it had fulfill its obligations by issuing, at the conclusion of this contract, an accurate and complete information about the risks. "

1.2 CONTENT OF THE INFORMATION


1.2.1. Information on the product’s characteristics;

1.2.2. Costs information ;

1.2.3. Information on the advantages/ disadvantages ;

1.2.4. Risks information.



1.2.1. Information on the essential characteristics of the products:

∼ CA Paris, 2 pole c. 5, October 25th, 2011, No. 09/05607.

The company Z must inform its clients about the essential characteristics of the proposed product.

∼ TGI Paris, May 16th, 2014, RG No. 09/07482.

The company CORE MANAGEMENT had to fulfill its obligation to provide information and advice, especially to provide a clear and complete information on the characteristics of the proposed investment, including the less favorable characteristics and the economic and fiscal risks.

∼ TGI Paris, May 27th, 2014, RG No. 09/01892.

The company Guinot becoming VIP Heritage Society, had to deliver, under its obligation to provide information and advice, a fair and complete information on all the characteristics of the proposed investment, including the less favorable characteristics and the risks associated to the options which can be the quid pro quo of its potential returns.



1.2.2. Costs information:

1.2.2.1. Inducements regime under articles 314-76 (investment services providers)and 325-6 (financial investment advisors) of the General Regulation of the AMF

1.2.2.2. Costs information by the KIID (Key Investor Information Document)

∼ The KIID is an information document for retail investors.

∼ Harmonized under European regulation

∼ Imposed for UCITS for the public

∼ A standardized table on fees and commissions paid to cover the operating costs of the UCITS: admission fees/exit/ current/ performance fee.




A point on the financial investment advisors 'compensation

∼ Fees: remuneration paid directly by the client

∼ Framed authorization to receive commissions from a third party

Criteria of inducements regime (Articles 314-76 and 325-6 of the General Regulations of the AMF):

• To clearly inform the client of the existence, the nature and the amount of the remuneration, commission or benefit, or where the amount can not be determined, the method of calculation ;

• To enhance the quality of service delivered to the client ;

• To serve in the best interests of the client.




The issues of the revision of current compensation framework

Trailer fees paid by producers / issuers of financial instruments represent about 80% of the financial advisors ‘ compensation ; the remaining 20% from fees or operations performed outside the scope of financial markets.

Objectives of a revision at the Community level:

• Strengthen the intermediaries’ advisory role to clients;• Fight against potential conflicts of interest;• Qualification criteria : "independence" of the service of investment advice :

i) sufficiently wide-ranging analysis of the market of savings products ii) prohibition to obtain commissions from third party

Risks associated

• Impact on the value of the commission on the cost of delivery charged to the client;• Disappearance of a part of the profession.




The Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 (MIFID II)

• Transparency of remuneration

Pre-contractual obligation to provide information (Article 24 paragraph 4c) : communication before providing the service, of the existence, nature and amount of compensation paid by a third party or if the amount can not be determined with certainty, the method of calculation.

• Frame of the remuneration

Continuation of the system of inducements (Article 24 paragraph 9): the payment of trailer fees is permitted if: • Designed to enhance the quality of the relevant service to the client; and • Does not impair compliance with the investment firm’s duty to act honestly, fairly and professionally in

accordance with the best interests of its client.

• Prevention of conflicts of interest

Investment firms take all necessary measures to prevent any conflicts of interest "caused by the receipt of inducements from third parties or by the investment firm’s own remuneration and other incentive structures.”(Article 23 point 1) “

1.2 CONTENT OF TE INFORMATION


1.2.2. Costs Information: Directive MiFID II

Constraints

Possibility for Member States to prohibit or restrict the payment of trailer fees, including requiring that those rights are redeemed or repaid to the client (Article 24 paragraph 8)

Investment advice provided on an independent basis

Prohibition to accept or to receive fees, commissions or non-monetary benefits of a third party in connection with the provision of an investment service or an ancillary service, on a discretionary basis (Article 24 paragraph 9)

Portfolio management provided on a discretionary basis

Enhanced transparency: communication of a periodic report listing all incentives granted or received in the previous period in relation to said management



1.2.2. Costs Information:

Draft of Directive DIA II

Largely inspired by MiFID II (Article 17 of the draft Directive DIA II - July 3rd , 2012)

Distinction between life and non-life insurance

Life insurance intermediaries

Client information before the signing of a life insurance contract on the nature of his compensation (fees and / or commissions).

Client information, during the execution of the contract, on the amount of fees charged or the method of calculation.

Non-life insurance intermediaries

No obligation to provide information unless at the client request, knowing he has been informed of this possibility.



1.2.2. Costs Information: Swiss case law: an example to be followed?

Federal Court, October 30th, 2012 (4A_127 / 2012 and 4A_141 / 2012)

Principle: Obligation to reimburse the rebates to the client concerning:

• The independent asset managers (independent financial advisors in France);

• Banks responsible for managing the assets of a client under a mandate;

• The bank receiving commissions from companies affiliated to a group.

Objective: To enhance transparency to fight against conflicts of interest

“The bank is encouraged to acquire or increase its own stock of a determined product so that the operation can not be justified in light of the client's interests.”

Exception: Waiver by the client of its right to return reimbursements

• Contractual waiver and informed consent;

• Customer information on:

i) the essential parameters of the agreement on the basis of which the rebates are calculated and paid;

ii) the predicted amount thereof.



1.2.3. Information on the advantages / disadvantages:

The distributor must inform the client on the disadvantages of the product, which are the quid pro quo of the advantages highlighted:

• Cass. com. April 13rd, 2010, No. 08-21334;

• Cass. Com. March 8th, 2011, No. 10-14456;

• TGI Paris, May 27th, 2014, RG No. 09/01892



1.2.4. Risk information:

1.2.4.1. Client Information:

The client must be able to make its decision in full knowledge of the facts:

∼ Lyon Court of Appeal, June 26th, 2014, No. 12/00139.

La Banque Postale is sentenced for having failed to take measures to explain to the clients the mechanism of the operation dealing with life insurance contracts, consequently they did not made a deliberate choice by subscribing to the financial investment which was supposed to guarantee the restitution of capital and an added value.



1.2.4.2. Customer Rating:

The risk information should be tailored to the client assessment.

The distributor must make a preliminary assessment of the :

• Financial position;

• Experience and knowledge regarding investment;

• The client's objectives.

∼ Cass. Com. January 10th, 2012, No. 10-28800.

The Bank must, when concluding the PEA, evaluate the financial situation of Mrs X, her investment experience and her objectives about the services requested, and provide the client a tailored information on the basis of this evaluation.

∼ CA Aix-en-Provence, December 12, 2013, RG No. 12/09846.

The Bank, as an investment service provider, is required to inquire into the financial situation of a client and fulfill its appropriate obligation to provide information based on skills assessment of the client.



∼1.2.4.3. A special case in tax exemption real estate transactionAn investor should be informed, in return to benefits announced by an advertising brochure, on the less favorable aspects and risks inherent to the acquisition of this type of real estate product (investment in a historic building).

∼ Cass. Com., January. 8, 2013, No. 11-19387

A bank and a real estate agency, both subsidiaries of the same group, having distributed the product in question may be liable for the failure to provide information and advice to investors.

In this case, investors received an advertising brochure describing some aspects of the operation, including the estimated cost of work on the building, as well as two expected tax savings personalized perspective. However, the cost of work has significantly increased.

Calling into question of the global economy of the investment operation

The information on the cost of work provided by the bank and the company Afedim at the conclusion of the investment operation by Mr. and Mrs. X had not allowed them to measure the risk, so the bank and the company had breached their obligation to provide information and advice, by depriving them of the opportunity to assess, in full knowledge, the suitability of the proposed operations to their situation and their expectation.

1.3 CHARACTERISTICS OF THE OPERATION


The information must be clear, accurate and not misleading.

The objectives of the case law is to enforce these characteristics:

∼ Cass. Com. February 15th, 2011, No. 10-12185.

The banker is held to provide his client a clear, accurate and not misleading information on the financial products it offers.

∼ Bordeaux Court of Appeal, February 28, 2013, No. 11/04949

An information note given to the client is not sufficient for the bank in satisfying its obligation to advice on the relevance of the products to be subscribed, and it must draw attention of the client on the risks inherent in the products, without promoting with imbalances the information on the advantages, for the purpose to deliver a clear, accurate and not misleading information.

1.3 CHARACTERISTICS OF THE INFORMATION


The information should be consistent.

∼ Cass. Com. January 19, 2010, No. 09-10627:

Regarding to Article 1147 of the Civil Code, the publication in order to purchase contentious mutual fund shares issued by La Poste to Mr. X must be consistent with the proposed investment.

∼ CA Toulouse, June 3, 2014, RG No. 13/00283:

In addition, the publication issued by the person who offers his client to subscribe for mutual funds shares must be consistent with the proposed investment and mention the less favorable characteristics and the risks inherent of the options that may be the quid pro quo of the advertised benefits.

1.3 CHARACTERISTICS OF THE OBLIGATION


The information must be prior to the investment.

∼ Cass. Com. November 30, 2010, No. 09-70810:

"But whereas the judgment holds that the company ... Z should have received a specific information about the risks before the signing of the contract, and not after it [...]"

∼ Pau Court of Appeal. November 29, 2013, RG No. 13/4533:

It was judged that the only reference, in the general terms of " savings invested in the mutual management fund follows its evolution ... “,” the value of units of account can be higher of lower "and " the subscriber will bear all the investment risks on the investment supports "does not fulfill the obligation of the bank to provide specific information on risks and must be issued before the subscription of the contract.

1.3 CHARACTERISTICS OF THE OBLIGATION


Use by an financial advisor of an advertisement prepared by another professional.

Active obligation to provide information

∼ Paris Court of Appeal, pole 5 ch. 6, October 11, 2012, No. 10/15784.

A financial advisor, using directly from an investor an advertisement produced and distributed by a insurance brokerage firm, does not demonstrate the fulfillment of its obligation to provide information and advice by the delivery of the information notices and appendices which, because of their generality, are not sufficient to ensure the subscriber information “as a result of the inconsistency, if not contradiction existed between advertising documents that had been given to Mr. B. and contract documents signed. "

Even though a financial advisor would not be responsible for the design and dissemination of the information provided, it must adopt a proactive approach to ensure that all information, including promotional communications, addressed by an investment services provider to clients, have an exact, clear and not misleading content and are consistent with the proposed investment.

1.4 REGIME OF THE OBLIGATION TO PROVIDE INFORMATION


Under Article 1315 of the Civil Code, there is a general principle that the burden of proof of compliance with the obligation falls on the distributor:

∼ Cass. Civ. 1st February 1997, No. 94-19685 25;

∼ Reims CA, September 10, 2013, RG No. 11/03496.

Those who are legally or contractually under specific obligation to provide information must supply proof that this obligation has been discharged.

∼ Cass. Com. February 16, 2010, No. 09-12071;

∼ Cass. Com. March 22, 2011, No. 10-13727;

Pursuant to Articles 1315 and 1147 of the Civil Code;

The Court of Appeal had reversed the burden of proof and violated the aforementioned texts, whereas the Bank must supply proof of the fulfillment of its obligation to provide information to its client.

2. DUTY TO ADVICE


Adequacy of investment

The professional must ensure the adequacy of investments made by his client in relation to his personal situation, his knowledge, his experience and investment objectives. ∼ Cass. com September 23, 2014, n° 13-22.763

A financial advisor at the origin of the proposed client asset management strategy can not simply provide to his client all the pre-contractual and contractual information under his obligation to inform.

∼ Paris Court of Appeal, pole 5 ch. 7, November 6, 2012, No. 2011/06225.

The brokerage firm had not fulfilled its obligation of advice, information and warning, as a financial investment professional, therefore it could not justify having at whatever time and in any manner whatsoever, including by the delivery of the information notice, provided the adequacy of investment made by his client in relation to his knowledge and personal situation.

∼ Paris Court of Appeal, pole 5 ch. 6, December 20, 2012, No. 11/03494.

Considering that the investment services provider can not be deliver to its investigations to ensure market transparency and should verify in each individual case, the investment medium is consistent with the profile management in line with the needs and objectives of its client.

3. DUTY TO WARN


Draw the client’ attention on the risks of the intended operations.

Dual condition:

• There is a speculative transaction;

• He is not an informed investor.

∼ Cass. Com., June 12, 2012, No. 11-21661.

The investment service provider is liable, from the beginning of the contractual relationship, and whatever the nature, to warn his client against the risks involved in speculative trading in futures markets, except if he has full knowledge of it.

CONCLUSION


∼ Increase of the number of decisions by the French courts

They “transpose in advance" European regulation relating to the harmonization of obligations owed by the financial products distributors,

∼AMF Position No. 2012-132 of October 5, 2012 on the requirements relating to the adequacy for a client of investment services or financial instruments,

The extent of information to be collected from clients should be based on services and products offered

∼ Joint action of the AMF and the ACPR to the gathering of information to the knowledge of clients

AMF position No. 2013-02 applicable to the marketing of financial instruments

ACP Recommendation No. 2013-R-01 for the marketing of life insurance contracts


ANY QUESTIONS?

Silvestre Tandeau de Marsac

Lawyer at the Paris Bar

SCP Fischer, Tandeau de Marsac, Sur & Associés

67, boulevard Malesherbes – 75008 PARIS [email protected]

www.ftms-a.com Tél +33 (0)1 47 23 47 24 Fax +33 (0)1 47

23 90 53

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