In this paper I examine the liability regime under Greek law when banks or other investment firms offer advice to their clients to invest in atypical financial products. I am talking mostly about banks but my findings apply to investment firms as well. I leave outside of my presentation cases of fraud, i.e., cases where bank employees deliberately give false information or advice to their clients. The main example is when a bank advises its client to invest in atypical assets, but fails to provide all relevant information or fails to adequately warn the client about the risks. The investment is not successful and the investor suffers losses. Does he have a compensation claim against his bank?
First question when dealing with the subject: What are atypical financial products? There is no formal definition in Greek law. Moreover, there is hardly any useful definition generally. Actually, one way to understand atypical products is as a contrast to typical ones. Atypical is a product if it is not typical. But what are typical financial products? Maybe one could speak about conventional versus alternative investments. But, besides old-fashioned financial investments (bonds, shares, cash) everything more exotic could be seen as alternative or unconventional. And since there is hardly any sector of the economy that innovates so extensively in the products and services it provides as the financial sector, what is unconventional today may be conventional tomorrow. On the other hand, investment products that are seen as alternative or unconventional (e.g. investments in precious metals, paintings, real estate, or even wine) are unconventional only in the sense that they are recommended by banks as alternatives to financial instruments. There is per se nothing unconventional in investing in gold or real property. And do these alternative investments have anything in common with investing in exotic new assets of the digital economy such as non-fungible tokens (NFTs)?
In my view, a more productive distinction when examining the liability of banks recommending financial assets would be between regulated and unregulated products. Non-legal criteria, such as the statistical occurrence in financial transactions, the novelty of their design, their connection with technology, etc., are not as useful as elements of a definition in connection with legal questions. Such features are found in both classes of assets, both typical and atypical. On the other hand, regulation on a class of products may have a significant impact of the question on liability. In any case, the distinction between regulated and unregulated assets can serve as a close proxy for the distinction between typical and atypical ones. As unregulated are here considered all products that are not the subject of specific legal treatment as investment assets. Under this distinction investment advice for a 90-year-old bottle of wine and for a specific NTF would fall under the same notion as both are not regulated as investment assets. Conversely, a derivative contract relating to commodities would be surely and unconventional investment. But it is nevertheless a financial instrument und thus regulated by MiFID.
The exact nature of the investment product is on the other hand not as important. The focus is not on the asset itself but on the advice for the investment in it. The exact nature and the specific properties of the asset do not change the underlying conflicting interests between the investor and the bank. This is specifically true with regard to the reliance of investors on their banks for advice as well as the vulnerability of their position, since they often lack the necessary expertise, experience, and information. In the same vein, there is no such thing as an absolutely safe investment. It follows, that even if the advice that the investors receive from their banks is perfectly sound and reasonable, their investment may still not be successful, and they may end up losing a lot of money. In this respect, it does not make any difference whether the bank recommends regulated or unregulated investment products. In both cases it is the quality of the advice that matters, which means that the criteria we need to evaluate the quality of the advice cannot be that different.
In view of these observations, a good starting point for the analysis of the liability in connection with unregulated products could be the liability in connection with regulated products. This will determine the impact of regulation on the liability of banks and highlight the crucial points in which the liability for regulated products is similar or different from the liability for unregulated ones.
This poses the question of how the regulation influences the liability regime. I will consider this question using the example of MiFID, the most comprehensive legislative text regarding the provision of investment services in Europe.
Investor protection is a core aim of MiFID. However, the Directive does not contain any rules establishing the obligation of banks to pay damages to investors in case of a breach of the conduct of business rules stipulated in it. If and to what extent investors can sue their banks for damages caused by investment services is outside of its scope and left to the discretion of the national law of each Member State.
Only art. 69(2) (final part) of MiFID, shows in the direction of liability: It obliges Member States to establish mechanisms to ensure that compensation may be paid or other remedial action be taken in accordance with national law for any financial loss or damage suffered as a result of an infringement of the directive. Nevertheless, the impact of this provision on the liability of banks should not be overestimated. First, the inclusion in art. 69 of MiFID II, which sets out the supervisory powers of the competent authorities, indicates that it covers administrative measures and not judicial remedies. Secondly, it leaves the configuration of the ways in which compensation will be granted in the hands of the national legislator and does not directly prescribe any liability of banks.
Generally, MiFID relies, for the enforcement of its standards, on administrative law means. It lays upon the national supervisors the task of ensuring that its conduct of business rules are observed by market participants, which should further lead to the harmonization of the investment services within the single European market. The primary concern of MiFID is not the corrective (ex post) justice between banks and their clients (investors) in case of a breach of its rules. The Directive focuses rather on the preemptive (ex ante) enforcement of its rules under the supervision of the national public authorities. The MiFID conduct of business rules are not conceived as directly shaping the legal relationship between banks and investors. MiFID does not establish private law rights and obligations.
This is also the view of the Court of Justice of the European Union (CJEU). In its judgment of 30 May 2013 case Bankinter, the court ruled that it is for the internal legal order of each Member State to determine the contractual consequences of non-compliance with the obligations of MiFID. Of course, the particular was only about the validity of the contract between the bank and the investor. Nevertheless, the ruling of the CJEU seems to have a wider scope and to encompass all civil law consequences of the violation of MiFID rules, including compensation for damages.
MiFID, not least because of its central role, is exemplary for the choice of the European legislator in the financial law to leave the Member States free to decide about civil law consequences of the infringement of its rules, including liability for damages. Indeed, rules on the civil liability of market participants are, if they exist at all, generally narrow in their scope. For example, the recently adopted MiCA Regulation contains rules on civil law liability, but this liability is only for the information given in a crypto-asset white paper or for the loss of crypto-assets held in custody. It is not for banks suggesting investment in crypto-assets.
The Greek law transposing MIFID does not provide any rules regarding the liability for investment advice in connection with financial instruments. It follows that investors who have suffered damages must rely upon general rules of civil law for compensation. In particular, they may rely on contract or pre-contractual liability, tort law, and professional liability.
Contractual liability is of course based on a contract. However, as the relevant case law shows, in most cases there is no explicit agreement between the bank and its client for the provision of investment advice. This is not an obstacle to establishing contractual liability. In the majority of cases it should be easy to accept an implicit agreement. Regardless of whether the bank approaches the investor or vice versa, the fact that the bank gives investment advice must, as a rule, be construed as an offer or acceptance for a binding agreement. In this regard, it is crucial that the provided advice is great economic importance for the investor who in turn relies on his bank for proper advice, whereas the bank expects a direct or usually indirect benefit from the advice.
As a next step, the exact breadth of the bank’s obligations towards its client must be determined. Here the principle of good faith plays the central role, especially in the case of an implicitly concluded agreement. According to art. 200 of the Greek Civil Code, contracts are to be interpreted as required by good faith. In the same vein, art. 288 CC stipulates that a debtor has a duty to perform his obligations according to the requirements of good faith. So, the main question would be here: What are the requirements of good faith with respect to the advice that the bank must provide? Surely, not any investment advice would be adequate.
Based on the principle of good faith, the bank has a general obligation to provide correct, complete, and understandable investment advice, in order to help the investor make an educated investment decision tailored to his specific needs. What is required, in a specific situation, depends on the circumstances of the case, but in general, two main factors are crucial: the individual investor (“know your customer”) and the specific investment object (“know your product”). First, the bank needs to tailor the recommendation of an investment to the personal characteristics of the investor. Secondly, the bank must tailor the advice to the nature and risks of the intended investment that are of importance to the investor’s decision. This entails the duty to disclose information about the investment (including foremost its risks) in a manner that makes it understandable to the individual investor, depending on the investor’s knowledge, experience, and expertise.
It should be clear by now that the contractual duties of the bank based on good faith overlap in their content with the regulatory duties imposed by MiFID in art. 24 and 25. Most notably here the suitability test stipulated by art. 25(2)(1) of MiFID (the advice must be tailored to the specific investor’s needs) imposes similar duties as those mentioned earlier.
However, the regulatory duties laid down in MiFID II do not become automatically and directly part of the contractual duties of the bank. The regulatory conduct of business rules and the contractual duties of banks should be seen as two distinct legal frameworks for the provision of investment services. The first legal framework (regulatory duties) operates when the supervisory authorities enforce the rules of the Directive and aims at harmonizing the European investment services landscape by adopting uniform duties that all banks must observe towards their clients when offering investment services. The second framework (contractual duties of care) deals with the (ex post) application of justice in each individual case based on the rules and principles of the Greek contract law.
According to this model of two distinct legal frameworks, the regulatory conduct of business rules of the Directive cannot find their way directly into the contractual obligations program without the application of civil law concepts and most notably the principle of good faith. These concepts act as gateways or mediators between the rules of MiFID and the application of civil law rules by the courts when adjudicating compensation claims.
This does not mean that the conduct of business rules of MiFID II should not be considered by the courts when adjudicating compensation claims of aggrieved investors. On the contrary, the conduct of business rules of MiFID II incorporate the extensive, decades-long experience and expertise of the regulatory authorities on an international level. They indicate the level of investor protection that is regularly necessary for the proper functioning of financial markets.
However, the conduct of business rules in MIFID are generally designed to address the typical risk situations affecting large groups of investors, whereas, in some respects, they are ultimately the product of political compromises between the Member States. Conversely, courts adjudicate concrete cases in which atypical situations may arise, that have to be taken into consideration. Here is where the flexibility of the principle of good faith when applied in contract law comes into play. It allows (indeed it compels) courts to consider the peculiarities of each individual case and do justice to the parties. They must do that by considering the specific circumstances that come up each time and accommodate unusual situations, that could not have been encompassed in a general rule.
It follows that in most cases, where the conflicting interests of the parties are more or less typical, the courts can (and mostly should) as a rule, apply the principle of good faith in accordance with MiFID II. In addition, however, this approach leaves room for considerable deviation when the courts adjudicate atypical cases, i.e., cases which are in some crucial respects different from the usual circumstances that the legislator of MiFID considered. In such cases, good faith may dictate a different set of contractual duties depending on the peculiarities of the situation at hand. In particular, it may impose more extensive or stricter contractual duties towards the investor than the regulatory duties.
For example, MiFID permits disclosure of information to investors in a standardized format (art. 24(5)). This can be adequate in most cases, but not always. In the case adjudicated by a Greek court, the investor, a retiree and a former sailor and later construction worker, had only graduated elementary school. He took investment advice from his bank and was persuaded to invest in Lehman Brothers securities. The court decided that, if the claimant had been explicitly warned orally by the bank employees about the true risks of his investment, he would have refrained from it. The standardized written warning by the bank was not enough in this case.
Similar duties towards the investor can arise during negotiations, based again on the principle of good faith according to art. 197 CC. As with contractual obligations, pre-contractual duties would have to be determined on a case-by-case basis. Nevertheless, establishing the liability on pre-contractual duties would be of little importance in connection with investment advice, as in the majority of these cases an agreement is implicitly concluded. Pre-contractual duties would become practically important if one is reluctant to accept such an implicit agreement.
Whether contractual or pre-contractual, bank duties towards the investor give rise to liability if breached, according to general civil law rules.
Contractual liability is however not the path preferred by Greek jurisprudence in connection with investment services. Greek courts base their decisions invariably on tort law, even when they refer, in their obiter, to an (impliedly concluded) investment services agreement. This is made possible by the relatively open wording of art. 914 CC, which sets illegal behavior as a basic condition of civil liability.
Despite this preference, the substantial arguments used by Greek courts in the context of tort law are hardly different from those presented above with regard to contractual liability. Even when they operate within tort law, courts resort to general principles and, more often than not, to the same principle of good faith that dominates contract law, in order to find if a bank has violated a general duty of care towards its client. Because courts decide by evaluating the concrete circumstances of each case in the light of general principles, it should not come as a surprise that their results are quite similar to the results they would have achieved if they had argued within contract law. In essence, the line of reasoning explained before in connection with contractual liability is the same as the line of reasoning that the courts make use of based on tort law.
At the same time, however, the courts are explicitly citing the conduct of business rules laid down in the legislation implementing MiFID in conjunction with art. 914 CC. The violation of these rules establishes the illegality of the bank’s behavior.
Nevertheless, the courts do not clarify the relationship between the general principle of good faith and the specific conduct of business rules of MiFID II. It seems plausible that they treat the conduct of business rules stipulated in the investment services legislation as legally provided manifestations of the duties that the courts would otherwise derive from general principles. If this is correct, it implies that, absent any specific legislatively defined conduct of business rules, the application of general principles would be enough to establish similar duties of care, which would in turn lead to the same result, namely liability for negligence.
Under both contract and tort law, the investor would have to prove a) that the bank has breached its duties, and b) that he has suffered damages because of this breach. Depending on the circumstances, this can be difficult to achieve. Art. 8 of the consumer protection law alleviates the problem by reversing the burden if the investor is a consumer, i.e., any natural person who acts for reasons outside his trade, business, craft, or profession. In this case, the investor has to prove neither that the bank has breached a duty of care nor that the damages suffered are the result of such a breach. It suffices to prove that he has suffered damages due to the provision of the service (not the breach of duty during the provision of service). The threshold for this proof is quite low here as the investor just follows his bank’s advice and invests in the recommended product. The bank must on the other hand prove either that it has not breached any duty (for example because it has properly disclosed all relevant information) or that the damages are not due to a breach of duty (for example because the investor would have proceeded with the investment despite any warning by the bank).
The scope of professional liability does not cover all retail clients as defined in MiFID (under retail clients MiFID understands not only individuals but legal entities as well). Nevertheless, this restriction is not of great practical importance. As the relevant case law shows, aggrieved investors are usually individuals who seek investment advice with regard to their private funds.
In order to download the whole paper please use the following link: Atypical Assets – papadimitropoulos
