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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Zaki & Ors v Credit Suisse (UK) Ltd [2013] EWCA Civ 14 (01 February 2013)
Cite as: [2013] 1 BCLC 640, [2013] 2 All ER (Comm) 1159, [2013] 1 CLC 341, [2013] EWCA Civ 14

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Neutral Citation Number: [2013] EWCA Civ 14
Case No: A3/2011/2727

2009 FOLIO 1393

Royal Courts of Justice
Strand, London, WC2A 2LL

B e f o r e :



ZAKI & Ors
- and -



(Transcript of the Handed Down Judgment of
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Mr Robert Anderson QC and Shaheed Fatima (instructed by Howard Kennedy Solicitors) for the Appellant
Mr Adrian Beltrami QC and Mr William Edwards (instructed by Freshfields Brukhaus Deringer LLP) for the Respondent
Hearing dates : Wednesday 13th June 2012
Thursday 14th June 2012
Monday 9th July 2012
Tuesday 10th July 2012



Crown Copyright ©

    Lord Justice Rix :

  1. This appeal, and the claim which underlies it, has been brought by Soheir Ahmed Zaki, the widow of Mohamed Magdy Zeid, a wealthy and successful Egyptian businessman, and by their two daughters, Shahira and Bahira Zeid. Mr Zeid died, at the age of 77, in May 2010. The claim arises out of the severe downturn in markets which occurred in September 2008. Mr Zeid had been invested in structured financial products, known as CDIs (the "notes"), which he had bought from the respondent (at trial, the defendant), Credit Suisse (UK) Limited (the "bank", or "CSUK"). When in October 2008 the bank made a margin call on Mr Zeid, he was unable or unwilling to meet it, his holdings were liquidated and he suffered a loss of US$ 69.4 million. His claim has been carried on by his widow and his daughters, who were joint account holders with him. At trial, Mr Justice Teare gave judgment in favour of the bank. The appeal centres around COB 7.9.3 and the suitability of the bank's lending to Mr Zeid for the purpose of his purchase of the notes.
  2. COB stands for the Conduct of Business Rules. Until 31 October 2007 these were the Rules which regulated investment business pursuant to section 138 of the Financial Services and Markets Act 2000. From 1 November 2007 COB were replaced by COBS, the Conduct of Business Sourcebook Rules. We are concerned only with COB, because the notes involved in this appeal ("notes 1-7") were all purchased before the end of October 2007, in the period from 2 February to 22 October 2007.
  3. In particular we are concerned with COB 7.9.3, which concerns "Restrictions on lending to private customers". It will also be necessary, however, to refer to COB 5.3.5, which is the central rule dealing with the "Requirement for suitability generally".
  4. Mr Zeid, as I will explain below, was an experienced and self-confident investor, as well as being an immensely wealthy and successful entrepreneur. Even so, it was common ground that he was to be classified under COB as a "private customer" to whom the full range of duties owed to private customers applied. The judge found that, so far as notes 1 to 7 were concerned, the bank was in breach of no duty, and that the notes were suitable for Mr Zeid. The finding of suitability is a central and significant finding which the appellants need, in one way or another, to displace or undermine. Their argument, essentially by reference to the bank's lending and COB 7.9.3, a restriction on lending rule, follows a somewhat complex route, as will appear below: but the judge's finding of suitability, and also a finding of lack of causation, present difficulties in their path.
  5. I shall set out the key wording of the critical COB rules now (but see also the Annex to this judgment).
  6. Thus COB 5.3.5 R, the suitability rule, provided in part:
  7. "(1) A firm must take reasonable steps to ensure that, if in the course of a designated investment business: (a) it makes any personal recommendation to a private customer to (i) buy…a designated investment…the advice on investments or transaction is suitable for the client."

    The bank therefore had to take reasonable steps to ensure that its investment advice was suitable for Mr Zeid.

  8. COB 7.9.3 R, the restriction on lending rule, provided in part:
  9. "A firm…must not lend money or grant credit to a private customer (or arrange for any other person to do so) in the course of, or in connection with, its designated investment business unless:
    (1) the firm has made and recorded an assessment of the private customer's financial standing, based on information disclosed by the private customer;
    (2) the firm has taken reasonable steps to ensure that the arrangements for the loan or credit and the amount concerned are suitable, based on the information disclosed by the private customer, for the type of investment agreement proposed...

    (3) the private customer has given his prior written consent to both the maximum amount of the loan or credit and the amount or basis of any interest or fees to be levied in connection with the loan or credit."

  10. Thus, to gloss the matter broadly, the bank had to assess Mr Zeid's financial standing (based on information disclosed by him), a matter of process, and take reasonable care to ensure that, upon that basis, the arrangements for the loan, and its amount, were suitable for the type of transaction proposed (a matter of suitability), and obtain prior written consent to the essential details of the loan. Unless those matters were done, the bank should not have lent money, and, it may be said, were prohibited from doing so.
  11. Issues have arisen on this appeal about the details of COB 7.9.3 and its relationship, so far as suitability is concerned, with COB 5.3.5. If the transaction as a whole, including the lending of money, and in particular the leverage connected with the transaction, is suitable, does anything else matter? Do matters of process matter? Is the test of suitability within COB 7.9.3(2) the same or narrower than the test of suitability within COB 5.3.5? If a transaction is found to be suitable within COB 5.3.5, as the judge found the transactions concerned to be suitable for Mr Zeid, does that eliminate any possible argument within COB 7.9.3? Or did the judge in any event consider the question of COB 5.3.5 suitability too narrowly, so as to leave an argument within COB 7.9.3 open, because the judge did not consider the bank's knowledge of and attitude to the liquidity of Mr Zeid's position, as distinct from his overall wealth? And, at a more detailed level of enquiry, had the bank been involved at all in arranging the loans concerned, where the actual lending had been done by a different company within the overall Credit Suisse group? And was the COB 7.9.3 suitability issue a limited one (see sub-rule (2)) concerned only with the type of transaction and the amount of the loan? And, at a more general level again, if there was any failure at all within the terms of COB 7.9.3, did a prohibition of lending in such circumstances ("must not lend…unless…") mean that all the consequences of such lending fall upon the bank, or is there still room to ask whether the bank's scope of duty extends so far, or whether Mr Zeid's determination to make the transaction in any event breaks any chain of causation?
  12. These issues arose against the background of submissions that the judge's findings had not dealt sufficiently with COB 7.9.3 in his judgment, or with aspects of suitability; as well as with submissions that the points sought to be raised on behalf of the appellants were not open to them in the light of the way in which the trial had been conducted below.
  13. By way of this introduction, I would finally mention that the trial below was concerned in all with ten notes bought by Mr Zeid on the personal recommendation of the bank. There is no appeal in relation to the failure of the claim with respect to notes 8-10, only with respect to notes 1-7. Notes 8-10, which were bought between 19 May and 27 June 2008, differed from notes 1-7 in at least two respects. First, they were bought during a period of greater market turbulence and volatility, not long before the crash of September 2008, and for these and other like reasons the judge found that, unlike his finding concerning notes 1-7, they were not suitable for Mr Zeid. He also found that the bank was in breach of its statutory duty with respect to those notes under what had become COBS 9.2.1. My reference to COBS 9.2.1 reflects the second main difference which affected notes 8-10, which was that they were bought in the period of COBS, not COB. Therefore, the suitability provision which used to be found in COB 5.3.5 was now to be found in COBS 9.2.1, and the restriction on lending provision which used to be found in COB 7.9.3 had disappeared. Instead there was COBS 9.3.4, headed "Loans and mortgages", which merely provided, as a matter of guidance, that –
  14. "COBS 9.3.4 G When considering the suitability of a particular investment product which is linked directly or indirectly to any form of loan…a firm should take account of the suitability of the overall transaction."

    Thus COBS enacted in terms what the judge had interpreted the overall effect of COB 5.3.5 and COB 7.9.3, read together, to be.

  15. Despite those findings of unsuitability concerning notes 8-10, however, the judge went on to find that there was no causative loss, because he considered that it had not been shown that Mr Zeid had relied on the bank's advice. More than that -
  16. "if Mr Zaki [the bank's representative] had advised that notes 8-10 were unsuitable, it is more probable than not that Mr Zeid would still have purchased them and suffered loss when they were liquidated" (at para [133]).

  17. There is no appeal against the judge's ultimate conclusion with regard to notes 8-10. There is in any event a disconnection between notes 8-10 and notes 1-7 because the true basis of the appeal with regard to notes 1-7 is in COB 7.9.3 of the COB Rules, which has not survived into COBS.
  18. This appeal, like the trial below, is concerned only with breach of statutory duty, not with common law remedies in tort or contract.
  19. Having introduced the critical provisions of COB 5.3.5 and COB 7.9.3 at the outset, I refer more fully to COB and COBS and their statutory foundation, putting those rules in the wider context, in the Annex to this judgment.
  20. The notes and their financing

  21. The notes were known as "CDIs". The judge said that it had never been explained why that was so. However, they were "Callable Bullish Notes", a type of yield enhancement structured product. In general they provided a periodic coupon at an enhanced rate. Their term could vary note by note but was typically for a number of years. At the end of the term, they were repayable at 100%. They could also be bought back by the issuer, here the bank, ie "called", at any periodic coupon payment date. Thus, if all went well, the notes would provide an enhanced yield (ie enhanced as compared with current deposit rates), and, if held from issue to expiry, no capital appreciation or loss. The down-side risk, however, which bought the enhanced yield, was that the notes were linked to one or more indices (or one or more individual stocks) and if one or other of the indices (or stocks) breached a "barrier level" on the downside, then no coupon would be paid during the period in which the barrier had been breached and the note would redeem at only the final level of the worst performing index or stock. The "barrier level" was fixed at (say) 55% of the strike price. Thus the risk of a breach was low, or considered to be low, because the index (or stock) would have to decline substantially for the barrier to be reached. On the other hand, there was a substantial risk of loss in a poor market. I believe that the notes could also be bought and sold in a secondary market, and in any event they would fluctuate in value depending on market circumstances and the way in which such circumstances had operated and/or were expected to operate on the outcome of the notes. In the event, the market crash which followed the failure of Lehman Brothers in September 2008 substantially reduced the value of the notes: at trial the loss resulting from liquidation was agreed to be US $69.4 million.
  22. Mr Zeid bought the notes on a leveraged basis with the assistance of credit from the bank's associate company in Geneva, Credit Suisse AG (CSAG). I will refer to the terms of Mr Zeid's credit arrangements below.
  23. Thus notes 1 and 2 were bought on 2 February 2007. Note 1 cost $5.2 million, and was bought with the aid of $3.9 million of borrowed money. Note 2 cost $20 million, and was bought with the aid of $15 million of borrowed money. So both these notes had leverage of 75%: that is to say Mr Zeid's equity investment of 25% bought 4 times what his equity investment would have permitted by itself. Note 1 had a term of 5 years and a 55% barrier. Note 2 had a term of 3 years and a 60% barrier. Both were referenced to three indices, the S&P 500, the Eurostoxx and the Nikkei. The bank's records on its Private Client Relationship Management system (PCRM) stated inter alia that Mr Zeid was fully liquid both at Credit Suisse and also at other banks.
  24. Note 3 was bought on 30 March 2007, for $20 million, with the assistance of a loan of $15 million. So the leverage there was again at 75%. The note was referenced to the same three indices. The bank's PCRM record was that Mr Zaki originally advised against the purchase because it would leave Mr Zeid's account close to shortfall, ie close to requiring additional margin (security for the borrowing): but that in the event the account increased in value and the trade became possible.
  25. Note 4 was bought on 8 May 2007, referenced to the same three indices, for $10 million with the aid of a loan of $7.5 million, another leverage at 75%. It followed the redemption of another product for $24 million.
  26. Note 5 was bought on 11 June 2007, and was again for $10 million, leveraged at 75%, and was referenced to the same three indices.
  27. Note 6 was bought on 29 June 2007, for $10 million, this time with the aid of $7 million of borrowed money. Thus the leverage was at 70%. It was referenced to the same three indices. The PCRM record referred to the redemption on the same day of another product.
  28. Note 7 was bought on 22 October 2007, also for $10 million, but on this occasion the leverage was at 80% ($8 million was borrowed). However, there was $11 million in cash in Mr Zeid's account, as the PCRM record for 31 July 2007, at a time when this purchase was anticipated, refers to Mr Zeid as pointing out. The judgment does not refer to the relevant indices, but I infer they remained the same. The market had fallen and the PCRM record also spoke of a "recent dip in the market". In retrospect this fall marked the first serious crack in the bull market which had obtained for a number of years and was the harbinger of worse to come a year later. In the meantime, however, markets recovered but became more volatile. Mr Zeid remained "bullish", as the PCRM notes also remarked.
  29. These 7 notes are the investments with which this appeal is concerned. I will refer briefly to notes 8-10 in order to complete the picture. Note 8 was not purchased until 19 May 2008: it was bought for $16 million with the aid of a loan of $5.5 million. Thus leverage was at 35%. It was referenced to four indices. The PCRM noted that Mr Zeid's risk profile was rated lower than the note and that the product was "potentially unsuitable". Note 9 was not referenced to stock indices, but to three banking stocks, namely JP Morgan, BNP Paribas and Barclays. Bank shares had had a hard time. The note cost $18.1 million with $10.1 million of that on borrowed money, a leverage of 56%. The PCRM record stated that Mr Zeid was "looking for enhanced return and is willing to take some risk". Note 10 was bought on 27 June 2008, for €20 million, with a loan of €15 million, a leverage at 75%, referenced to four indices. The judge found that it again reflected Mr Zeid's bullish outlook.
  30. Mr Zeid and his relations with the bank

  31. Mr Zeid had graduated from Cairo University with a degree in chemistry. In 1978 he established Maridive, which provides marine and oil support services in the Middle East and North Africa. Maridive became a great success and in May 2008 its shares were offered to the public, reporting an operating profit for 2007 of nearly $100 million. Mr Zeid's daughter, Shahira, is now chairman of the family investment holding company. At the time of trial she accepted that Maridive was worth $1.5 billion and that the family retained a holding of 17.64% worth about $300 million. She also accepted that the total family wealth, diversified into other businesses in Egypt, China and Europe, in 2007 would not have been less than $600-700 million.
  32. Mr Zeid had begun to purchase structured products from Credit Suisse First Boston (CSFB), the predecessor of CSUK, the bank, in 2003. His relationship manager throughout had been Mr Mahmoud Zaki (no relation to Mrs Zaki). At the time relevant to the notes with which we are concerned Mr Zaki was employed by another company within the Credit Suisse group, namely Credit Suisse Securities (Europe) Ltd ("CSSEL").
  33. In September 2003 Mr Zeid had opened an account with CSAG, in the name of his wife and daughters as well as himself. This involvement of his wife and daughters was done at least in part for succession purposes. Mr Zaki dealt only with Mr Zeid, as the appellants recognised and accepted. Mr Zeid was in every way their agent for the conduct of the family's investments. The judge found that they could not assert that what was suitable for Mr Zeid was not suitable for them. Nevertheless, they were of course owed the same statutory duties as were owed to Mr Zeid himself.
  34. On 2 December 2003 Mr Zeid and the appellants (the "Zeid family") signed a Private Banking Agreement with CSFB in London, by which CSFB was to provide, inter alia, an advisory service. The family's investment objectives were described as "Growth/Maximise capital growth" and included the purchase of derivatives and structured products with high risk profiles.
  35. Between 15 December 2003 and January 2005 the Zeid family entered into credit facilities with CSFB or CSAG (it was not clear which) which rose during this period from an initial $21 million to $100 million, plus an additional £8 million sterling.
  36. On 14 February 2005 the bank replaced CSFB.
  37. On 15 September 2006 Mr Zaki's assistants, Francis Menassa and Christian Robinson, applied on behalf of the Zeid family for a "Framework Credit Limit" agreement from CSAG, which came into effect later in the same month. It applied to all existing loans. I will refer to these credit facilities in greater detail below.
  38. Between 2003 and the purchase of note 1 in February 2007 Mr Zeid had previously purchased 29 structured products from CSFB or the bank. Of these, 14 notes were capital protected (ie no capital loss could be suffered on them if held to maturity), but 15 were not. In nearly every case, the products were bought on a leveraged basis, typically at 75% or thereabouts. During the same period Mr Zeid was buying structured products from other banks as well, such as Barclays and Citibank, sometimes on a leveraged basis. Thus, by the period with which this appeal is concerned, Mr Zeid had great experience in dealing with the relevant type of investment, and with investing on a highly leveraged basis.
  39. Mr Zaki worked on the bank's Middle East desk. He met Mr Zeid in Cairo or elsewhere as necessary. Their relations were friendly. Mr Zaki would explain the notes in detail, including the risks associated with them and the effect of leverage on those risks. Ultimately, however, Mr Zeid decided what trade to carry out. The PCRM records supported this account of the relationship. The judge said:
  40. "[38] These [PCRM records] paint a picture of Mr Zeid having his own ideas as to what he wanted, examining critically the notes offered to him by Mr Zaki and suggesting changes to the notes offered to reflect his wishes. They also show Mr Zaki explaining the advantage of diversity. They certainly support Mr Zaki's oral evidence that the discussions about structured products were "two-way". The notes do not suggest that Mr Zaki's description of his discussions with Mr Zeid is unreliable. I therefore accept his description of those discussions."

    The judge also went on to say (at his para [133]):

    "To invest in products linked to equity markets in May/June 2008 one had to have a serious appetite for investing and to be bullish, brave and confident. Mr Zeid was, it seems to me, all of those and was determined to get an enhanced return on his money. Mr Zaki described Mr Zeid as having an "appetite for continuing to purchase…He was a pro, he was bullish about the market and he wanted to take advantage"."

  41. Nevertheless, it was accepted that Mr Zaki was an advisor and that he was responsible for assessing client suitability. There had been an issue at trial as to whether that had been so, as to whether Mr Zaki had made personal recommendations, ie "advice on the merits", on buying the notes. The judge found that he had.
  42. The first non capital protected note was bought by Mr Zeid in December 2004, a second in March 2005. Mr Zeid's first purchase of a CDI was made in November 2005. The bank's "transaction suitability form" described Mr Zeid's risk tolerance as medium but his investment objective as capital growth. It also stated: "Client extremely experienced in structured products. Currently has a diverse portfolio of 9 products and fully understands merits and risks involved…Client is extremely liquid through significant banking relationships…Client understands margin call scenario".
  43. In a significant passage of his judgment the judge carefully considered Mr Zeid's understanding of the notes and the risks associated with them. He rejected the submissions at trial that Mr Zeid understood neither their structure nor their risks, and that Mr Zaki was aware that this was so. These facts are no longer in dispute and therefore I will deal with them much more briefly than the judge did. In sum, the judge pointed to three occasions prior to the final debacle when Mr Zeid experienced setbacks. In December 2005 he learned that a product was no longer paying a coupon because a barrier had been broken. His reaction was to sell the product and reinvest. In June 2006 Mr Zeid made sales, giving rise to at least the possibility of margin calls, causing him over £5 million of losses. The sales were made at least in part to cover a shortfall on his account. In January 2008 there was a shortfall of about $3 million which led to a cash injection of $3 million in February, but was not properly dealt with until April 2008 with the help of a rise in the market. (As it was, the Maridive IPO in May 2008 brought the family $50 million in cash.) The judge concluded that Mr Zeid did understand the basic structure of the notes and that he had an experienced investor's sense, even if not a mathematician's understanding, of the risks involved.
  44. The judge's findings on suitability

  45. The judge asked himself whether, in the light of his finding that Mr Zeid understood the structure of the notes and the risks involved in holding them, and in the light of the information which the bank had about Mr Zeid, its recommendations could be regarded as having been suitable for him. He answered this composite question in favour of the bank.
  46. The judge accepted that the bank's approach to obtaining and recording information about Mr Zeid lacked the rigour and care which COB (and COBS) required. Mr Zaki had certainly never interrogated Mr Zeid about his net wealth, if indeed that would ever have been possible within the culture of the Middle East, which Mr Zaki said it would not have been. Nevertheless, in estimating net worth during the period of notes 1-7 at $200-250 million, Mr Zaki substantially underestimated the correct figure (some $600-700 million). Significantly, the judge observed that there was no suggestion that Mr Zeid was unable to bear the risks associated with the notes. Moreover, the judge found that Mr Zaki was right to have regarded Mr Zeid as an "expert" private client. The question of process did not ultimately determine the issue of suitability. Regulatory failures in obtaining information might support a case of unsuitability, but they were not sufficient proof of it.
  47. The judge observed that COB 5 did not specify what factors must be taken into account when assessing suitability. COBS 9.2, however, subsequently identified as relevant factors the investor's knowledge and experience, his financial situation, and his investment objectives. The judge adopted those factors as amongst those relevant to his COB 5.3.5 enquiry. In the light of his findings as to the first two of those matters, already stated, there was nothing there, however, to assist the claim.
  48. The judge went on to look at the question of suitability from the aspects of risk profile, diversification, and leverage.
  49. Mr Zeid's noted risk profile was "medium". The judge found that the notes "fell squarely within the description of moderate risk". In return for high coupons and foregoing the chance of upside gains the investor took the risk that a low probability event would not happen over a medium term horizon. That risk could not be eliminated, but compared to high grade bonds on the one hand and equities on the other the notes were of "moderate risk". In particular, Mr Zeid was prepared to take the risk of non-capital protected notes with his eyes wide open, for the sake of the coupon returns available.
  50. As for diversification, the judge noted that the bench-mark indices for the notes were all equity based, however that had to be balanced against Mr Zeid's stated desire for "double digit returns". The judge concluded that the lack of diversity for notes 1-7 did not make the notes unsuitable.
  51. As for leverage, the judge took into account both COB 7.9 and the replacement of it to be found in COBS 9.3.4, which much more broadly stated, and then only as a matter of guidance rather than as a rule, that where a particular investment was linked to a loan, a firm "should take account of the suitability of the overall transaction".
  52. Because this lending aspect of the matter looms large in this appeal, I will set out what the judge said about it in full:
  53. "122. No explanation was given as to why the regulation of lending in COBS was so different from the regulation of lending in COB. However, I do not consider that, so far as this case is concerned, the difference is material. When a firm makes a recommendation to purchase a structured product for, say, US$20m. with the assistance of a loan of, say, US$15m., the firm must take reasonable steps to ensure that its recommendation is suitable for its client under both COB and COBS. Suitability will, in my judgment, usually require account to be taken of the substantial leverage. For such leverage greatly increases both the potential losses which may be suffered by the client and the risk of a margin call, requiring the payment of additional collateral in default of which pledged assets may be sold. That leverage must be considered when assessing suitability seems to me to be implicit in COB but is the subject of express guidance in COBS. Mr Croft[1] did not appear to agree with this. He suggested that suitability was focussed on the product and that financing was a separate matter. In this regard I am unable to accept his evidence.

    123. In circumstances where an existing credit facility is drawn down I do not consider that COB imposes an additional duty to consider the suitability of drawing down the loan. COB 7.9 appears to me to be dealing with the suitability of a loan or credit facility at an earlier stage, namely, when it is granted, not when it is drawn down. Thus the customer is required to give his "prior written consent to both the maximum amount of the loan or credit and the amount or basis of any interest or fees." The customer will surely do that when the loan or facility is granted, not when it is drawn down. Before granting the facility the firm must have taken reasonable steps to ensure that the arrangement for the loan or credit and the amount concerned are suitable "for the type of investment agreement proposed or which the private customer is likely to enter into." There was no suggestion in the present case that when the credit facility of US$100m. was arranged by CSFB in January 2005 or when CSUK arranged the Framework Credit Limit in September 2006 that such credit was unsuitable for Mr Zeid. What was suggested was that when that credit was drawn down to purchase structured credit products, and in particular, the 10 which form the subject matter of this claim, those purchases, taking into account the substantial leverage, were unsuitable for him. In my judgment leverage was a relevant matter to take into account when accessing suitability, but that duty arose pursuant to COB 5.2.5 [scilicet COB 5.3.5] and COBS 9.2.1.
    124. The amount of leverage was substantial. It was 75% for notes 1-5, 70% for loan 6, 80% for note 7, 34% for note 8, 55% for note 9 and 75% for note 10. Mr Zaki accepted that it was "excessive". Its particular relevance lay in the fact that it increased the quantum of any loss of capital and that it would lead to a demand for additional collateral when the loan to value ratio fell below the ratio regarded by CSUK as acceptable, usually 70%. It seems clear that the amount of leverage extended to Mr Zeid was usually the maximum or nearly the maximum available to him at any particular time.
    125. The extent of leverage meant that in the event of a fall in the markets there was a risk of a margin call. This had happened in June 2006. Despite this, in 2007 leveraging of over 75% was arranged for notes 1-5, 70% for note 6 and 80% for note 7. Did such leverage, and the risks it entailed, make those notes unsuitable for Mr Zeid? For many people "aggressive" (per Mr Croft) or "excessive" (per Mr Zaki) leveraging at the levels accepted by Mr Zeid would be unsuitable. Indeed, Mr Zaki accepted that "excessive" meant "unsuitable". But whether or not the leveraging made available to Mr Zeid, which was undoubtedly on a grand scale, was unsuitable for Mr Zeid depends on his understanding of the risks involved and his ability to bear the consequences of those risks if they materialise. There can be no doubt, having regard in particular to the experience of June 2006 and the market and financial information provided to him by and discussed with Mr Zaki, that Mr Zeid understood the risks associated with leverage. No evidence was led which suggested that Mr Zeid was unable to bear the risks involved. These matters, coupled with the fact that Mr Zeid had accepted substantial leveraging since 2003, suggest that notes 1-7, notwithstanding the leveraging levels, were suitable for Mr Zeid and I so find."

  54. In this passage, the judge made the following determinations:
  55. (i) The matter of leverage entered into the issue of suitability within COB 5.2.5.

    (ii) The degree of leverage, even though in theory called "aggressive" or "excessive", did not render the investments in notes 1-7 unsuitable, because Mr Zeid both understood the risks associated with leverage and was able to bear those risks if they went against him.

    (iii) There was no additional or different question of suitability which arose by reference to COB 7.9.3 (and the question of suitability raised by reference to the guidance in COBS 9.3.4 remained the same question).

    (iv) This was because any additional question raised by COB 7.9.3 did not concern individual draw-downs of borrowed money as each note was purchased, but only arose in connection with the underlying facility agreements made in January 2005 and/or September 2006: as to which no complaint had been made.

    (v) Therefore nothing further needed to be decided arising out of the wording of COB 7.9.3.

  56. In the present appeal, Mr Robert Anderson QC on behalf of the family appellants submitted that in this passage the judge had erred: (a) in setting aside further consideration of COB 7.9.3; (b) in deciding that COB 7.9.3 applied only to the facility arrangements and not to individual investments made with the assistance of borrowed money; (c) in failing therefore to rule that the terms of COB 7.9.3 governed the question of the suitability of such investments; (d) in failing therefore to take into account the procedural requirements of COB 7.9.3 as bearing on the suitability of such investments; and (e) in failing to recognise that the prohibition on lending save in strict compliance with the requirements of COB 7.9.3 entailed that, whether in terms of unsuitability for the purposes of COB 7.9.3 or simply because there was a breach of that prohibition, the bank was in breach of its statutory duty and must bear the consequences of such breach.
  57. Nevertheless, the judge went on, in an extended footnote 2, at the end of his para [123], to give his obiter views on whether the bank was responsible for at least arranging the loans provided by the lending facilities and the Framework Credit Limit. He concluded that it was. He said:
  58. "In the light of this conclusion it is unnecessary to determine other disputes concerning 7.9.3, in particular, whether CSUK arranged for loans to be made to Mr Zeid. In case a finding is necessary I shall express my views on these disputes shortly. Until CSUK took over the account the financing was made available from CSFB. From September 2006 the financing was provided by CSAG (Credit Suisse in Geneva) pursuant to the Framework Credit Limit. There was a dispute as to whether this replaced the earlier facilities. The request for the Framework Credit Limit requested that it applied to all existing facilities. There is no evidence that this request was denied. This suggests that the existing facilities remained in existence but were governed by the Framework Credit Limit. No mention is made of any other credit facilities. On the balance of probabilities I consider that the existing facility of US$100m remained in existence but that it was governed by the Framework Credit Limit. Although Mr Zaki accepted that he was instrumental in arranging this facility and that it was used to leverage each note, it was submitted on behalf of CSUK that CSUK did not arrange the facility. It is true that CSUK did not arrange the facilities before CSUK came onto the scene. But it seems to me that in circumstances where CSUK requested the Framework Credit Limit on terms that it applied to the existing facilities it would be an unduly narrow view of the facts to say that the credit facility represented by the Framework Credit Limit had not been arranged by CSUK. It was further submitted on behalf of CSUK that, because CSUK had no control over the grant of financing facilities, it could not be said that CSUK had arranged them. There was a difference between requesting them and arranging them. However, COB 7.9 applies both to firms that lend money and those that arrange for another person to do so. In that context the firm that lends money plainly has control over the grant of financing facilities. I do not therefore consider it appropriate to construe "arrange" in its context as requiring control over the grant of financing facilities. I consider that "arrange" should be given its narrow meaning of taking steps to organise or procure. By requesting financing facilities CSUK was, as between it and Mr Zeid, arranging those facilities."

  59. As to notes 8-10, with which this appeal is not concerned, I have already mentioned above that the judge found that those notes were not suitable, and that in their case there had been a breach of statutory duty under COBS 9.2.1. He said:
  60. "129. Having weighed these matters, I consider that, notwithstanding Mr Zeid's appreciation of the risks and his ability to bear the consequences of them materialising, the line had been crossed in May/June 2008. Notes 8-10 were unsuitable. The markets were volatile and there was no diversity in Mr Zeid's portfolio of investments with CSUK. They were all linked with equity markets or three banking stocks. The notes were heavily leveraged…There had already been considerable leveraging of the earlier notes and so this further substantial leveraging must, at a time of market volatility, have greatly enhanced the risk of substantial margin calls, especially where the loan to value had been increased to 80% with the aim of avoiding an earlier margin call. Although no evidence was led as to what Mr Zeid's liquid resources were in the latter part of 2008 the fact that Mr Zeid failed to meet the margin call in October 2008 suggests that he did not have sufficient liquid resources at that time to meet that margin call. That was the view formed by Mr Zaki at the time."

  61. However, there was no liability on the bank, even with respect to notes 8-10, since the appellants had failed to prove causation, ie had failed to prove that Mr Zeid would not have purchased those notes even if Mr Zaki had not recommended them. The judge reasoned as follows (at his para [133]):
  62. "The burden is on the Claimants to show that Mr Zeid relied on Mr Zaki's recommendations. In the absence of evidence from Mr Zeid, they are, it seems to me, unable to discharge that burden. Mr Zaki's agreement that Mr Zaki relied upon his "advice" (unparticularised) is not sufficient for this purpose. I am left unpersuaded that Mr Zeid relied upon Mr Zaki's recommendations in deciding to purchase notes 8-10…To invest in products linked to equity markets in May/June 2008 one had to have a serious appetite for investing and to be bullish, brave and confident. Mr Zeid was, it seems to me, all of those and was determined to get an enhanced return on his money. Mr Zaki described Mr Zeid as having an "appetite for continuing to purchase…He was a pro, he was bullish about the market and he wanted to take advantage." In deciding to purchase notes 8-10 it is more likely than not that Mr Zeid relied on his own judgment and not on advice from Mr Zaki. If Mr Zeid had not received advice on the merits from Mr Zaki he would have still bought the notes and suffered loss when they were liquidated. Put another way, if Mr Zaki had advised that notes 8-10 were unsuitable, it is more probable than not that Mr Zeid would still have purchased them and suffered loss when they were liquidated."

  63. These are extremely strong findings. They go beyond a finding of failure to meet the burden of proof and amount to positive findings that Mr Zeid would have bought the notes even if he had been advised not to do so. However, strong as they are, there is no appeal against them. There are no equivalent findings in relation to notes 1-7 (where they would have had an obiter status), but they are relied on by the bank as having implicit and inevitable bearing on any question of causation that might arise in relation to those earlier notes.
  64. The finance arrangements

  65. By a facility letter dated 15 December 2003 CSFB confirmed to Mr Zeid and his family (the "borrowers") its agreement to place at their disposal "an uncommitted facility" of $21,000,000 on the terms contained therein. The facility was to be available for utilisation against the security of a portfolio of investment assets. To request a drawing, the borrowers had to submit a notice of their desired drawdown. While that notice bound the borrowers, CSFB had an option to permit it or not. The interest rate would depend on a margin of 0.4% above LIBOR (as determined by CSFB). There was a specific reference to no fees being chargeable. By further letters dated 2 July 2004, 22 September 2004 and 26 January 2005 this dollar facility was increased, on the same terms, by stages, to $40, $60 and $100 million respectively. Hence the judge's reference in para [123] of his judgment to the $100 million facility of January 2005.
  66. In due course, however, the facility letters were followed by a Framework Credit Limit agreement ("FCL"). This was signed on behalf of the Zeid family on 15 September 2006 and on behalf of CSAG on 29 September 2006. Hence the judge's reference to the September 2006 FCL in his para [123]. The limit was expressed to be "based on the collateral value of the pledged assets". As to "Availability", clause 5 stated that "the Bank will grant an advance on the pledged assets in accordance with its customary lending guidelines". As for interest, that "will be determined by the Bank each time an advance is drawn…based on conditions on the money and capital markets" (clause 3). Interest rates could change during the period of the advance. Fees were payable "for auditing, changing, monitoring and managing" the FCL (clause 10), but they were not specified therein.
  67. A question arises whether the facility letters were superseded, or merely varied, by the FCL. This is because it is common ground that the earlier facilities were arranged by CSFB (or CSAG, the judge left the matter open) before CSUK entered the scene. In an obiter passage of his judgment, at its long footnote 2, placed at the end of its para [123], a footnote to which I have referred above, the judge opined that "the existing facilities remained in existence but were governed by the Framework Credit Limit". His reason was that the FCL said that the agreement "be applied to all existing loans…". The issue, however, is problematical. The facility letters came from the bank's predecessor, CSFB, a London entity, and were governed by English law (with non-exclusive jurisdiction in England). The FCL, however, was an agreement with CSAG and was governed by Swiss law with exclusive jurisdiction in Zurich. There were inconsistent provisions relating to amount, interest rates and fees (see the preceding paragraph). In my judgment, the FCL was intended to set a new limit on not only future but existing loans, but I do not detect that the agreed terms on which past lending had been conducted were affected. However, I cannot see any answer to the proposition that any future lending would be conducted under the terms of the FCL. To that extent, the FCL supersedes and does not merely govern the earlier facilities.
  68. Ultimately, all the notes were purchased in the era of and therefore under the FCL, so its terms are the terms that govern. It is open to argument whether the FCL committed CSAG to lend up to the value of the pledged collateral, or whether the "customary lending guidelines" referred to in its clause 5 retained for CSAG a discretion on lending (as had plainly existed under the earlier facility letters). Those guidelines are not, as far as I am aware, before the court; but it appears to be accepted by the bank that "The actual amount of permitted leverage was determined by CSAG" and would depend on loan to value ratios which varied with the type of investment and also applied in aggregate (see the bank's third skeleton argument dated 29 June 2012, at para 28). In any event, it is plain that neither the maximum amount of the credit nor the interest and/or fees to be charged were fixed in the FCL agreement. The maximum credit would depend upon the changing value of the collateral available. The interest would depend on market conditions from time to time, but also on an unspecified margin that CSAG would obviously require. The requirement of fees, but not their amount or basis was indicated. Under the facility letters the maximum amount had been stated, as had the basis of the interest rate to be charged, namely current LIBOR plus a 0.4% margin, and there had been a specific reference to there being no fees. Even so, there has been no issue as to the COB 7.9.3(3) requirement of prior written consent, presumably because at the time of each drawdown there was clarity as to the situation in respect of each such advance. Since the Zeid family has concentrated for the purposes of its complaints under COB 7.9.3 on the individual lending transactions as each note was bought, and has made no complaint about the overarching facilities, it has had no call to complain of any breach under sub-rule (3).
  69. As the litigation proceeded, however, and again on this appeal, the question has arisen, driven by the bank, as to whether COB 7.9.3 applied at all to the bank. It has been submitted on behalf of the bank that COB 7.9.3 did not apply because (i) the earlier facilities were put in place before the bank came on the scene; (ii) contrary to the judge's obiter opinion, the bank had no place in arranging CSAG's FCL; but (iii) the judge was right to opine that COB 7.9.3 looked to the overarching contractual arrangements, and not to individual draw-downs on individual transactions; and (iv) it was therefore irrelevant to consider such matters as leveraging of individual transactions, since the only question was whether the overarching facility was suitable. As to that the judge concluded that both the prior facilities and the FCL were suitable (see above). I shall therefore have to consider two issues, one of which the judge decided, and the other of which he only dealt with by way of his opinion, viz: (a) Does COB 7.9.3 apply to the overarching facility or to the individual lending transactions? (b) Did the bank "arrange" for CSAG to enter into the FCL?
  70. The issues and how they developed

  71. At the outset of this appeal, the issues raised by the appellants' skeleton argument (dated 22 October 2011) were limited entirely to COB 7.9.3 and in particular sub-rule (1). The appellants submitted that there had been a breach of sub-rule (1), in that the bank had failed to make a proper record of Mr Zeid's financial standing. This failure of process was critical. COB 7.9.3 applied because the judge had been right to suggest that the bank had been involved in arranging the FCL, but wrong to hold that the rule did not engage with individual drawdowns. In the light of the bank's failure of process, it was forbidden by the opening words of the rule ("must not lend…or arrange for any other person to do so") to procure the loans drawn down at the time of entering into notes 1-7. The rule was concerned with individual draw-downs and was not confined to the overarching facility. Since such lending was forbidden, the bank was responsible for all the losses caused by the leveraging of those investments. It was said that at trial such losses had been identified by the bank's own expert, Mr Croft, at $46.1 million. The bank for its part submitted that the judge had been right to limit the engagement of COB 7.9.3 to the overarching facility, as to which no complaint had been made.
  72. A second and much lengthier "reply" skeleton argument was drawn up on behalf of the appellants on 28 May 2012. It was now suggested for the first time that there had been a breach of sub-rule (2) of COB 7.9.3 as well as of sub-rule (1). The bank had failed to take reasonable steps to ensure that the arrangements for the loans drawn down for the purchase of notes 1-7 were "suitable". That failure was itself caused by its breach of sub-rule (1). The judge had never ruled on that issue of suitability, because he had considered that COB 7.9.3 did not apply to individual draw-downs. The lending was unsuitable because the leveraging was "excessive", as Mr Zaki had said in his evidence, stating that by excessive he meant "unsuitable". Mr Croft, the bank's own expert, had described the leveraging as "aggressive" or "bold". In his evidence, Mr Zaki accepted that he had not even been aware of the requirements of COB 7.9.3. The bank's case that the appellants must in any event lose on the judge's findings of COB 5.3.5 suitability (as to notes 1-7) and causation (as to notes 8-10, said to be applicable also to notes 1-7) were disputed; as was its alternative argument of contributory negligence.
  73. The hearing of the appeal revealed that there was a fundamental difficulty in the appellants' case to the extent that the judge had found that the individual transactions on notes 1-7 had been suitable for Mr Zeid, taking into account the lending and leveraging aspects of those transactions as well (see the judge's paras [121]-[125] cited above). The judge had dealt with all aspects of suitability under COB 5.3.5. The question arose as to whether Mr Anderson was content to live with the narrow focus of the appeal, dealing only with COB 7.9.3 and running the danger that the judge's finding of COB 5.3.5 suitability put his appeal out of court, or whether, by amending his grounds of appeal, if he could, he wished to put in issue the judge's overall treatment of suitability, which would involve considering COB 5.3.5 as well. Mr Anderson indicated that he would wish to do that. On behalf of the bank, Mr Adrian Beltrami QC submitted that he should not be permitted to do so. We ruled that the appellants should be entitled to amend their grounds of appeal in order to encompass the judge's treatment of COB 5.3.5 as well, but not so as to call into question any findings of fact. It remained to be seen therefore whether Mr Anderson could show either that the judge had erred in his test of suitability (for he was not allowed to appeal from the judge's findings of fact), or that the COB 5.3.5 test of suitability and the COB 7.9.3 test of suitability differed even on the basis that the latter applied to individual transactions (as the bank submitted and the judge agreed COB 7.9.3 did not).
  74. The hearing was then adjourned, part heard.
  75. When the hearing resumed, we had amended grounds of appeal and a third skeleton argument from Mr Anderson. The new grounds of appeal submitted that the suitability tests under COB 5.3.5 and COB 7.9.3 were not the same: that the question under COB 7.9.3 was the narrower issue of whether the bank had taken reasonable steps at the time of each transaction to ensure that the amount of leverage was suitable, based on the information which it ought to have had available to it by a proper assessment of Mr Zeid's financial standing; whereas the judge had rescued the COB 5.3.5 enquiry in favour of the bank by taking other aspects into account, such as Mr Zeid's experience, knowledge of and appetite for the risk. Moreover, the judge had failed to give any or any proper weight to the unchallenged evidence of Mr Zaki that the leverage was excessive, or any or any proper regard to Mr Zeid's liquidity, ie to his ability to withstand losses on a leveraged basis, if the market turned against his investments.
  76. In response, with the aid of a third skeleton argument from the side of the bank as well, Mr Beltrami submitted: that the judge's finding of actual suitability went beyond any question of the taking of reasonable care to ensure suitability and was therefore conclusive, whatever defects there might have been in the matter of process (although none were acknowledged); that the issue of suitability within COB 7.9.3 was indeed a narrower question than the issue under COB 5.3.5, since the former rule was engaged whether or not any personal recommendation for any transaction was made and thus applied only to the structure of a lending arrangement, as the rule stated, "for the type of investment agreement proposed"; that in any event the narrower question of suitability in COB 7.9.3 was subsumed within and answered by the broader question of suitability within COB 5.3.5; that, whether or not an attack on the judge's finding of suitability as a question of fact was open to the appellants, the judge's finding that the leverage was not unsuitable for Mr Zeid was one to which he was entitled on the evidence to come; and that, as to liquidity, there never had been any issue at trial that Mr Zeid could not afford to have his investments go wrong, highly leveraged as they were. It was also submitted that the losses claimed, namely all the losses which had arisen from the leveraging of notes 1-7, were beyond the scope of the duty inherent in COB 7.9.3; that, for the reasons stated by the judge in respect of notes 8-10, the losses had not been caused by any breach of duty; that any liability could not extend beyond the point at which leverage could possibly become "excessive", viz 75% (or perhaps 70%); and that Mr Zeid's contributory negligence in any event would have amounted to almost 100%.
  77. COB 7.9.3 – "must not lend…(or arrange for any other person to do so)"

  78. The first range of issues arises under the opening words of COB 7.9.3. (i) Had the bank arranged for CSAG to lend? On this point, the judge, in his obiter footnote 2, had been in favour of the appellants. It was the subject matter of a respondent's notice. If the judge was wrong in this respect, COB 7.9.3 was not engaged at all. (ii) Was COB 7.9.3 engaged only by the FCL (or the earlier facilities, if they are relevant), or (also) by the individual draw-downs? On this point, the judge ruled in favour of the bank. On that basis COB 7.9.3 applied, but had no practical role to play in the litigation, for the appellants made no complaint in relation to the FCL, only in relation to individual draw-downs under it. I have already expressed the view, contrary to the judge's opinion, that the FCL superseded the original facilities. But, whether it did or whether it did not does not appear to matter. No relevant distinction is drawn between them. In any event, the FSL applied to all lendings on notes 1-7.
  79. I will address issue (i) first. Mr Beltrami submitted that the bank had nothing to do with the FCL. It was an agreement between CSAG and the family. In applying to CSAG for its agreement, the Zeid family authorised Mr Zaki's assistants, Mr Francis Menassa and Mr Christian Robinson, to sign the form on its behalf. Mr Zaki, however, was employed by CSSEL, not by the bank, even if he, and his assistants, represented the bank in dealing with Mr Zeid. However, in mediating between Mr Zeid and CSAG in relation to the FCL or individual draw-downs, Mr Zaki must be regarded as wearing his CSSEL hat, rather than his CSUK hat (the bank's hat). Moreover, CSSEL also had a power of attorney from the Zeid family to act on its behalf.
  80. In my judgment, these submissions do not detract from the judge's pragmatically correct solution. In dealing with Mr Zeid on a day to day basis, Mr Zaki was representing the bank, even if he was employed by CSSEL. Such arrangements must commonly happen in large groups. The same was true of his assistants. It follows that when Mr Zaki's assistants approached CSAG on the family's behalf on the matter of the FCL, they were themselves assisting it to obtain the lending facility reflected in the FCL agreement. There was no need for Mr Zaki's assistants to be acting formally in any particular agency relationship. The essential fact was that Mr Zeid was an investing customer of the bank, and it was as such that he desired to have, and the bank desired him to have, lending facilities from that member of the Credit Suisse group, viz CSAG, which was set up to make the advances requested by customers in such a situation. It seems obvious to me that in such circumstances, it was the bank, through Mr Zaki and/or his assistants, who assisted in the arrangement or procurement of the FCL. After all, if Mr Zeid had not been a recommended customer of the bank, his application would no doubt have taken a rather different turn. I agree therefore with the judge that the rule's language "lend…(or arrange for any other person to do so)" does not require any concept of the bank having control over the grant of financing facilities. On the contrary, it seems to me that the broad language of the rule's "arrange for any other person to do so" is used precisely to meet the type of situation found in this case: where the firm's customer obtains finance, for his investment business with the firm, from another company within the same (or an associated) group. If it were otherwise, a large group (even a small group) of companies could seek to avoid its COB responsibilities by relying on the complexities of its group structure and internal arrangements.
  81. I turn to issue (ii). Mr Beltrami submits that the judge was right to focus exclusively on the overarching facility, and to ignore the individual advances on each transaction. If it were otherwise, then the rule's requirements would have to be gone through anew on each transaction, which would be unnecessarily burdensome. That is why sub-rule (2) spoke of the credit arrangements as being suitable "for the type of investment agreement" rather than for individual transactions.
  82. In my judgment, the judge was wrong about this. The hypothesis is that the rule is only concerned with overarching facility agreements (what the judge called the "grant" of loans) and not with draw-downs to finance individual transactions. However, I see no reason in the wording of the rule or in principle, practicalities or good sense, to limit the arrangements concerned to those of one kind or another. If it were so, difficult distinctions would arise as to whether the real loan was delivered on so-called "grant" or on draw-down. It is not like a typical mortgage arrangement, where the grant of the facility is the crucial matter, and the draw-down is essentially a matter of mere execution, concerning an agreed subject-matter on agreed terms. The facilities in this case, however, were expressed in only the most general terms, as were well suited to arrangements which would or could be used for all kinds of transactions, at different times, on terms which would fluctuate as credit market conditions fluctuated. That was why the lender here was not obliged to lend save at its discretion in the light of particular proposed transactions at differing leverage ratios, responding to particular loan to value situations. The judge reasoned that the fact that the customer is required "to give his prior written consent to both the maximum amount of the loan or credit and the amount or basis of any interest or fees" (sub-rule (3)) showed that this would be done when the facility was granted, not when it was drawn upon. However, the terms of the facilities in question in this case do not, as it seems to me, support his confident assertion.
  83. As for the submission that it would be impracticable for a firm to undertake the responsibilities recorded in sub-rules (1) and (2) on a transaction by transaction basis, I would disagree. Provided a proper assessment within sub-rule (1) has been done at some earlier stage, it would not be too onerous to require such an assessment, and the taking of reasonable care to ensure suitability within sub-rule (2), to be updated at the time of each draw-down: especially as it will be in the lender's own interest to do so. It would essentially be done on a change of circumstances basis. The firm is not obliged to ensure suitability, only to take "reasonable steps" to do so. There is essentially no difference in terms of practicalities between the procedural requirements supportive of transaction by transaction suitability under COB 5 and the requirements, as I understand them, of COB 7.9.3.
  84. As for sub-rule (2) being stated in terms of the "type" of investment agreement proposed, it is difficult to think that this language would not embrace consideration of whether the lending would be on a leveraged basis or not. Mr Beltrami exemplified the unsuitability of a long term loan for a short term transaction (or he might have said vice versa): but in this context the use of leverage is amongst the most typical uses of finance for investment purposes, and the essential question will be – how much leverage will be allowed for any particular type of transaction? Where the purchase of a currency is in question, a much higher leverage will, I am confident, be allowed, than in the case of an equity purchase. CDIs presumably fall between these two examples. Will the arrangements permit of leverage at all, if so how much? These questions were not addressed at all in the overarching facilities, being subsumed in the lender's discretion or in his "lending guidelines", and could only be addressed in terms of a particular (type of) transaction proposed.
  85. For these reasons, I would conclude that COB 7.9.3 was engaged by the transactions with which we are concerned, in the purchases of notes 1-7.
  86. COB 7.9.3 (1) – assessments and process

  87. The next range of issues arises under the wording of sub-rule (1): (iii) Has the bank failed to make and record an assessment of Mr Zeid's financial standing on information disclosed by him? (iv) If so, what is the significance or potential significance of such a breach?
  88. The judge did not consider the application of COB 7.9.3 because in his view it was not engaged. The question is whether it is clear what his findings would have been if he had considered whether there had been any breach of sub-rule (1). Mr Anderson submitted that it was clear that the bank was in breach. Thus he referred to the following aspects of the judge's findings in relation to inter alia the COB 5.3.5(3) requirement that the bank "must have regard to (a) the facts disclosed by the client; and (b) other relevant facts about the client of which the firm is, or reasonably should be aware". The PCRM suitability forms were entered up by Mr Zaki, which recorded his net worth in the period of the purchase of notes 1-7 at $200 to 250 million: but the judge commented there was "no evidence that Mr Zaki ever interrogated Mr Zeid as to his net worth. He said that was never done in the Middle East" (at para [97]). At para [98] the judge said that the evidence "does not suggest that those records were completed with an appropriate degree of care and attention"; and at para [99] the judge found that the bank's approach to obtaining and recording information about Mr Zeid therefore "appears to have lacked the rigour and care which COB and COBS required". Indeed, Mr Zaki was not aware of the requirements of COB 7.9.3 and, as the judge said at para [130], albeit in the context of COB 5.3.5, "Mr Zaki did not appear to be aware of the need for him to assess the suitability of leveraging when recommending the purchase of a note. He regarded such matters as a function of the credit department".
  89. It may therefore appear that the judge might, if he had turned his attention to COB 7.9.3 for these purposes, have found some element of breach. However, COB 7.9.3 is not widely drawn, concentrating as it does on "financial standing, based on information disclosed by the private customer". In that respect, its language is narrower than that of COB 5.3.5(3) (or COB 5.2.5 and COB 5.2.9). In fact, Mr Anderson identified only two aspects in which he submitted that the bank's recorded information was inadequate for the purposes of COB 7.9.3(1), and those were (a) that the bank had failed to bottom out Mr Zeid's net wealth; and (b) that it had not addressed his liquidity, ie his ability to meet margin calls, if things went wrong.
  90. As to the former, however, the complaint goes nowhere since evidence at trial revealed that Mr Zaki's estimate of $200/250 million was too conservative. Indeed, in the course of his reply submissions Mr Anderson accepted that his complaint in this respect (and, subject to leverage, with respect to sub-rule (2) as well) was essentially about liquidity. In my judgment, he was right to be cautious as to his complaint about the bank's assessment of Mr Zeid's (or the family's) financial standing. Thus, there were assessments, which were recorded, as to Mr Zeid's financial standing, and there could be no fault in those assessments being too conservative. To some extent, no doubt, they were based on information disclosed by Mr Zeid or deriving from his known business interests, such as in Maridive itself (see Day 5.181-184); but if the conventions of the Middle East prevented a more accurate assessment of his greater wealth, that cannot in my judgment count as a breach. It would make nonsense of the rule to suppose that an under-estimate of a client's wealth, based on a client's taciturnity regarding the greater extent of his true wealth, would count as a breach preventing the extending of otherwise suitable lending arrangements, especially under a procedural rule premised "on information disclosed by the private customer himself".
  91. As to liquidity, it had never been raised as an issue at trial. There was nothing about liquidity in either the claimants' pleadings or the trial skeleton arguments served on their behalf. Thus the judge was able, accurately, to say, at his para [125], in relation to notes 1-7, that "No evidence was led which suggested that Mr Zeid was unable to bear the risks involved". It was only in relation to notes 8-10 that he, admittedly somewhat inconsistently, observed that there was no evidence that Mr Zaki took any steps "to consider whether Mr Zeid's liquid resources at that time would be sufficient to meet a margin call of a size significantly greater than that discussed in January-April 2008". That was a reference to the $3 million shortfall on Mr Zeid's account in that period (see at [36] above). It appears that, in the more volatile and dangerous circumstances of May 2008 onwards, in the period of notes 8-10, the judge of his own motion drew on the absence of any evidence of liquidity in order to support his finding of lack of suitability for those final three notes.
  92. In fact, there was one piece of evidence regarding liquidity which emerged almost accidentally in the course of Mr Zaki's cross-examination (see at Day 5.194-196). Mr Anderson was there acknowledging (rightly or wrongly) that the bank's suitability forms "constantly emphasised the Zeids' liquidity", when Mr Zaki responded, contrary to the suggestion made to him, as follows: "I didn't think that we have ever thought that he is highly liquid, because we had encountered a problem during the relationship with raising money to fund margin calls…So I think the opposite is true, Mr Anderson".
  93. Be that as it may, and we are not concerned with the later period of notes 8-10, there was never an issue at trial concerning liquidity, and I would not be prepared in such circumstances to make any finding, contrary to what the judge said at his para [125], to the effect that the bank failed in its responsibilities under sub-rule (1) by reference to an improper assessment of Mr Zeid's liquidity at the earlier time in 2007 with which notes 1-7 are concerned.
  94. In the circumstances I would reject any suggestion that the judge's findings compel the conclusion by this court of any breach of sub-rule (1).
  95. Issue (iv) therefore does not arise. Nevertheless, I would also reject Mr Anderson's submission that process is critical and that therefore any breach of sub-rule (1), however anodyne, would render the bank liable for all the losses arising out of the lending.
  96. Sub-rule (1) provides the process by which the substantive obligation to take reasonable steps to ensure suitability under sub-rule (2) is facilitated: hence the latter's language – "based on the information provided by the private customer". Where there has been a breach of sub-rule (1), there is always a possibility that the bank will have defaulted on that substantive obligation. Therefore, evidence of a breach of sub-rule (1) will or may assist a claimant to prove a breach of sub-rule (2). It may be impossible for a firm to deflect a claim of having failed to take reasonable steps under sub-rule (2) where it has failed to carry out its assessment and recording obligation properly under sub-rule (1). If, however, the lending was in fact suitable, whatever a firm has done, properly or improperly, by reference to sub-rule (1), then any failure under sub-rule (1) becomes mere water under the bridge, a matter of no ultimate consequence. I accept, nevertheless, that a proven breach of the obligation of process will in the natural course of things lead a court to consider carefully, and if need be sceptically, a firm's case that it had taken reasonable steps or that the lending was suitable, despite any lack of care in the process leading to the lending arrangements: see, for instance, Rubenstein v. HSBC Bank plc [2012] EWCA 1184 at para [93].
  97. The same reasoning applies to the COB 5.3.5 (or COBS 9.2) obligation to take reasonable steps to ensure that a recommended investment is suitable for the client. That is what the judge said in this case (at his para [99]), in particular when he reasoned that –
  98. "99. CSUK's approach to obtaining and recording information about Mr Zeid therefore appears to have lacked the rigour and care which COB and COBS required. But, although detailed submissions were made about that approach and, in particular, as to the manner in which CSUK and its predecessor had classified Mr Zeid, those submissions, did not, in my judgment, ultimately assist the claimants' case on suitability…The important point, it seems to me, is whether the recommendations made by Mr Zaki were suitable for Mr Zeid...If they were suitable, then…it cannot matter whether his approach to obtaining and recording information and classification was adequate or not."

  99. Analogous reasoning was applied by this court in Adams v. Rhymney Valley District Council [2001] PNLR 4 (see at 81) and was relied on by Andrew Smith J in Camerata Property Inc v. Credit Suisse Securities (Europe) Ltd [2011] 2 BCLC 54. In Adams, a personal injury claim, the defendant landlord was held not to be negligent in the design of the locking mechanism of the windows in its accommodation, because it had adopted, albeit without proper investigation of the alternatives, a design which was supported by a body of responsible professional opinion. Staughton LJ said that to concentrate on the consideration of alternatives "and hold the council negligent on those grounds, seems to me to prefer form to substance". In Camerata sound investment advice was not to be condemned as negligent because of failings in process: Andrew Smith J said (at [199] that "Negligence in these circumstances depends essentially upon what advice was in fact given, not upon the processes whereby it came to be given".
  100. Those were cases in the common law of negligence. I would accept that where as here the issue arises in the context of statutory duty, it is possible that the statutory requirements may to a greater or lesser extent mould their own solutions, so as to give greater weight to requirements of process. Nevertheless, what is aimed at is the provision of suitable advice (COB 5.3.5) or suitable lending arrangements (COB 7.9.3), and not merely suitable advice or lending arrangements in the abstract, but suitable advice or arrangements for the client and his proposed investments. The complex rules are an attempt to hold the balance between the parties fairly, giving weight both for the need to protect investors from ignorance or even from themselves and for the need to permit ultimate autonomy to the properly informed investor to make and take responsibility for his own mistakes (see FSMA section 5(2)). Where it is ultimately to be found, giving all due weight to the statutory requirements, both of form and substance, that personal recommendations or lending arrangements are suitable, they cannot be rendered unsuitable by some incidental and essentially immaterial failure of mere form.
  101. Another question that may arise in this context, if there be any breach of statutory duty as a matter of process (or even substance), is whether that breach has caused any loss; and whether the loss claimed falls within the scope of the duty in question. I will revert to such questions below.
  102. In the circumstances, even if I had found a breach of sub-rule (1), it would have been necessary to pass on to sub-rule (2) and consider its relevance in the light of the issues of substantive suitability which arise thereunder.
  103. COB 7.9.3(2) – "reasonable steps to ensure that the arrangements for the loan…and the amount concerned are suitable…for the type of investment agreement proposed…"

  104. For the purposes of sub-rule (2), Mr Anderson submits that the lending arrangements were unsuitable because the leverage was excessive and/or because insufficient thought was given to Mr Zeid's liquidity.
  105. Sub-rule (2) raises the next range of issues: (v) Is the test under COB 7.9.3(2) the same as, or different from, the suitability test contained in COB 5.3.5? (vi) If it is the same as the COB 5.3.5 test, can the appellants avoid the judge's conclusion that the arrangements were suitable, seeing that the judge considered leverage as part of the question of suitability? (vii) If the test is narrower, does it survive to live an effective life of its own where a broader test has been applied and the investment recommendations have been found suitable, including their lending and leverage aspects? (viii) Did the judge in any event mismanage the suitability test, whether under COB 5.3.5 or otherwise, because of the aspects of leverage and/or liquidity? (ix) In this context, what effect can and/or should be given to the evidence from Mr Zaki that the leverage was excessive, or from Mr Croft that it was "aggressive" or "bold"? (x) And what, again, is the role in this context of considerations of Mr Zeid's liquidity?
  106. As for issues (v), (vi) and (vii), in my judgment the tests raised by COB 5.3.5 and by COB 7.9.3 respectively are not the same. The COB 7.9.3 test is a narrower test, but on the judge's approach, whereby he looked holistically at all aspects of the personal recommendations, including leverage (and liquidity, for all that it was not in issue at the trial), the COB 7.9.3 test has been subsumed into the COB 5.3.5 test as exercised by the judge. The judge did not mismanage the suitability test, and the appellants are unable successfully to pray in aid considerations of leverage or liquidity (issues (viii), (ix) and (x)). These conclusions need some expansion.
  107. COB 5.3.5 is concerned with (reasonable steps to ensure that) a personal recommendation (the advice on investments or transaction) is suitable for the client. COB 7.9.3 is concerned with (reasonable steps to ensure that) arrangements for a loan (and the amount concerned) are suitable for the type of investment agreement proposed or which the client is likely to enter into. COB 5.3.5 bites only where a firm makes a personal recommendation to a private customer. COB 7.9.3 bites whether or not a firm makes a personal recommendation: it operates to prohibit a firm from lending money, or arranging for another to do so, to a private customer unless (inter alia) the arrangements for the loan are suitable for the type of investment agreement proposed. On the assumption that the suitability of the lending arrangements enter into the suitability of the personal recommendation, where a personal recommendation is made, the COB 7.9.3 test will be subsumed in the COB 5.3.5 test, at any rate where the personal recommendation is found to be suitable. It is of course possible that, where the personal recommendation is not suitable, or where no personal recommendation is made, the COB 7.9.3 test may operate independently, and give up its own answer. Thus lending arrangements may be suitable, even if a particular personal recommendation is not suitable.[2]
  108. As for leverage, since the COB 7.9.3 test is also concerned with the suitability of the "amount concerned", it must in my judgment follow, as I have reasoned above, that leverage is to be taken into account. This is because, even though the test is worded as relating to the "type" of investment agreement proposed, leverage, and its extent, is often an essential part of such types. A loan which cannot provide the leverage inherent in a type of investment agreement proposed will not be fit for its purpose. A loan which provides for excessive leverage, unsuitable for the client, ought to pass neither the COB 5.3.5 test nor the COB 7.9.3 test.
  109. In the present case, however, the lending arrangements were entirely suitable to achieve what was required of them. The complaint is that they were rendered unsuitable for Mr Zeid because they gave rise to excessive leverage in the context of a particular transaction. That, however, was the very question which the judge considered, albeit for the purpose of COB 5.3.5.
  110. I therefore reject Mr Anderson's submission that, because the COB 7.9.3(2) suitability enquiry is narrower than the test under COB 5.3.5, it follows that even on the facts of this case, where leverage is the focus of the enquiry, the lending arrangements can be found unsuitable under the former rule, although the leverage aspects of the individual transactions have been found suitable under the latter rule.
  111. It must follow, therefore, that, if the judge was entitled to make such findings of suitability, both the COB 5.3.5 test and the COB 7.9.3 test were passed, so far as leverage at any rate was concerned. The appellants rely on no other aspect of the lending arrangements, other than liquidity (to which I will return below).
  112. Was the leverage on notes 1-7 unsuitable? The judge found otherwise. Mr Anderson submits that such a finding was not open to him, in the light of Mr Zaki's and Mr Croft's evidence. However, this submission is not borne out by considering Mr Zaki's evidence as a whole. This is what Mr Zaki said in cross-examination (at Day 5.110-111):
  113. "Q. What did you regard as excessive leverage?

    A. Anything above 75%.

    Q. Why was there excessive leverage on this account?

    A. Well, this was – the reason there was excessive leverage is that Mr Zeid asked for up to the maximum, what we can give, which is 75%. By nature of the market, if it goes down a little bit, that 75% becomes 80, and then we have to ask for money unless – otherwise, we will issue margin calls. So that's what I mean by excessive, you know, leverage. Excessive leverage is anything above 70, 75%.
    Q. Did you ever advise Mr Zeid to take excessive leverage?
    A. No, of course not. It is a nightmare for me. Actually, it's a recipe to ruin a good relationship. Why would I be wanting to do that?
    Q. Did you ever advise Mr Zeid not to take excessive leverage?
    A. Yes."

  114. A fair assessment of this evidence yields the following: it is only leverage above 75% (possibly 70%) which is described as excessive; Mr Zaki did not recommend such leverage; on the contrary he advised against it.
  115. With the exception of note 7, which was leveraged at 80%, none of the other transactions concerning notes 1-7 involved leverage of more than 75% (although for the most part, at 75%, they exceeded 70% by the margin of 5%; and note 6 was at 70%). However, as Mr Beltrami was able to illustrate from the documents in the case, for all of the time relevant to the period of notes 1-7 Mr Zeid was maintaining a position, when account was taken of cash on deposit and the value of his portfolio, which reduced his overall leverage to below 70%. It was at some 65% on 10 January 2007, a few weeks before the purchase of notes 1 and 2; at some 66% on 2 March 2007, a few weeks before the purchase of note 3; at some 64% on 18 April 2007, a few weeks before the purchase of note 4; and at some 72% on 7 September 2007, some six weeks before the purchase of note 7. Throughout the period from 3 April 2007 down to the end of 2007, Mr Zeid was maintaining a cash deposit which fluctuated between $9 and $11 million. At the time of purchasing note 7, the cash deposit stood at nearly $10 million. The effect of this cash balance was to reduce the loan to value percentage of Mr Zeid's loans to below the nominal level of leverage of each transaction. So Mr Zeid's borrowings did not in fact put him at or over the edge of the bank's margin requirements.
  116. The point Mr Zaki was making, in my judgment, was that anyone who borrows at up to the maximum level permitted by a lender before further security (in the form of margin calls) is required is at risk of having to find such further security if there is any set-back at all in the value of the investor's portfolio. Thus, the danger that further security needs to be requested casts a shadow over the relationship between bank and client. That, it seems to me, is Mr Zaki's point.
  117. As such, the point is perhaps linked with the concept of liquidity. If the client is liquid, the provision of further security can be overcome, even if it makes for some awkwardness in the relationship. If necessary, because of the absence of free funds, some of the investor's portfolio can be sold: and that is something which occurs from time to time in the management of any portfolio, and had occurred in the case of Mr Zeid's investments with the bank.
  118. As it is, for reasons explained above in the context of sub-rule (1), which apply equally in the context of sub-rule (2), there was no case made at trial in terms of liquidity, and it is not open to the appellants to raise one on appeal.
  119. However, to my mind, the real risk of high leverage, even with an entirely liquid investor, is something different, to which I am not sure that Mr Zaki was referring, although Mr Croft, in his use of the terms "aggressive" and "bold", may have been. The real risk of high leverage is that it multiplies losses (and gains). At a leverage of 75%, any given level of loss or gain on the underlying asset is multiplied four times. That, of course, is entirely inherent in the concept of leverage, as Mr Zeid was well aware, and, since he was bullish, was exactly what he wanted.
  120. In these circumstances, the judge was entitled, in my judgment, to form the view that Mr Zaki's and Mr Croft's evidence of "excessive" or "aggressive" leverage spoke rather in the abstract, and that what ultimately counted was whether the investments, leveraged as they were, were suitable for Mr Zeid, with his knowledge and appreciation of and appetite for the risk. Mr Zaki may well have regarded leverage at above the 75% point as excessive, and counselled Mr Zeid to be more cautious. However, there is no evidence of which I am aware that the leverage on Mr Zaki's overall portfolio was ever above the 75% mark at this period, and for the most part it was comfortably below 70%.
  121. In any event, I regard the attempt by Mr Anderson to open up the question of the suitability of the leverage provided on notes 1-7 on any issue of liquidity, as a matter of fact, as being beyond the scope of the appeal. If Mr Anderson had been able to show that the judge's test of suitability was flawed, or that COB 7.9.3(2), which the judge did not apply, imposed a more stringent test of suitability than that which the judge applied for the purposes of COB 5.3.5, then it might have been necessary for the matter to be remitted to the trial court for the appropriate test to be conducted anew. The material which we have considered makes me think it unlikely that it would have been possible or appropriate for this court to have imposed its own views on the question. As it is, however, even on my understanding of sub-rule (2), which goes beyond the submissions of Mr Beltrami (see at [65] - [66] above), the test thereunder is a narrower one and entirely subsumed in the approach of the judge to COB 5.3.5. Therefore, the findings of the judge cannot be undermined by any submission that he applied the wrong test where leverage is concerned for the purposes of COB 7.9.3(2). In such circumstances, having satisfied myself that the judge's findings are at any rate possible findings, I do not consider that the appellants are entitled to go any further, on this appeal, to ask this court to reconsider them for ourselves. Indeed, in the absence of any error of law or principle, I do not consider that any such questions of fact are open on this appeal at all.
  122. In these circumstances, the appeal must fail.
  123. Further considerations of causation, scope of duty and contributory negligence

  124. However, even if there had been some breach of either sub-rule (1) or (2) of COB 7.9.3, or if there might in theory have had to be a remission to the trial court to investigate the question of such breach further, additional matters are relied upon by the bank as making any success for the appellants beyond their reach. The bank submits that the judge has made conclusive findings against Mr Zeid on causation. The bank also submits that any liability in damages would either lie outside the scope of the statutory duties concerned or be limited, for instance to the extent that the lending exceeded suitable leverage. Finally, the bank relies on contributory negligence. I regard this passage of my judgment as being obiter.
  125. As for causation, this could in theory constitute an entirely separate ground for dismissing this appeal. Although the judge did not think it was necessary to make any finding as to causation with respect to notes 1-7, Mr Beltrami submits that it must follow from the finding that Mr Zeid was the cause of his own losses on notes 8-10 that the same must be true with respect to notes 1-7.
  126. Mr Anderson does not I think submit otherwise as a matter of inferential fact, but he has a legal submission that the position is different for the purposes of a breach under COB 7.9.3 from that which obtains upon breach of COB 5.3.5, which is what the judge was dealing with. For these purposes Mr Anderson relies on the wording of COB 7.9.3 which is expressed in prohibitory terms, rather than positive mandatory terms. Thus COB 7.9.3 states that a firm "must not lend…unless", and there then follow the cumulative sub-rules (1), (2) and (3), whereas COB 5.3.5 states that a firm "must take reasonable steps to ensure" that any personal recommendation is suitable. On that basis Mr Anderson submits that it follows that, because any lending (or the arranging of lending) is prohibited unless the sub-rules are complied with, any breach of those sub-rules renders the firm liable for the full consequences of the lending. The question of causation is not what would have happened if the bank had not made an unsuitable recommendation, but what would have happened if the bank had simply refused to mediate the lending by CSAG, because it was not able lawfully to do so. If the lending simply was not there, how could Mr Zeid have suffered the losses he went on to incur? Mr Anderson points to the events of early 2008 when there was a shortfall of about $3 million on Mr Zeid's account. During this period Mr Zaki purchased two notes (on 1 February and 18 March 2008) without leverage (see the judge's judgment at para [47]). These notes are not among the ten notes made the subject matter of this litigation.
  127. I agree with Mr Anderson's submission to this extent: that if Mr Zeid would not have been able to purchase notes 1-7 without the assistance of funding from CSAG, then he could not have suffered the losses he incurred. The judge did not have to consider this possibility, because he did not consider that COB 7.9.3 was engaged. He only had to ask himself whether Mr Zeid would have bought the notes even if Mr Zaki had advised against them. If therefore, contrary to my holdings above, the bank had been in breach of COB 7.9.3, I do not consider that it would be safe to extrapolate from the judge's findings on causation in relation to notes 8-10 and COB 5.3.5 to what the position might have been in relation to notes 1-7 and COB 7.9.3 and the lending arrangements. Much might depend in such circumstances on what the nature of the hypothetical breach of COB 7.9.3 might be. But if the only problem was that the leverage afforded was too great, so that it might have to be assumed that leverage of, say, greater than 70% or 75% could not properly be afforded, there might have to be only a further limited enquiry: such as whether that would have impeded Mr Zeid's bullishness to any extent at all in the circumstances described at [33] above, especially where Mr Zeid had between $9 and $11 million of his own money on deposit, which he could have applied to make up any lending shortfall. It is unlikely that such an enquiry would produce anything like the loss figure put forward on this appeal of $46.1 million.
  128. In any event, it seems to me that Mr Anderson's submissions at this stage of the argument tended to confuse an issue about scope of duty with the question of causation. It may be open to argue that because the scope of the statutory duty is to be derived from the statutory purpose, and because there is an indication that the statutory purpose is to prevent lending in breach of the COB 7.9.3 sub-rules, therefore a firm in breach of COB 7.9.3 should be responsible for all the consequences of lending in such circumstances. However, the jurisprudence regarding scope of duty led by South Australia Asset Management Corporation v. York Montague Ltd [1997] AC 191 (SAAMCO), Nykredit Mortgage Bank plc v. Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627 (HL) and Aneco Reinsurance Underwriting Ltd v. Johnson & Higgins Ltd [2002] 1 Lloyd's Rep 157 (HL) (see also Haugesund Kommune v. Depfa ACS Bank (No 2) [2011] EWCA Civ 33, [2012] Bus LR 230) rather demonstrates to the contrary: that, even where there has been a breach without which no transaction would have taken place at all, it does not follow that the defendant in breach is liable for all the losses suffered by the claimant in consequence of entering into the transaction.[3] In the present case I am doubtful that an investor would be entitled to be compensated in full for an otherwise suitable investment just because there has been some breach, of whatever kind, of COB 7.9.3. Suppose the sole breach was one of process under sub-rule (1), or was one of the requirement for express acceptance of clear terms under sub-rule (3): I do not imagine that there would be full compensation for an otherwise suitable investment which had in the event gone wrong. Suppose similarly that the only fault under COB 7.9.3 was that the lending arrangements came with unsuitably high leverage: I do not think that there would be compensation for losses in full, as distinct from losses to the extent of the unsuitable leverage. Thus, if leverage at, say, 70% would have been suitable, it would only be the losses on leverage in excess of such a figure which would be recoverable.
  129. Nor am I impressed by the language of prohibition in COB 7.9.3 to think that the scope of duty is widened beyond what it otherwise might have been had the rule been expressed in positive mandatory terms. If the sole breach is in obtaining the client's prior written consent to the interest rate and fees applicable, is the client to be compensated for the whole of his loss on his financed investment, and even where there has been no personal recommendation? I doubt it.
  130. As for contributory negligence, I do not think it is necessary to go further than to note that in Spreadex Ltd v. Sekhon [2009] 1 BCLC 102 at paras [166]ff Morgan J recorded that the parties before him were agreed that contributory negligence was available in the context of a breach under COB 7.10.5 R. He considered that Reeves v. Metropolitan Police Commissioner [2000] 1 AC 360 recognised the availability of the defence of contributory negligence even in circumstances where the policy of the rule is to protect a person against himself.
  131. Conclusion

  132. For the reasons given above, this appeal is dismissed.
  133. Lord Justice Patten :

  134. I agree.
  135. The Chancellor of the High Court :

  136. I also agree.
  137. ANNEX

    The statutory foundation of COB and COBS

    Section 5 of the FSMA sets out the regulatory objectives of the rules, so far as relates to the "protection of consumers":

    "5(2) In considering what degree of protection may be appropriate, the Authority must have regard to -

    (a) the differing degrees of risk involved in different kinds of investment or other transaction;…
    (c) the need that consumers may have for advice and accurate information; and
    (d) the general principle that consumers should take responsibility for their decisions

    The COB requirements

    COB 5.3 is headed "Suitability". COB 5.3.4 G ("Purpose") is guidance, not rule. It refers to Principle 9 which requires a firm to take reasonable care to ensure the suitability of its advice, and states its purpose to amplify this requirement. It emphasises that "The nature of the steps firms must take will vary greatly, depending on the needs and priorities of the private customer; the type of investment or service being offered, and the nature of the relationship…"

    COB 5.3.5 R, which is a rule, is headed "Requirement for suitability generally". It provides:

    "(1) A firm must take reasonable steps to ensure that, if in the course of designated investment business:

    (a) it makes any personal recommendation to a private customer to:
    (i) buy, sell, subscribe for or underwrite a designated investment…

    the advice on investments or transaction is suitable for the client…

    (4) In making the recommendation or effecting the transaction in (1), the firm must have regard to:

    (a) the facts disclosed by the client; and
    (b) other relevant facts about the client of which the firm is, or reasonably should be, aware."

    The relevance of a client's understanding of risks to the requirement of suitability is inherent in COB 5.4 ("Customer's understanding of risk"). COB 5.4.2 G, which is guidance, refers to both principle 7 (which requires a firm to pay due regard to the information needs of its clients) and principle 9. COB 5.4.3 R ("Requirement for risk warnings") is a rule which states that "A firm must not (1) make a personal recommendation of a transaction…unless it has taken reasonable steps to ensure that the private customer understands the nature of the risks involved."

    There is no complaint in this appeal regarding the judge's dealing with either of these rules (COB 5.4.2 and COB 5.4.3). There is also COB 5.2.5 R ("Requirement to know your customer"), a rule which states that "Before a firm gives a personal recommendation concerning a designated investment to a private customer…it must take reasonable steps to ensure that it is in possession of sufficient personal and financial information about that customer relevant to the services that the firm has agreed to provide". In connection with COB 5.2.5 there is also COB 5.2.9 R ("Record keeping: personal and financial circumstances") which provides that "a firm must make and retain a record of a private customer's personal and financial circumstances that it has obtained in satisfying COB 5.2.5 R". There is similarly no complaint in this appeal concerning COB 5.2.5 or COB 5.2.9.

    COB 7.9 ("Lending to private customers") occurs in a section of COB which primarily concerns those COB principles which protect customers' interests and provide for treating customers fairly. Thus COB 7.1 is concerned with "Conflict of interest and material interest"; COB 7.2 with "Churning and switching"; COB 7.3 with "Dealing ahead of investment research"; COB 7.4 with "Customer order priority"; COB 7.5 with "Best execution"; COB 7.6 with "Timely execution"; COB 7.7 with "Aggregation and allocation"; 7.8 with "Realisation of a private customer's assets"; COB 7.10 with "Margin requirements", and so on. They are all particular aspects of a firm's dealing with its customers which it has to carry out fairly. COB 7.9 provides as follows:

    "COB 7.9.1 R Application

    This section applies to a firm when it lends money or grants credit to a private customer or arranges for any other person to do so, in the course of, or in connection with, its designated investment business.

    COB 7.9.2 G Purpose

    Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly. This section seeks to ensure that a firm lends money or grants credit to a private customer only in appropriate circumstances, and only if the customer has given prior consent in full knowledge of any resulting interest and fees.

    COB 7.9.3 R Restrictions on lending to private customers

    A firm, subject to the exceptions in COB 7.9.5 R, must not lend money or grant credit to a private customer (or arrange for any other person to do so) in the course of, or in connection with, its designated investment business unless:

    (1) the firm has made and recorded an assessment of the the private customer's financial standing, based on information disclosed by the private customer;
    (2) the firm has taken reasonable steps to ensure that the arrangements for the loan or credit and the amount concerned are suitable, based on the information disclosed by the private customer, for the type of investment agreement proposed or which the private customer is likely to enter into; and
    (3) the private customer has given his prior written consent to both the maximum amount and the amount or basis of any interest or fees to be levied in connection with the loan or credit…

    COB 7.9.7 R Record keeping requirements

    A firm must make a record of the information about the private customer's financial standing upon which the assessment required by COB 7.9.3 R (1) was made, including the date on which the information was last updated or checked, and retain the record for three years from the date on which the credit arrangements ceased.

    The COBS requirements

    In COBS, the suitability rule is to be found transposed into COBS 9.2 ("Assessing suitability"), which contains rules, and 9.3 ("Guidance on assessing suitability"), which contains guidance, as follows:

    "COBS 9.2.1 R Assessing suitability: the obligations

    (1) A firm must take reasonable steps to ensure that a personal recommendation, or a decision to trade, is suitable for its client…

    COBS 9.2.2 R

    (1) A firm must obtain from the client such information as is necessary for the firm to understand the essential facts about him and have a reasonable basis for believing, giving due consideration to the nature and extent of the service provided, that the specific transaction to be recommended, or entered into in the course of managing:

    (a) meets the investment objectives;

    (b) is such that he is able financially to bear any related investment risks consistent with his investment objectives; and
    (c) is such that he has the necessary experience and knowledge in order to understand the risks involved in the transaction or in the management of his portfolio.

    COBS 9.3.1 G

    (1) A transaction may be unsuitable for a client because of the risks of the designated investments involved, the type of transaction, the characteristics of the trade or the frequency of the trading…

    COBS 9.3.4 G Loans and mortgages

    When considering the suitability of a particular investment product which is linked directly or indirectly to any form of loan, mortgage or home reversion plan, a firm should take account of the suitability of the overall transaction…"

Note 1   The bank’s expert    [Back]

Note 2   It may even perhaps be possible that a personal recommendation is suitable, but that a lending arrangement is not fit for its intended purpose, albeit in a way which did not impinge on the overall suitability of the personal recommendation.    [Back]

Note 3   Although, it might do so: see Rubenstein v. HSBC Bank plc, [2012] EWCA Civ 1184, a case concerned with COB    [Back]

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