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In a financial environment where credit institutions are diversifying their activities well beyond lending, their role as investment services providers (ISPs) raises special legal issues. This specific dimension gives rise to a distinct liability regime, with enhanced professional obligations, particularly in the context of European banking and financial regulations. Understanding the general responsibility of the banker is a useful prerequisite.
The dual role of banking institutions
Banking institutions often operate simultaneously as traditional lenders and ISPs. This dual role complicates the legal analysis of complex financial arrangements, particularly when a loan is combined with a financial investment. In such cases, case law makes a fundamental distinction: the borrower can either invoke the principles of contractual liability under ordinary law, or rely directly on the specific rules of the Monetary and Financial Code (CMF) and the Autorité des marchés financiers (AMF).
When faced with a customer who is disappointed by an investment financed by a loan, it is crucial to define the nature of the activity. Is it a simple loan or a financial service subject to a heightened duty to advise? For an analysis of the responsibilities associated with complex transactions, see the bank responsibility for financial engineering. It all depends on the initiative taken by the bank and the mission entrusted to it. This issue is all the more important given that management companies and other entities approved by the AMF are required to obtain financial authorisation in order to provide investment advice as a regular profession. In the event of a dispute, legal assistance may be necessary.
The legal basis for ISP liability
The right to rely on CMF rules
Since a landmark decision on 24 June 2008, it has been established that borrowers may invoke the provisions of the CMF in support of their liability action against an ISP. Article L. 533-12 stipulates that information must be "accurate, clear and not misleading". ISPs must provide clients with information enabling them to understand the nature of the service and the associated risks.
This principle is reinforced by Article 314-11 of the AMF General Regulation, which requires consistency in the information provided. The ISP is liable if it fails to present the least favourable characteristics and the risks inherent in the proposed transaction. This protection falls within the broader framework of MiFID II and the texts supplementing the directive adopted by the European Parliament and the Council.
The "Buon" case law and its developments
The "Buon" ruling of 5 November 1991 is a cornerstone of this specific liability. The Court of Cassation held that an ISP is obliged "from the outset of the contractual relationship and whatever its nature, to warn its client of the risks incurred in speculative transactions on the futures markets, unless the client is aware of them".
This case law has developed significantly, with the Court clarifying that the ISP bears the burden of proving that it has fulfilled its obligation to provide information and warnings. This approach has been confirmed in a number of subsequent rulings and is part of a more general trend towards protecting retail investors against market abuse.
The duty to inform: a substantial obligation
The ISP owes the investor a general obligation to provide information on the essential characteristics of the product offered. This information must be complete, accurate and formulated in terms that the client can understand, whether the client is a professional or a retail investor.
Information content and procedures
In particular, the information must draw attention to :
- The characteristics of the proposed product, including its classification as a financial instrument.
- The less favourable aspects may result from price trends.
- Potential exposure to loss of capital and other economic risks.
The obligation is generally deemed to be fulfilled by the delivery of a document setting out these elements, sometimes in the form of a risk statement. However, jurisdictions require this information to be tailored to the customer's financial situation, experience and investment objectives. This requirement applies both to French institutions and to foreign players operating in France under the European passport.
Case law places particular emphasis on the consistency between advertising documents and the information prospectus. In recent years, however, it has adopted a more liberal approach, considering that explicit general terms and conditions may be sufficient to inform policyholders about the risks of an investment product (Cass. com., 22 May 2013 and 18 June 2013).
Consequences of non-compliance
If the bank fails to fulfil its obligation to provide information, it is liable for damages resulting from the loss of an opportunity. This loss is assessed on the basis of the opportunity lost, but cannot be equal to the benefit that would have accrued had the opportunity been taken. The ISP's administrative liability may also be brought before the AMF Enforcement Committee, which can impose considerable penalties.
The duty to warn for speculative products
Distinction between risk and speculation
Financial markets law makes an essential distinction between the simple risk inherent in any investment and genuine speculation. As recalled in a ruling by the Commercial Chamber on 28 January 2014, "the banker providing investment services is not bound by a duty to warn his client, even an uninformed one, if he offers him financial products that are not speculative in nature, regardless of whether they are subject to the variability of the financial markets."
Speculative transactions are defined as "transactions motivated by the hope of a rapid capital gain with no direct counterpart in the real economy". According to this definition, UCITS or mutual funds are generally not considered speculative. Only speculative transactions on futures markets clearly fall into this category, although some of them may be considered as speculative. financial engineering operations may also be affected.
Whether you're an informed or uninformed user
It is relatively easy to prove that a borrower is not a sophisticated investor. A sophisticated investor must have the ability to understand :
- The nature of the product and its type.
- The associated risks, particularly in the case of participative investment or crowdfunding.
- The advisability of the transaction as part of its portfolio management.
The case law specifies that informed status cannot be established by simple deduction or presumption based on the insured's professional qualities. Specific knowledge of the transactions in question is required, which often distinguishes legal entities from private individuals as investors.
When the product is speculative and the customer uninformed, the duty to warn arises. Intermediaries marketing such products must explicitly warn of the risks involved, a particularly important obligation for crowdfunding platforms acting as intermediaries.
The obligation to profile and match services
Article L. 533-13 of the CMF imposes two sets of major obligations on ISPs:
- An obligation to know and profile the customer.
- An obligation to verify the suitability or adequacy of the product or service offered.
These obligations are part of the broader framework of the European MiFID II Directive and its application in French law, in particular via article 314-11 of the AMF General Regulation.
Customer categorisation
ISPs must categorise their clients by distinguishing between professional and non-professional clients. This classification, which complies with European Union requirements, determines the level of protection afforded and directly influences the procedure for assessing the suitability of the services offered.
The Autorité de contrôle prudentiel et de résolution (ACPR) and the AMF have published detailed recommendations on the information to be gathered (AMF Position 2013-02 and ACP Recommendation 2013-R-01). Clients may rely on their failure to comply with these rules to establish that the investment services offered are not appropriate to their situation. This assessment is one of the essential skills that financial institutions' compliance officers must master.
Proof of due diligence
ISPs must provide proof of their due diligence in terms of profiling and suitability. In the event of a dispute, it will be up to them to demonstrate that they have met their obligations, in particular by keeping a record of the questionnaires and forms used to assess the client's suitability and competence.
A complete file must be compiled for each client, including details of his financial situation, investment objectives and experience. This documentation requirement is particularly important when the ISP manages a portfolio on behalf of third parties or provides investor services involving complex financial instruments.
Managing conflicts of interest
Managing conflicts of interest is a key obligation for ISPs. Article L. 533-10 of the CMF requires ISPs to take "all reasonable steps to prevent conflicts of interest from adversely affecting the interests of their clients" and to maintain "effective organisational and administrative arrangements" to detect, avoid or manage such conflicts [cite: 1331]. Such conflicts may arise between the bank and its client, or between two clients of the bank.
The regulations, notably MiFID II, set out the practical obligations. These include the establishment of 'Chinese walls' to separate activities likely to generate conflicts, such as financial analysis and investment banking [cite: 1331]. Financial analysts, for example, must comply with strict rules to guarantee their independence and the objectivity of their recommendations [cite: 1331].
Where organisational measures are not sufficient to ensure that the client's interests are not adversely affected, the ISP has an obligation to clearly inform the client of the general nature and source of conflicts between the bank and the client before taking action [cite: 1331]. This information must be sufficiently detailed to enable the client to make an informed decision.
The loss arising from a breach of these obligations, including those relating to conflicts of interest, generally results from the loss of a chance to have avoided the loss incurred on the investment by making a more judicious investment or taking a less risky direction.
If you feel that you have been the victim of a breach by your bank acting as an ISP, do not hesitate to contact our firm for an analysis of your situation.
Sources
- Monetary and Financial Code, articles L. 533-10, L. 533-12 and L. 533-13
- General Regulation of the Autorité des marchés financiers, article 314-11 Directive 2014/65/EU (MiFID II)
- Buon" judgment, Cass. com. 5 Nov. 1991, Bull. civ. 1991, IV, No. 327
- Cass. com. 24 June 2008, RD bancaire et fin. 2008, no. 6, p. 20
- Cass. com. 28 Jan. 2014, no. 12-29.204
- AMF Position 2013-02 and ACP Recommendation 2013-R-01
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