November 2018

The Hong Kong Court of First Instance on 30 July 2018 affirmed the existing principles governing the relationship between banks and customers engaging in investment services, and found that the bank did not owe a duty to advise on the suitability and risks of certain high-risk products.

Factual background

The case of Shine Grace Investment Ltd v Citibank, N.A. & Anor [2018] HKCFI 1737 is concerned with nine equity accumulator contracts entered into by the Shine Grace Investment Ltd with the bank in 2007. The bank issued margin call notices under the accounts of the nine contracts in dispute, demanding Shine Grace to deposit additional margin security but the margin calls were not met.

The disputed accounts resulted in heavy financial losses for Shine Grace. The total unwinding costs of the open positions on the six disputed accounts exceeded HK$427 million, while the losses suffered from the sale of the shares accumulated under all the disputed accounts were around HK$51 million, making a total of HK$478 million.

Shine Grace disclaimed the disputed accounts and asserted that they were invalid and unenforceable. It alleged what is commonly known as mis-selling of the equity accumulator contracts by the bank. The relationship manager of the bank was also named personally a co-defendant to the legal proceedings. Two guarantors brought connected proceedings against the bank under guarantees executed in favour of Shine Grace. The guarantors challenged the appropriation of HK$25,609,002.71 and HK$39,109,301.58 from their respective accounts on 25 January 2008 to satisfy Shine Grace’s liability under the disputed accounts.

Bank’s duty to advise?

As explained by the court, at the time when the subject transaction took place, the mere banker-customer relationship did not mean that the bank had a duty to consider the prudence of an investment transaction from the customer’s perspective or to warn him of the risk involved. While a banker had a general duty not to mislead, the mere giving of “advice” did not necessarily mean that a bank had assumed legal responsibility for it. On the court’s approach in determining whether a bank had assumed legal responsibility, the court should examine the conduct of the salesperson against the facts and circumstances of each case before one could determine if responsibility had been assumed when recommendations were made. One should also examine the terms and conditions set out in the services agreements and the risk disclosure statements as well as other relevant factual circumstances surrounding the dealings between the parties in determining the extent of the bank’s duty.

On the fact of this case, the court found that the parties agreed to enter the deal on the basis that the bank did not assume any responsibility to advise, no matter what recommendations might have been provided in the course of their relationship.

The court also considered all “other relevant factual circumstances” in the round, in particular, Shine Grace’s extensive experience in investment and the fact that the bank’s staff were on more than one occasion expressly asked not to interfere with its investment decisions. The court was satisfied that the bank did not assume legal responsibility to advise Shine Grace on the suitability and risks of the accounts, as it did not require such advice.

The Court did not accept that the bank was subject to an “intermediate” common law duty to explain fully and accurately the nature and effect of a financial product where its banker volunteered an explanation in that respect. Such proposition appears to be inconsistent with the earlier decision of the Court of Appeal in Chang Pui Yin v Bank of Singapore Limited (above).


In our earlier news update (10 August 2017), we discussed Court of Appeal’s decision in Chang Pui Yin v Bank of Singapore Limited (CACV 194/2016), which raised the question whether authorized institutions can still be contractually protected by non-reliance clauses in alleged mis-selling where the transactions were conducted well before the Securities and Futures Commissions (SFC) introduced the mandatory clauses to be incorporated into every client agreement pursuant to paragraphs 6.2(i) and 6.5 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct), which took effect from 9 June 2017.

Before the SFC imposed the new requirement by revising the Code of Conduct, the legal principle established by case law was that banks and financial institutions were contractually protected by non-reliance clauses in case of allegation of mis-selling by their clients. In two earlier Hong Kong cases, Kwok Wai Hing Selina v HSBC Private Bank (Suisse) SA (formerly known as HSBC Republic Bank (Suisse) SA) (HCCL 7/2010), and DBS Bank (Hong Kong) Limited v San-Hot HK Industrial Company Limited and Hao Ting (HCA 2279/2008), the court upheld the “execution-only” clauses in the contractual documents as effective. In one of the above cases, the court rejected the argument by the client that professional duties were expressly incorporated into contracts by reference to the Code of Conduct. The court explained that paragraph 5.2 of the Code of Conduct did not have any contractual effect. Hence, a well-drafted disclaimer in the client agreement should prevail over the suitability requirement in paragraph 5.2 of the Code of Conduct.

The equity accumulator contracts entered into by Shine Grace with the bank in 2007, well before the Code of Conduct was revised. While the significance of Shine Grace Investment Ltd v Citibank, N.A. is perhaps hampered by the reform introduced by the SFC in June 2017, it serves as a helpful reminder of the importance of clear drafting of clients’ contracts and record keeping of suitability assessments carried out by banks.