2016.12.26 XIE, Qing (Natasha)
This Client Briefing offers a brief introduction to an article named the Civil Liability for Breach of Suitability Duty (the “Article”) written by Ms. Weiwei Yao, who is a counsel at JunHe LLP. Before joining in JunHe, Ms. Yao served as a judge on the Shanghai No.1 Intermediary People’s Court for 17 years, with ample experience in presiding over commercial and financial cases.
The investment suitability requirement refers to an obligation for the products and services offered by financial institution to investor to match the financial status, investment goals, risk tolerance ability, investment needs, knowledge and experience of the investor. A financial institution shall have the legal duty to “know your clients” and “sell suitable products to suitable investors” (“Suitability Duty”).
In reference to three final judgments recently released, the Article provides deep analyses of the application of law and the determination of constitutive elements of the civil liability of a financial institution for its breach of the Suitability Duty.
So far the relevant provisions regarding the Suitability Duty in our country can be mainly seen from the normative documents issued by the financial regulatory departments. Courts when hearing the relevant cases may refer to the provisions of such normative documents issued by the financial regulatory departments, and may cite and apply certain basic principles for cases related to the securities markets established by the existing judicial interpretations for the determination of civil liability.
Depending on the right of claim exercised by the concerned party, the nature of the civil liability for breach of the Suitability Duty may be the liability for negligence in contracting, the liability for contractual breach and damages, or the liability for tort. If a financial institution, before entering into a contract, intentionally hides important facts or provides false information related to the contract, and that leads such contract to fail to be established, to be invalidated, or to be changed or revoked, then an investor may claim against such financial institution for the liability for negligence in contracting, or the liability for contractual breach and damages if the contract is already established on the grounds of breach of contract, or the tort liability on the grounds of a breach of Suitability Duty.
The author of the Article believes that claim for tort liability would be easier for an investor to obtain remedies, compared to the liability for negligence in contracting or the liability for contractual breach and damages, and therefore would be largely used by investors as the basis of the right of claim.
The judicial practice in China regards tortious conduct in relation to securities as a special kind of tortious conduct, which shall be governed by the principle of liability of non-fault or presumption of fault. The China Securities Regulatory Commission (“CSRC”) specified in the Administrative Measures on Suitability for Securities and Futures Investors (Consultation Paper) issued by it for public comment on September 9, 2016 (“Consultation Paper”) that, for any dispute between a securities and futures operation institution and an ordinary investor, an institution which fails to prove its performance of the relevant duties shall bear the corresponding legal liability. Therefore, it is clear that the violation of Suitability Duty is bound by the principle of no-fault liability. Even if an ordinary investor is slightly negligent, the principle of compensatio culpae will not be triggered.
When determining the cause-and-effect relationship under the liability for tort of a financial institution for breach of the Suitability Duty, the presumption of causation shall be applied, i.e. an investor will not need to prove there is a cause-and-effect relation between the tortious conduct and its loss, any proof of existence of the unlawful conduct of financial institution’s breach of Suitability Duty will be sufficient. Meantime, when applying the principle of liability of presumption of fault and presumption of causation, the reversion of the burden of proof will be applied, i.e. the financial institution shall bear the burden to provide proof that it has fully performed the Suitability Duty and has no fault therein.
Among the four elements of the civil liability for breach of the Suitability Duty, -- i.e. the fault of defendant, unlawful conduct, loss of investors and cause-and-effect relation -- an investor only needs to prove two elements: unlawful conduct and any loss incurred, while the burden of proof of the subjective fault and cause-and-effect relation are basically borne by the defendant. The Consultation Paper also specifies the principle of reversion of the burden of proof, which is consistent with the principles of the Several Provisions of the Supreme People’s Court on Trial of Cases of Civil Compensation Arising from False Statement in Securities Market. The liability exemption of financial institutions depends on whether the financial institution has good command of the correct information of its clients through due diligence and conducts the appropriate risk disclosure. On the premise that the financial institution has performed its duty of due diligence and completed appropriate risk disclosure, if an investor fails to provide necessary information or the information provided is false, such financial institution shall not be deemed for breach of the Suitability Duty.
If you are interested in the discussion of the judicial theory and practice in relation to Suitability Duty, please feel free to contact us. We would be delighted to share with you the full content of the Article.