In a recent (August 2014) decision, the DIFC Court has ruled against financial institutions in a USD 200 million investment mis-selling claim, finding that the defendants, Bank Sarasin- Alpen ("Sarasin") and Bank Sarasin (Swiss Incorporated) ("Sarasin Swiss"), were liable for breaches arising out of Sarasin Swiss' unauthorised conduct of financial services in the DIFC, and in relation to Sarasin's failures in client classification and suitability of the advice.
Background
The defendants operated under a common model for international financial institutions operating in the DIFC. Sarasin had a DFSA Category 4 licence, and its primary role was to introduce and refer clients to Sarasin Swiss, which was not DFSA authorised to conduct financial activity. Those clients were "on-boarded" at booking centres in Switzerland, and it was envisaged that any financial activity or advice would therefore take place outside the DIFC.
In the course of 2007 and 2008, the Claimants (wealthy Kuwaiti nationals) were introduced by Sarasin to Sarasin Swiss, from whom they purchased structured financial products valued at $200m (the "Notes"). The Claimants maintained at trial that they had been looking for capital protection combined with a regular income and were assured that they would not lose any money by investing in the Notes.
In November 2008, Sarasin Swiss made a margin call, and when the Claimants did not meet that call, terminated facilities and closed the Notes. This left outstanding balances on loans taken out to fund the purchases and resulted in portfolio losses.
Findings against Sarasin
The Court accepted that the Claimants were not given sufficient warnings as to the level of risk involved in the investments or an adequate explanation of the nature and effect of the documents signed. It also found that there were regulatory breaches by Sarasin in complying with client classification requirements, and a lack of proper consideration to the individuals' level of financial sophistication and knowledge/understanding of the types of investments involved, such that they did not meet the Conduct of Business Rules definition of "Client" but were instead "Retail Customers".
Sarasin also failed to carry out an adequate suitability assessment, such that products were sold which were unsuitable to the Claimants' investment objectives.
Findings against Sarasin Swiss
Somewhat controversially, the regulatory claim against Sarasin Swiss (which is not DFSA regulated) was upheld, on the basis that it was carrying on regulated activity, in breach of the general prohibition at article 41 (1) of the DIFC Law no 1 of 2004.
The Court highlighted that there was insufficient delineation between Sarasin and Sarasin Swiss, with some documents on file giving a misleading impression that it was the (DFSA regulated) Sarasin which was the provider of bank accounts and investment services when in fact it was the (non-DFSA regulated) Sarasin Swiss which provided these facilities.
Conclusion
Both Sarasin and Sarasin Swiss were ordered to pay compensation to the Claimants in respect of the losses sustained. Damages are as yet unquantified, but are understood to be very large given the amount invested.
The case, of course, turns on its unique facts. Nonetheless, the judgment, which is being appealed, certainly evidences a willingness by the DIFC Courts to look beyond the appearances of formal legal structures and focus on the practical realities when it comes to the assessment of liability for the provision of regulated financial services.
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