Highlights of Recent Developments in Banking Law

Profession:Jones Day Gouldens

in short...December 2001 Issue No. 17

In Australia & New Zealand Banking Group Ltd v. Cattan & Anor (2 August 2001), the Court has highlighted the significant degree of care required when classifying customers for investment business. Although the requirements of the SROs relating to customer classification were merged as from 1 December 2001 within the FSA Conduct of Business Rules, the case remains of general relevance to future customer classification.

The bank sued for losses incurred by the defendant customer as a result of trading in emerging market debt (EMD). The customer, C, alleged that although he had entered into the trades, he did so as a result of the bank improperly categorising him as non-private investor, in breach of the IMRO Rules, and that he did not possess the knowledge and experience to be so classified. In reality, he asserted, he should have been treated as a private investor to whom the bank owed a duty of care to ensure that he did not enter into deals which he did not understand and which were inherently so risky that they were not suitable for a person of his standing and means. Therefore, C argued that he was not indebted to the claimant and had a counterclaim for losses made during his unsuccessful trading, pursuant to section 62(1) of the Financial Services Act 1986 (see now Section 150 of the Financial Services and Markets Act 2000).

Under the bank's procedures, no private individual could be accepted as an investor in EMD.

Under Rule 2.1 of Chapter II, Section 2 of the IMRO Rules, a firm must take reasonable steps to establish whether a customer is a private or non-private customer. A firm may treat a customer as non-private, if:

It believes on reasonable grounds that the customer has sufficient experience and understanding to waive the protections provided for private customers.

It has given a clear written warning to the customer of the protection which he will lose, including any right of action under Section 62 FSA 1986 for breach of any IMRO rules.

The customer has given his written consent after a proper opportunity to consider the written warning, unless the customer is ordinarily resident outside the UK and is reasonably believed not to wish to consent in writing.

Before reaching any conclusion about whether a customer has sufficient experience and understanding, firms must consider whether, on the basis of information known about the customer and/or any representations made by the customer, he understands the nature and suitability of the investments and has sufficient experience to assess the suitability of the relevant transactions.

After hearing lengthy cross-examination, the court concluded:

C was introduced to the bank by the Deputy Governor of the Central Bank of Jordan.

C displayed considerable knowledge of EMD, including information of interest about Algerian debt which the bank's officers did not know. C was a well-informed man who knew about at least part of the EMD market and the sort of factors which affected its value.

Discussions with C at the first meeting included discussion about other parts of the EMD market, such as the sovereign debt of Gabon and Sudan which were very specialised sectors of the market and about which C talked in an informed way and to a...

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