THE INCREASE OF PROFESSIONAL
LIABILITY OF FINANCIAL ADVISORS
Examples of French case law
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SUMMARY
Introduction :
• French and European regulatory convergence on financial
instruments distribution
• Review of applicable texts
• Increased autonomy of the obligation to provide information
1.
General obligation to provide information
2.
Duty to advice
3.
Duty to warn
Conclusion
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INTRODUCTION
• French and European regulatory convergence on financial instruments
distribution;
• Review of applicable texts;
• Increased autonomy of the obligation to provide information.
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FRENCH AND EUROPEAN REGULATORY
CONVERGENCE
•
PRIPs Regulation – ongoing:
 Creation of a general obligation to provide information whatever the nature of the product.
•
AIFM Directive – 2011 :
 Obligation to provide information for alternative investment funds.
•
OPCVM IV Directive – 2009 :
 Obligation to provide information for UCITS to the public.
•
Moving towards harmonization
French and European regulatory steps towards harmonization of the obligation to provide
information owed by the various actors:
MIF Directive– 2004 :
 Detailed obligation to provide information for investment services providers.
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FRENCH AND EUROPEAN REGULATORY
CONVERGENCE
 A sector-specific regulation harmonized under French law :
A gradual harmonization of regulation applying to :
•
Investment services providers
•
Financial investment advisors
•
Insurance intermediaries
•
Direct marketers
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REVIEW OF APPLICABLE TEXTS
Investment services providers :
OBLIGATION TO PROVIDE INFORMATION
General regulation of the AMF
Monetary and Financial Code
Accurate, clear and not misleading
information
Content of the information
Article 314-10 and 314-11
Article L.533-12
Timing of disclosure
Article 314-21 to 314-24
Information medium
Article 314-25 to 314-28
Disclosure of performance
Article 314-12 to 314-16
Conflict of interest
Article 313-23 and 313-24
Advertisements
Article 314-29 to 314-31 and Article
212-28
Article 314-32 to 314-41
Information of providers, services and
instruments
Portfolio management
Information on costs
Article 314-17 to 214-20
Article L.533-12
Article L. 533-12
Article 314-40 to 314-41
Article 314-42
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REVIEW OF APPLICABLE TEXTS
Investment services providers:
OBLIGATION TO INFORM ITSELF: CLIENTS ASSESSMENT
General Regulation of the AMF
Monetary and Financial code
Assessment for :
• Collective management
• Investment advice
Articles 314-43 and 314-47
Articles L.533-13 and L.533-16
Assessment for other investment services
Article 314-49 and 314-50
Articles L.533-13 and L.533-16
Common provisions
Article 314-51 to 314-54
DUTY TO ADVICE
Advice adapted to the needs and objectives of
clients
General Regulation of the AMF
Monetary and Financial code
Article 314-51 to 314-54
Articles L.533-13 and L.533-16
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REVIEW OF APPLICABLE TEXTS
Financial investment advisors :
OBLIGATION TO PROVIDE INFORMATION
General Regulation of the AMF
Monetary and Financial Code
Identification of the Financial investment
advisor
Article 325-3
Article L.546-1
Content of the reporting information
Article 325-3
Letter of engagement
Article 325-4
Accurate, clear and not misleading
information
Article 325-5
Information on risks
Article 325-7
OBLIGATION TO INFORM ITSELF: CLIENTS ASSESSMENT
Client’s financial position
General Regulation of the AMF
Monetary and Financial Code
Article 325-7
Article L.541-8-1
DUTY TO ADVICE
Advice adapted to the client’s needs and
objectives
General Regulation of the AMF
Monetary and Financial Code
Article 325-7
Article L.541-8-1
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REVIEW OF APPLICABLE TEXTS
Insurance intermediaries :
OBLIGATION TO PROVIDE INFORMATION
Insurance code
Identification of the intermediary
Article L.520-1
Life insurance contract
Article L.132-5
Content of the contract
Articles L. 132-5, R.132-4 and A. 132-8
Information brief
Article L.132-5-2
Cash value and contract transfer
Article L. 132-21
Accurate, clear and not misleading
information
Articles L. 132-27 and R. 520-2
Contract costs
Article R. 132-3
Distance contract
Article R. 132-5-1
Monetary and Financial Code
OBLIGATION TO INFORM ITSELF: CLIENTS ASSESSMENT
Insurance Code
Financial position of the investor
Articles L. 520-1 and L.132-27-1
Objectives of the subscription
Article L. 132-27-1
Monetary and Financial Code
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REVIEW OF APPLICABLE TEXTS
Insurance intermediaries:
DUTY TO ADVICE
Insurance Code
Advice adapted to the client’s needs
and objectives
Monetary and Financial Code
Articles L. 520-4 and L.132-27-1
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REVIEW OF APPLICABLE TEXTS
Direct marketers:
OBLIGATION TO PROVIDE INFORMATION
General Regulation of the AMF
Monetary and Financial Code
Clear and comprehensible information
Articles L.341-11 and L.341-12
Identity of direct marketer’s information
Articles L. 341-12 and R. 341-16
Product offered ‘ information
Articles L. 341-12 and R. 341-16
Contractual terms information
Articles L. 341-12 and R. 341-16
The form of information appropriate to the
distance communication
Articles L. 341-12 and R. 341-16
OBLIGATION TO INFORM ITSELF: CLIENTS ASSESSMENT
General Regulation of the AMF
Monetary and Financial Code
Information on the client’s financial position
Articles L.341-11
Information on the client’s experience
Articles L.341-11
Information on the client’s objectives
Articles L.341-11
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REVIEW OF APPLICABLE TEXTS
Direct marketers:
DUTY TO ADVICE
General Regulation of the AMF
Advice adapted to the client’s needs and
objectives
Monetary and Financial Code
Articles L.341-11
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INCREASED AUTONOMY OF THE OBLIGATION
TO PROVIDE INFORMATION
Failure to meet the obligation to provide information is punishable under Article 1147 of the
French Civil Code.
∼ Cass. Com. March 8th , 2011, No. 10-14456: Mr. X / Société Générale
Pursuant to Article 1147 of the Civil Code;
The decision of the Court of Appeal is without a legal basis for not having examined if the bank had not breached its obligation to provide information
by failing to mention the less favorable characteristics and the risks attached to the options which can be the quid pro quo of its potential returns.
∼ Paris Court of Appeal, April 1st , 2014, RG No. 2012/09286
Failure of the Bank Gestion Privée Indosuez to its pre-contractual obligation to provide information must be retained and can incur its liability on the
basis of the Article 1147 of the Civil Code.
∼ Pau Court of Appeal , March 26th , 2013, RG No. 11/04300;
It is sufficiently established that the Caisse d'Epargne had failed to the obligation to provide advice and information (...), and had committed a fault
which could incur its liability to the underwriters pursuant to Article 1147 of the Civil Code.
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INCREASED AUTONOMY OF THE OBLIGATION
TO PROVIDE INFORMATION
The most recent case law clearly distinguishes obligation to provide information from other obligations:
Obligation to provide information  Duty to warn.
∼ Paris Court of Appeal, Pôle 5 ch. 7, January 10th , 2012, No. 2010/04686, JurisData 2012-000135.
Considering that the bank justified the accurate, complete and not misleading information to its client, subscriber on the objective characteristics of the proposed
product;
The characteristics of the Product BENEFIC are not giving to it a speculative nature, so the bank was not required, to a duty to warn about the risks. "
Obligation to provide information  Duty to advice.
∼ Paris Court of Appeal, Pôle 5 ch. 7, October 25, 2011, No. 2010/12514.
In compliance with the obligation to provide information; [...] That therefore, the information appears to be sincere and complete since the reference of the randomness
of the products was sufficient [...];
In compliance with the duty to advice; [...] Considering that the investment services provider must provide to his client an advice adapted to its personal situation.
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1. GENERAL OBLIGATION TO PROVIDE
INFORMATION
1.1. Scope of the obligation to provide information :
1.2. Content of the information :
•
•
•
•
1.2.1. Information on the product’s characteristics;
1.2.2. Costs information;
1.2.3. Information on the advantages/ disadvantages ;
1.2.4. Risks information.
1.3. Characteristics of the information :
1.4. Regime of the obligation:
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1.1 SCOPE OF THE OBLIGATION TO PROVIDE
INFORMATION
All financial actors must respect this general obligation to provide information, for all the products and all
the investors.
∼
All the actors must give this information
•
•
Investment services providers: Cass. Com. February 15th 2011, n° 10-12.185; Paris Court of first Instance, May 20th 2014, RG n°12/12842
Financial investment advisors : Nancy court of Appeal, February 24th 2009, n° 04/02940.
Insurance intermediaries : Lyon Court of Appeal , June 26th 2014, RG n°12/00139
Direct marketers
∼
An information given for all the banking and financial products and services.
∼
An information provided for informed and non informed investors.
•
Cass. Com. November 9th 2010, n° 09-69.997.
•
•
« But expected that Mr X.. [...] was an informed investor [...] the bank was not required to a particular duty to warn the client and it had fulfill its obligations by
issuing, at the conclusion of this contract, an accurate and complete information about the risks. "
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1.2 CONTENT OF THE INFORMATION
1.2.1. Information on the product’s characteristics;
1.2.2. Costs information ;
1.2.3. Information on the advantages/ disadvantages ;
1.2.4. Risks information.
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1.2 CONTENT OF THE INFORMATION
1.2.1. Information on the essential characteristics of the products:
∼ CA Paris, 2 pole c. 5, October 25th, 2011, No. 09/05607.
The company Z must inform its clients about the essential characteristics of the proposed product.
∼ TGI Paris, May 16th, 2014, RG No. 09/07482.
The company CORE MANAGEMENT had to fulfill its obligation to provide information and advice, especially to provide a clear and complete
information on the characteristics of the proposed investment, including the less favorable characteristics and the economic and fiscal risks.
∼ TGI Paris, May 27th, 2014, RG No. 09/01892.
The company Guinot becoming VIP Heritage Society, had to deliver, under its obligation to provide information and advice, a fair and complete
information on all the characteristics of the proposed investment, including the less favorable characteristics and the risks associated to the options which
can be the quid pro quo of its potential returns.
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1.2 CONTENT OF THE INFORMATION
1.2.2. Costs information:
1.2.2.1. Inducements regime under articles 314-76 (investment services providers)and 325-6
(financial investment advisors) of the General Regulation of the AMF
1.2.2.2. Costs information by the KIID (Key Investor Information Document)
∼
The KIID is an information document for retail investors.
∼
Harmonized under European regulation
∼
Imposed for UCITS for the public
∼
A standardized table on fees and commissions paid to cover the operating costs of the UCITS: admission fees/exit/
current/ performance fee.
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1.2 CONTENT OF THE INFORMATION
1.2.2. Costs information:
A point on the financial investment advisors 'compensation
∼ Fees: remuneration paid directly by the client
∼ Framed authorization to receive commissions from a third party
Criteria of inducements regime (Articles 314-76 and 325-6 of the General Regulations of the AMF):
• To clearly inform the client of the existence, the nature and the amount of the remuneration, commission or benefit,
or where the amount can not be determined, the method of calculation ;
• To enhance the quality of service delivered to the client ;
• To serve in the best interests of the client.
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1.2 CONTENT OF THE INFORMATION
1.2.2. Costs information:
The issues of the revision of current compensation framework
Trailer fees paid by producers / issuers of financial instruments represent about 80% of the financial advisors ‘ compensation ;
the remaining 20% from fees or operations performed outside the scope of financial markets.
Objectives of a revision at the Community level:
•
•
•
Strengthen the intermediaries’ advisory role to clients;
Fight against potential conflicts of interest;
Qualification criteria : "independence" of the service of investment advice :
i) sufficiently wide-ranging analysis of the market of savings products
ii) prohibition to obtain commissions from third party
Risks associated
•
•
Impact on the value of the commission on the cost of delivery charged to the client;
Disappearance of a part of the profession.
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1.2 CONTENT OF THE INFORMATION
1.2.2. Costs information:
The Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 (MIFID II)
•
Transparency of remuneration
Pre-contractual obligation to provide information (Article 24 paragraph 4c) : communication before providing the service, of
the existence, nature and amount of compensation paid by a third party or if the amount can not be determined with certainty,
the method of calculation.
•
Frame of the remuneration
Continuation of the system of inducements (Article 24 paragraph 9): the payment of trailer fees is permitted if:
•
Designed to enhance the quality of the relevant service to the client; and
•
Does not impair compliance with the investment firm’s duty to act honestly, fairly and professionally in accordance with
the best interests of its client.
•
Prevention of conflicts of interest
Investment firms take all necessary measures to prevent any conflicts of interest "caused by the receipt of inducements from third parties
or by the investment firm’s own remuneration and other incentive structures.”(Article 23 point 1) “
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1.2 CONTENT OF TE INFORMATION
1.2.2. Costs Information:
Directive MiFID II
Constraints
Possibility for Member States to prohibit or restrict the payment of trailer fees, including requiring that those rights are
redeemed or repaid to the client (Article 24 paragraph 8)
 Investment advice provided on an independent basis
Prohibition to accept or to receive fees, commissions or non-monetary benefits of a third party in connection with the
provision of an investment service or an ancillary service, on a discretionary basis (Article 24 paragraph 9)
 Portfolio management provided on a discretionary basis
Enhanced transparency: communication of a periodic report listing all incentives granted or received in the previous
period in relation to said management
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1.2 CONTENT OF THE INFORMATION
1.2.2. Costs Information:
Draft of Directive DIA II
Largely inspired by MiFID II (Article 17 of the draft Directive DIA II - July 3rd , 2012)
 Distinction between life and non-life insurance
Life insurance intermediaries
Client information before the signing of a life insurance contract on the nature of his compensation (fees and / or
commissions).
Client information, during the execution of the contract, on the amount of fees charged or the method of calculation.
Non-life insurance intermediaries
No obligation to provide information unless at the client request, knowing he has been informed of this possibility.
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1.2 CONTENT OF THE INFORMATION
1.2.2. Costs Information:
Swiss case law: an example to be followed?
Federal Court, October 30th, 2012 (4A_127 / 2012 and 4A_141 / 2012)
Principle: Obligation to reimburse the rebates to the client concerning:
• The independent asset managers (independent financial advisors in France);
• Banks responsible for managing the assets of a client under a mandate;
• The bank receiving commissions from companies affiliated to a group.
Objective: To enhance transparency to fight against conflicts of interest
“The bank is encouraged to acquire or increase its own stock of a determined product so that the operation can not be justified in light of the client's
interests.”
Exception: Waiver by the client of its right to return reimbursements
• Contractual waiver and informed consent;
• Customer information on:
i) the essential parameters of the agreement on the basis of which the rebates are calculated and paid;
ii) the predicted amount thereof.
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1.2 CONTENT OF THE INFORMATION
1.2.3. Information on the advantages / disadvantages:
The distributor must inform the client on the disadvantages of the product, which are the quid pro quo
of the advantages highlighted:
•
Cass. com. April 13rd, 2010, No. 08-21334;
• Cass. Com. March 8th, 2011, No. 10-14456;
• TGI Paris, May 27th, 2014, RG No. 09/01892
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1.2 CONTENT OF THE INFORMATION
1.2.4. Risk information:
1.2.4.1. Client Information:
The client must be able to make its decision in full knowledge of the facts:
∼ Lyon Court of Appeal, June 26th, 2014, No. 12/00139.
La Banque Postale is sentenced for having failed to take measures to explain to the clients the mechanism of the operation dealing
with life insurance contracts, consequently they did not made a deliberate choice by subscribing to the financial investment which was
supposed to guarantee the restitution of capital and an added value.
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1.2 CONTENT OF THE INFORMATION
1.2.4.2. Customer Rating:
The risk information should be tailored to the client assessment.
The distributor must make a preliminary assessment of the :
• Financial position;
• Experience and knowledge regarding investment;
• The client's objectives.
∼ Cass. Com. January 10th, 2012, No. 10-28800.
The Bank must, when concluding the PEA, evaluate the financial situation of Mrs X, her investment experience and her objectives about the
services requested, and provide the client a tailored information on the basis of this evaluation.
∼ CA Aix-en-Provence, December 12, 2013, RG No. 12/09846.
The Bank, as an investment service provider, is required to inquire into the financial situation of a client and fulfill its appropriate obligation
to provide information based on skills assessment of the client.
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1.2 CONTENT OF THE INFORMATION
∼ 1.2.4.3. A special case in tax exemption real estate transaction
An investor should be informed, in return to benefits announced by an advertising brochure, on the less favorable aspects
and risks inherent to the acquisition of this type of real estate product (investment in a historic building).
∼ Cass. Com., January. 8, 2013, No. 11-19387
A bank and a real estate agency, both subsidiaries of the same group, having distributed the product in question may be liable for the failure to
provide information and advice to investors.
In this case, investors received an advertising brochure describing some aspects of the operation, including the estimated cost of work on the
building, as well as two expected tax savings personalized perspective. However, the cost of work has significantly increased.
 Calling into question of the global economy of the investment operation
The information on the cost of work provided by the bank and the company Afedim at the conclusion of the investment operation by Mr. and
Mrs. X had not allowed them to measure the risk, so the bank and the company had breached their obligation to provide information and
advice, by depriving them of the opportunity to assess, in full knowledge, the suitability of the proposed operations to their situation and their
expectation.
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1.3 CHARACTERISTICS OF THE OPERATION
The information must be clear, accurate and not misleading.
The objectives of the case law is to enforce these characteristics:
∼ Cass. Com. February 15th, 2011, No. 10-12185.
The banker is held to provide his client a clear, accurate and not misleading information on the financial products it offers.
∼ Bordeaux Court of Appeal, February 28, 2013, No. 11/04949
An information note given to the client is not sufficient for the bank in satisfying its obligation to advice on the relevance of the
products to be subscribed, and it must draw attention of the client on the risks inherent in the products, without promoting with
imbalances the information on the advantages, for the purpose to deliver a clear, accurate and not misleading information.
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1.3 CHARACTERISTICS OF THE INFORMATION
The information should be consistent.
∼ Cass. Com. January 19, 2010, No. 09-10627:
Regarding to Article 1147 of the Civil Code, the publication in order to purchase contentious mutual fund shares issued by La Poste
to Mr. X must be consistent with the proposed investment.
∼ CA Toulouse, June 3, 2014, RG No. 13/00283:
In addition, the publication issued by the person who offers his client to subscribe for mutual funds shares must be consistent with the
proposed investment and mention the less favorable characteristics and the risks inherent of the options that may be the quid pro quo
of the advertised benefits.
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1.3 CHARACTERISTICS OF THE OBLIGATION
The information must be prior to the investment.
∼ Cass. Com. November 30, 2010, No. 09-70810:
"But whereas the judgment holds that the company ... Z should have received a specific information about the risks before the signing
of the contract, and not after it [...]"
∼ Pau Court of Appeal. November 29, 2013, RG No. 13/4533:
It was judged that the only reference, in the general terms of " savings invested in the mutual management fund follows its evolution ...
“,” the value of units of account can be higher of lower "and " the subscriber will bear all the investment risks on the investment
supports "does not fulfill the obligation of the bank to provide specific information on risks and must be issued before the subscription
of the contract.
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1.3 CHARACTERISTICS OF THE OBLIGATION
Use by an financial advisor of an advertisement prepared by another professional.
 Active obligation to provide information
∼ Paris Court of Appeal, pole 5 ch. 6, October 11, 2012, No. 10/15784.
A financial advisor, using directly from an investor an advertisement produced and distributed by a insurance brokerage firm, does not demonstrate the
fulfillment of its obligation to provide information and advice by the delivery of the information notices and appendices which, because of their generality,
are not sufficient to ensure the subscriber information “as a result of the inconsistency, if not contradiction existed between advertising documents that
had been given to Mr. B. and contract documents signed. "
Even though a financial advisor would not be responsible for the design and dissemination of the information provided, it must
adopt a proactive approach to ensure that all information, including promotional communications, addressed by an investment
services provider to clients, have an exact, clear and not misleading content and are consistent with the proposed investment.
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1.4 REGIME OF THE OBLIGATION TO PROVIDE
INFORMATION
Under Article 1315 of the Civil Code, there is a general principle that the burden of proof of
compliance with the obligation falls on the distributor:
∼ Cass. Civ. 1st February 1997, No. 94-19685 25;
∼ Reims CA, September 10, 2013, RG No. 11/03496.
Those who are legally or contractually under specific obligation to provide information must supply proof that this obligation has been discharged.
∼ Cass. Com. February 16, 2010, No. 09-12071;
∼ Cass. Com. March 22, 2011, No. 10-13727;
Pursuant to Articles 1315 and 1147 of the Civil Code;
The Court of Appeal had reversed the burden of proof and violated the aforementioned texts, whereas the Bank must supply proof of the fulfillment
of its obligation to provide information to its client.
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2. DUTY TO ADVICE
 Adequacy of investment
The professional must ensure the adequacy of investments made by his client in relation to his personal
situation, his knowledge, his experience and investment objectives.
∼ Cass. com September 23, 2014, n° 13-22.763
A financial advisor at the origin of the proposed client asset management strategy can not simply provide to his client all the pre-contractual and
contractual information under his obligation to inform.
∼ Paris Court of Appeal, pole 5 ch. 7, November 6, 2012, No. 2011/06225.
The brokerage firm had not fulfilled its obligation of advice, information and warning, as a financial investment professional, therefore it could
not justify having at whatever time and in any manner whatsoever, including by the delivery of the information notice, provided the adequacy of
investment made by his client in relation to his knowledge and personal situation.
∼ Paris Court of Appeal, pole 5 ch. 6, December 20, 2012, No. 11/03494.
Considering that the investment services provider can not be deliver to its investigations to ensure market transparency and should verify in each
individual case, the investment medium is consistent with the profile management in line with the needs and objectives of its client.
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3. DUTY TO WARN
Draw the client’ attention on the risks of the intended operations.
Dual condition:
• There is a speculative transaction;
• He is not an informed investor.
∼ Cass. Com., June 12, 2012, No. 11-21661.
The investment service provider is liable, from the beginning of the contractual relationship, and whatever the nature, to warn his client against
the risks involved in speculative trading in futures markets, except if he has full knowledge of it.
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CONCLUSION
∼ Increase of the number of decisions by the French courts
They “transpose in advance" European regulation relating to the harmonization of obligations owed by
the financial products distributors,
∼ AMF Position No. 2012-132 of October 5, 2012 on the requirements relating to the adequacy for
a client of investment services or financial instruments,
 The extent of information to be collected from clients should be based on services and
products offered
∼ Joint action of the AMF and the ACPR to the gathering of information to the knowledge of
clients
 AMF position No. 2013-02 applicable to the marketing of financial instruments
 ACP Recommendation No. 2013-R-01 for the marketing of life insurance contracts
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ANY QUESTIONS?
Silvestre Tandeau de Marsac
Lawyer at the Paris Bar
SCP Fischer, Tandeau de Marsac, Sur & Associés
67, boulevard Malesherbes – 75008 PARIS
smarsac@ftms-a.com
www.ftms-a.com
Tél +33 (0)1 47 23 47 24
Fax +33 (0)1 47 23 90 53
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