Part 1 – Duty to provide advice and assistance
While having lunch with a banker in Monaco, I discreetly told him, without mentioning any names, as noblesse oblige, about an investor who had been recommended a risky product. He had lost everything and, refusing to give up, wanted to sue his bank for failing to advise him properly.
After listening to my story, he replied, “Here, between banks and their clients, Darwinian theory applies.“
My interlocutor was implying that customers must adapt to the situation and the environment, like a bird whose species would eventually, over time, see its wings atrophy, making it impossible for it and its species to fly again on the island where they lived, because the constant winds were so strong.
I had never heard such nonsense; I had to look into it further. Perhaps there was some sad truth behind this analogy?
Could the Darwinian principle of evolution and the adaptability of animal species in the face of Mother Nature’s adversity be applied to an average investor client dealing with a banker based in Monaco? Would it be appropriate?
It was spring 2018, and starting from the beginning, I immersed myself in reading the Monegasque laws governing the relationship between banks and their clients (I).
Upon reading the Law and its Implementing Ordinance on financial activities, a contradiction, or rather a lack of precision, presented itself for criticism, and in doing so, the investor client found himself in a no man’s land, or indeed, a terrible realisation, where Darwinian theory came to mind (II).
It seems that law professors teach the law, lawyers say what they want, and judges applies the law, and of these three professions, the last is the most difficult to practise.
However, reading the writings of a Monegasque lawyer, through his numerous exchanges of conclusions in a case dealing with a bank’s failure to advise its client, the Monegasque legislator himself amended the law along the way, clarifying it so that the no man’s land was filled in, to the benefit and in the interests of protecting savers (III).
While lawyers can say what they want, it must be acknowledged that their writings do not always remain dead letters.
Darwin’s theory has merit, but it is also contested in that it encompasses all animals, including us, whereas humans are endowed with a very specific characteristic: reason, if not intelligence.
This reason is sincerity, clear-sightedness, loyalty and trust, which Justice calls “consent”, a prerequisite for any relationship between individuals and, even more so, for any contractual commitment between them.
Mother Nature has no reason to involve herself in such a situation, and the Monegasque legislature has rightly pointed this out.
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Preamble
• Two main types of relationships prevail between an investor client and their banker.
- Either, the relationship is established under a management mandate, where the client gives a mandate (power) to their banker to manage their capital on their behalf.
The limits of the banker’s authority are determined by the client’s pre-established profile. Generally, the client’s profile indicates their risk aversion, which is reflected in a management mandate that, depending on the client’s profile, will be categorised as prudent, medium risk or risky.
The banker’s liability will be fairly straightforward: if the banker has exceeded the powers conferred on them by their client, it will suffice to prove that the limits set in the mandate have been exceeded.
- Either the relationship is established as a service provided by the banker to their client, which involves making the bank’s back and front office available to the client, who then places their own orders.
This is commonly referred to as R.T.O., or Reception et Transmission d’ Ordres (order reception and transmission).
The banker’s liability will be more complicated. This is because, insofar as the client has complete control over the choices made and only calls on their banker for the technical service offered, it will be difficult for them to blame their banker for a loss of capital, which they manage themselves.
This is all the truer since the banker is not required to ask the client for a management profile or to inquire about his risk aversion, since the client investing under RTO manages his own capital, is in control of his choices and, in short, is free.
And nothing is more difficult for a free man than to prove that he is not free.
• The extraordinary imagination of financiers.
If there is one profession, one field where you would not expect it, that requires boundless imagination, it is the world of finance. You would not expect it because boundless imagination seems to be reserved for the world of artists.
Junk bonds and subprime mortgages, taken up by major filmmakers, such as in The Wolf of Wall Street, attempt to explain the inexplicable, the complicated, but also the mysterious world of finance.
This world, with its promises of profits, appeals to us, homo economicus that we are.
Thus, born from the fertile imagination of financiers, a nuance is added to the two pillars of the relationship between an investor and their banker (management mandate or RTO).
Under the RTO regime, recommendations are made for products that may or may not be complex but are often structured in a way that is incomprehensible to the average person, and for which the banker is required to provide “advice and assistance“.
Drawing on their imagination, bankers must clearly explain to their customers what they are proposing to invest in, having first profiled them, because unlike buying a Dali or a Picasso, which are real and have an immediate impact, financial products are experienced and composed in the future.
Patrick LAURE
Secrétaire Particulier
+33 6 35 45 27 02
laurepatrick@wanadoo.fr
**The information provided in this article is for general informational purposes only and does not constitute legal advice. It is not intended to create an attorney-client relationship. Laws and regulations vary by jurisdiction and may change over time. Readers should consult a qualified legal professional for advice specific to their situation. The author and publisher are not responsible for any actions taken based on this information.
