PLC Global Finance update for October 2010: Singapore

Practical Law UK Articles 8-503-7198 (Approx. 7 pages)

PLC Global Finance update for October 2010: Singapore

by Allen & Gledhill LLP

Dispute Resolution

Singapore High Court rules that bank owes no contractual or tortious duty to give client investment advice

The recent case of Go Dante Yap v Bank Austria Creditanstalt AG concerned an action brought by the plaintiff against the defendant bank in respect of losses suffered on the plaintiff's investment portfolio, following the Asian financial crisis of 1997 and 1998. The Singapore High Court held that the defendant bank owed no duty in contract and/or tort to advise the plaintiff as to the prudence of his investment portfolio. The court also dismissed the plaintiff's claims that the investments were made by the defendant bank without the plaintiff's authority.

The parties

The plaintiff was a businessman and a national of the Philippines. The defendant was an Austrian-incorporated bank which formerly operated branches in Hong Kong and Singapore. The defendant ceased its operations in Asia sometime in October 2001.

Plaintiff opened two accounts with defendant

The plaintiff had opened two investment accounts with the defendant's Singapore and Hong Kong branches:

The Singapore account. The plaintiff's investments were to be held in the Singapore account.
The Hong Kong account. This Hong Kong account functioned essentially as a credit facility account, which would allow the plaintiff to draw down loans to fund the purchases of investments in his Singapore account. The defendant required that a Hong Kong-domiciled account be used if the plaintiff wished to obtain a loan facility from the defendant.

Both accounts were handled by one Winnifred Natasha Tong Ching Laude (Ms Ching) who was, at that time, a vice-president in the defendant's Hong Kong branch.

The plaintiff's claims

As a result of losses suffered on his investment portfolio maintained with the defendant, following the Asian financial crisis of 1997 and 1998, the plaintiff commenced the present action against the defendant. The plaintiff made the following claims:

A total of 16 investments under the Singapore account and loans drawn down from the Hong Kong account to finance those investments were not authorised by him (the unauthorised investments claim).
The plaintiff also alleged that the defendant had breached its duty owed to the plaintiff, in contract and/or tort, by failing to advise him that it was imprudent to have maintained the portfolio that he was holding during the period of the Asian financial crisis (the advisory claim).

The unauthorised investments claim

After considering all relevant evidence relating to the plaintiff's conduct, the court concluded that the investments were properly authorised. In reaching its conclusion on this issue, the court made the following findings:

The plaintiff was not a conservative investor. The plaintiff attempted to picture himself as a conservative and risk adverse investor who would not have agreed to the investments allegedly made by the defendant without his authority. However, he failed to produce any credible evidence to support his assertion that he had given the defendant a conservative investment mandate. The court also noted that during cross-examination, the plaintiff conceded that he had opened the Singapore account with the defendant because he wanted to pursue a different investment strategy from the low-to-medium risk investment policy which he had adopted for his other accounts.
Delay in complaints. The court found it incredible that the plaintiff chose not to complain to the defendant as soon as he found out that supposedly unauthorised investments had been made on his behalf and that loans had been made to his account. The plaintiff was not able to provide an adequate explanation for the delay.
Inconsistent conduct. The plaintiff's conduct throughout the relevant period was completely inconsistent with his claim that the investments were unauthorised. For instance, the plaintiff had conceded that he had gone through the account statements for the Singapore account at the monthly meetings and was therefore aware of the securities that were held in that account. He even admitted that it would have been apparent to him that loans were indeed being drawn down from the Hong Kong accounts to finance the purchase of the investments without being shown any of the Hong Kong account statements. The plaintiff had even remitted some funds to the defendant for the purpose of servicing part of the loans in his Hong Kong account. The court was of the view that the plaintiff would not have repaid the loans in part if he had not authorised those investments.

The advisory claim

In considering the plaintiff's claim, the court noted that a general duty of care can co-exist with a contractual duty, although if there was an assumption of legal responsibility, then the contract may modify or exclude the scope of any existing tortious duty arising out of that assumption of responsibility. In contrast, if there was no assumption of responsibility by either party, the contract will generally be completely determinative of the scope of the parties' duties. Hence, the court will not lightly find the existence of an additional duty within a banking relationship that is already governed by contract unless there is conduct amounting to an assumption of responsibility coupled with reliance.

In the instant case, the court decided that the defendant owed no duty, in contract and/or tort, to advise the plaintiff as to the prudence of his investment portfolio, after examining the following key factors:

Extent of the plaintiff's financial experience and sophistication. On the facts, the court held that the plaintiff was not an inexperienced and unsophisticated client who had to rely entirely on the defendant for advice relating to the management of his investment portfolio. For instance, the court noted that the plaintiff was a successful and wealthy businessman, who clearly understood the types of risk involved.
Contractual context. The court noted that none of the relevant contractual terms expressly provided for an advisory relationship between the parties. Further, the mere duty to recommend securities does not, without more, give rise to a further and continuing duty to give advice with regards to the management of the investment portfolio.
Actual role played by Ms Ching (including the purpose for which she was giving the plaintiff recommendations) and extent of the plaintiff's reliance on Ms Ching. It was undisputed that Ms Ching only provided recommendations of investment to the plaintiff at the monthly meetings and that she did not provide any other form of advice. The plaintiff further conceded that he did not rely on any of Ms Ching's recommendations. As such, the court held that there was no basis for the plaintiff to argue that the defendant had voluntarily assumed any responsibility for giving investment advice to the plaintiff on an ongoing basis.

Judgment

The court dismissed the plaintiff's action with costs to be taxed unless agreed.

Commentary

In addition, the court also noted that there was a systemic problem of abject record-keeping within the defendant's organisation. Although these failings on the part of the defendant did not affect the outcome of the final decision of this case, it might be useful to note the court's findings on the issue of proper record-keeping in the context of a bank, which is in a similar position as the defendant. Set out below are some of the court's findings which resulted in the court's conclusion that there was a worrying lack of compliance with procedural requirements on the part of the defendant, and even on the occasions when procedures were complied with, it took the form of bare compliance for the sake of formality with no real regard for the purpose of having such safeguards in place:

The defendant's internal documents showed that the plaintiff purportedly gave instructions at the exact same time, or 9.00am, on every single occasion. The defendant's assistant vice-president at the material time conceded that the times recorded in those internal documents probably did not reflect the actual time that the instructions were received.
Although it was standard procedure for a private banking officer to fill in an order form for the trading desk whenever the officer wished to transact a security, no such order forms were filled by Ms Ching.
Although phone conversations were supposed to be recorded as a matter of practice, the defendant could not produce any tape recordings.
Ms Ching admitted that she failed to keep a complete record of all the meetings that had taken place with the plaintiff.
Ms Ching's handwritten minutes tended to be very brief and almost never indicated the exact dates of those meetings with the plaintiff.

Financial institutions

MAS responds to feedback on proposals to enhance Deposit Insurance Scheme: Insuring all non-bank depositors and raising coverage to S$50,000

On 3 September 2010, the Monetary Authority of Singapore (the MAS) issued its response to feedback received during a public consultation exercise on proposed enhancements to the Deposit Insurance Scheme (the Scheme) in Singapore. The consultation paper was released on 25 February 2010 and formed part of the MAS' regular review with the Singapore Deposit Insurance Corporation to ensure that the Scheme, which was first implemented in 2006, remains relevant. Feedback to the consultation exercise was received from both consumers and the industry. Some of the MAS' proposals are discussed herein.

Proposal: To expand scope of Scheme to insure deposits of other non-bank depositors

In response to a variety of feedback received on this proposal, mainly suggesting excluding different categories of corporate bodies and depositors from the Scheme, the MAS noted that the primary objective of the Scheme remained that of protecting small depositors. Insuring businesses would be consistent with this objective as small businesses may similarly not be in a position to make an informed decision as to which banks to place their deposits with.

In response to calls for clarification of the scope of the expansion, the MAS noted that the list of exclusions proposed in the consultation paper was on the basis that it would not be necessary to extend the Scheme coverage to entities such as insurance companies, investment companies, unincorporated entities, etc. However, the MAS has reconsidered the issue and finds that it might be simpler to insure all non-bank depositors in general and not provide for specific exclusions. This approach would be more even-handed, while mitigating concerns over moral hazard and costs by keeping the Scheme coverage limit at a reasonable level.

Proposal: To enhance depositor protection by raising deposit insurance coverage limit from S$20,000 to S$50,000 per depositor per institution

The MAS received feedback querying the limit proposed. In response, the MAS explained that in proposing deposit insurance coverage of S$50,000, which applies on the basis of per depositor per Scheme member, the MAS considered the need to provide adequate protection to small depositors while limiting the cost to Scheme members and depositors. The amount of S$50,000 would fully insure 91% of depositors covered under the Scheme. Beyond S$50,000, the incremental benefit is small and may not justify the cost. In response to feedback received, the MAS clarified that coverage is not aggregated for a group of related entities. Each entity will be separately insured up to S$50,000.

Proposal: In computing coverage for a sole proprietor, to aggregate deposits in his own name and under his sole proprietorship business and for partnerships to treat the partnership as a single entity

In response to concerns regarding the aggregation of deposits, the MAS explained that sole proprietorships and partnerships are not treated as legal entities distinct from their owners under the law. Therefore, ideally, the deposits of the sole proprietor should be aggregated with those of his business as he may commingle these deposits. In practice, Scheme members should have a single customer view. The MAS noted potential concerns over depositors setting up several partnerships with nominee partners for the purpose of maximising their deposit insurance protection and reasons that there is little incentive for this in practice.

Proposal: To streamline deposit insurance coverage for CPF-related accounts, by aggregating an individual's CPFMS deposits with his monies in the CPFIS under a common S$50,000 limit

In response to feedback suggesting separate coverage for monies held under the CPF Minimum Sum Scheme (CPFMS) and the CPF Investment Scheme (CPFIS) instead of aggregating them under a common S$50,000 limit, the MAS stated that the Scheme only insures monies placed with Scheme members and not a CPF member's full minimum sum maintained with the CPF. The MAS clarified that the deposit profile of Scheme members showed that the proposed deposit insurance coverage of S$50,000 would fully insure close to 100% of insured depositors who place CPF monies with Scheme members.

Proposal: To adopt a gross payout approach for the purpose of deposit insurance payout, such that an insured depositor is paid the gross amount of his deposits up to the deposit insurance coverage limit, without first netting off his liabilities to the Scheme member

Most respondents to the public consultation were not in favour of a gross payout approach. The MAS stated that a gross payout approach is consistent with international practice and developments. It contributed to greater confidence and stability in a distressed situation as it is easier for depositors to understand and is operationally faster. In response to the concerns highlighted, the MAS clarified that the gross deposit insurance payout is not unfair as it does not extinguish the depositor’s liabilities to the Scheme member. A debtor or borrower will still have to repay his liabilities and the failure of his bank does not negate his obligation to do so. In practice, the MAS expects borrowers to continue to service their loans.

The MAS also clarified that the proposal does not mean returning the full deposit to the depositor. The amount returned will only cover that which is insured under the Scheme so to ensure that the Scheme is effective.

Proposal: To insure the amount of a pledged deposit that is not set aside by the Scheme member in respect of a debt owing by the depositor, and that may be withdrawn by the depositor

The majority of feedback received concerning this proposal did not support it compared to the status quo, where pledged deposits were totally excluded from coverage. The MAS has reconsidered its position and proposes to insure pledged deposits as with normal deposits, and pay out on the same gross basis. This means that deposits, whether pledged or not, will be aggregated and capped at the Scheme coverage limit, in determining the depositor's compensation. This will be simpler and easier to understand, which in turn will promote public confidence.

This change in position affects a further proposal in the consultation paper where the MAS had expressed its expectation that Scheme members would disclose clearly and upfront to customers, the implications on coverage under the Scheme from pledging their deposits, as well as the insured status of their deposits from time to time. With the change to insure pledged deposits as with normal deposits, no specific Scheme disclosure will be required for pledged deposits. Scheme members should still, however, disclose to customers any implication arising from the pledge.

Proposal: To clarify that accrued interests that have been posted to the accounts of depositors are insured under the Scheme

Many respondents to the consultation paper sought clarification on whether accrued interest that has not been posted to the account of depositors would be insured. The MAS said that it would not. Accordingly, for the purpose of Scheme premium assessment and payout, Scheme members need only include the amount of accrued interest that has been posted to the accounts of depositors.

Proposal: To amend the Deposit Insurance Act so that deposits that are insured before a merger/acquisition of a Scheme member remain separately insured for one year after the transaction

The MAS clarified that the transition coverage would take effect from the effective date of merger between two Scheme members.

Proposal: To lower the rates for annual premium contributions to between 2bps (0.02%) and 7bps (0.07%) of insured deposit base and extend the fund build-up period by four years

The MAS clarified that the existing approach of taking into account the asset maintenance ratio of a Scheme member to determine its premium rate is appropriate. If proceeds from liquidation of a failed Scheme member's assets are insufficient to recover the amount of Scheme compensation that was drawn from the Scheme Fund to pay insured depositors, the Scheme Fund may suffer a loss. It is therefore reasonable for a Scheme member that maintains a higher level of eligible assets in Singapore relative to its insured deposit base to pay a lower premium rate, as it poses a lower risk of loss to the Scheme Fund.

Implementation

The MAS intends to consult on proposed legislative amendments in the later part of 2010, with a view to implementing the revised Scheme in early 2011. The Scheme is independent of the government guarantee on deposits which expires on 31 December 2010.

Reference materials

Please click here to access an article entitled "MAS issues consultation paper on ‘Review of Deposit Insurance Scheme in Singapore".

Please click on the links below to access the relevant documents on this development, which are also available on the Monetary Authority of Singapore website:

PLC Global Finance update for October 2010: Singapore | Practical Law