Award of compensation for bonds

Award of compensation for bonds

by George Coucounis

“Breach of statutory duty and negligence justify award of compensation for bonds”

THE bonds were a sticking point and a dispute between buyers and the bank, claiming the money they invested, alleging that the bank had not complied with its obligations under the relevant law for the protection of investors and that its conduct constituted negligence and breach of its statutory duty, which allows them to be compensated for the loss they suffered. They base their claim that the bank provided them with investment advice itself, instead of referring them to an independent investment advisor, it did not assess their suitability to buy bonds and provided them with misleading information by not mentioning the risks they undertook, but only promoting the potential benefits of the bonds to induce them to buy them. According to Law 144(I)/2007, a Cyprus Investment Firm, when providing investment and ancillary services to clients, must act honestly, fairly and professionally in accordance with its clients’ best interest and comply with certain principles, such as the provision of accurate, clear and non-misleading information. When providing investment advice, it must obtain the necessary information about the client’s knowledge and experience in the investment sector, as well as on his financial situation and investment objectives in order to recommend to him the investment services and financial instruments that are suitable for his case.

The District Court of Nicosia in a judgment issued on 4.12.2020 examined the claim of a buyer of bonds worth €1.700.000 for the cancellation of their purchase agreements and for compensation and refund of the amounts paid plus interest. He based his claim, inter alia, on negligence and breach of statutory duty by the bank. The Court emphasized that the actionable right to a breach of statutory duty is distinct and extraordinary and that such a claim may succeed or be rejected regardless of the fate of the claim for negligence. It considered that the examination first of whether there had been breach of statutory duties, given that the bank alleged that Law 144(I)/2007 and the relevant Directive of the Central Bank did not apply, because no provision or exercise of investment services took place. It decided that the main purpose of the law was to regulate the provision of investment services and the banks which obtained a license from the Central Bank could provide investment and ancillary services and carry out investment activities. Article 143 provides for civil liability of the offenders, who are obliged to compensate anyone who suffers a damage or loss of profit that may have arisen due to their action or omission in violation of their obligations under the law.

The Court examined whether the bonds are financial instruments and ruled that there is no doubt that the disputed capital bonds of an unlimited time provided a right of sale, i.e. they were transferable movable securities by law and as such they were financial instruments. Bonds were a complex type of financial instrument and the bank had a duty to provide not only a general description of its nature, but mainly of the inherent risk due to the categorisation of the buyer as an individual and the nature of the bonds, as it was obvious that he did not have any relevant knowledge. The bank had a duty to include in its description the risk of losing all the buyer’s investment and this omission constituted a breach of its statutory duties.

With regard to negligence, the Court referred to case law and held that the damage suffered by the plaintiff – buyer was predictable given that by acquiring bonds, he could not actually get his money back unless the bank became solvent and only if it decided by its choice to redeem the bonds. There was also a close relationship between the bank and the customer, they knew him for many years and that the customer had his deposits there. The Court held that it was fair and reasonable to recognise the legal obligation of the bank to take care of the customer. It concluded that the bank officers had shown negligence by stating what they had