Leiden Law Blog

Emotional customers, cautious banks

Posted on by Wouter den Hollander in Private Law
Emotional customers, cautious banks

X is co-owner of a sports supplies shop. As the result of a buy-out he acquires substantial capital. X designates this capital for, among other things, supplementing his (just above average) monthly income and pension. He invests capital through Funda Rend, a local investment manager. This initially pays off, however he later suffers considerable losses. He therefore switches to another investment manager, Rabobank, at the initiative of the latter, but the situation only worsens. In less than two years the bank carries out transactions in options and futures with a value of EUR 128 million, on the basis of X’s deposits of about EUR 1,27 million. In the end, a little over EUR 0,1 million is left over. Can X challenge Rabobank for the damages?

In court, Rabobank contends that X signed statements confirming that he was fully aware of the risks involved in trading in options and futures. Funda Rend, his previous asset manager, also traded in such derivatives and this also resulted in considerable losses for X. Furthermore Rabobank employees testify that they advised X not to invest in options and futures right from the start.

These circumstances prove to be of no avail to Rabobank. The Dutch Supreme Court decides that making X sign the statement declaring that he was fully aware of the risks is not sufficient. Nor is the mere advice not to invest in options and futures (it did, additionally, not became clear during proceedings whether this advice was indeed given right from the start). In fact there was all the more reason for Rabobank to ‘probingly’ warn X about the risks he was about to take. X proved to be ‘emotional’ about the losses he had suffered with Funda Rend and was determined to recoup them. He was not in a position to make a proper assessment of the risks involved and properly manage his own assets.

This decision once again demonstrates the far-reaching nature of the duty of care resting on financial service providers. This duty does not only aim to protect the customer against the dangers stemming from a lack of expertise, but also against the dangers stemming from decision-making on ‘preponderantly’ emotional grounds, as the Supreme Court indicates in this case.

Perhaps in this particular case X’s emotional state and Rabobank’s over eagerness could warrant an assumption of violation of duty of care. More generally speaking, one could question whether this approach does not go to far, as Leiden scholar Kasper Jansen does. In his recently defended PhD-thesis on information duties (cum laude), Jansen asserts that the doctrine of the duty of care systematically leaves little room for investors own responsibility to be taken into account in the process of establishing liability and, therefore, fits poorly into the general Dutch law of obligations.

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