ANZ bank wins UK court appeal on mis-selling ruling


The UK Court of Appeal has reversed an earlier ruling that a structured product had been mis-sold because of a mistake made by a bank sales official in verbally explaining the deal, even though the terms and conditions within the documentation were correct.

The initial ruling would probably have slowed the sale of structured products to a trickle, with dealers having to review and upgrade the training of distributors and sales staff. Currently, most distributors offer a variety of structured products at any one time - which makes it difficult for sales staff to be intimately familiar with all structures, say some participants.

In the initial judgement last May, Australian bank ANZ was ordered to fully repay $250,000 invested by Peekay, an investment vehicle, in a structured product linked to a Russian government bond in February 1998. Despite the fact that Peekay director Harish Pawani received - and signed - a document outlining the final terms and conditions (FTCs) of the transaction, the judge upheld the view that Ranjita Balasubramaniam, an ANZ employee based at a branch in Dubai, had misled Pawani about the nature of the product in a telephone call days before the investment was made.

According to the evidence presented to the court, Pawani was led to believe that in the event of a default, he would be left with a proprietary interest in the bond. But the investment was only synthetically linked to the underlying, and when the Russian government announced a moratorium on the bond six months later, Pawani recouped only $5,918 of the initial investment - and without any control over the wind-up of the bond.

The three judges presiding over the appeal, however, decided unanimously that in putting his name to the FTCs - despite not having read them - Pawani had agreed to the investment on ANZ's terms.

"Any misrepresentation as to the nature of the investment product was dispelled by the terms of the FTCs of which Mr Pawani, having signed the disclosure statement, must be taken to have been aware, whether he had actually read them or not," said Lord Justice Moore-Bick. "Accordingly, Peekay could no longer say it had been induced to enter into the contract by any representations made in the course of the earlier conversations.

"Balasubramaniam had innocently described the investment being offered by ANZ in a way that was inconsistent with its true nature, but she did not discuss the FTCs with him, and said nothing to him about their meaning or effect, or about the investment they actually described. In those circumstances, it is necessary to consider whether what she said amounted to a misrepresentation of any kind."


Structured product providers welcomed the decision but some lawyers warn that the initial ruling against ANZ should nevertheless prompt banks to examine their sales practices in detail. "With this case, there was always going to be some kind of general reconsideration of the whole retail structured products area - that is, we can't rely on our documentation, so we're going to have to rethink large chunks of our redistribution strategy," says Simon Gleeson, a partner at law firm Allen and Overy in London. "Now this decision is a bit of a relief, because the legal problem is not quite as great as we thought it was going to be. But it is still a real problem and it hasn't gone away."

The complexity of documentation distributed to retail and private banking clients could render a contract void if the signatory can "do a reasonable impression of simple-mindedness" in the witness box, says Gleeson. "The discovery that the bank wasn't safe in those circumstances, which is essentially what the judge ruled in the first instance, caused a lot of people to swallow their coffee the wrong way."

The Financial Services Authority, the UK regulatory body, recently launched an investigation into selling practices adopted by banks, and criticised the "reward systems that incentivise the sales force to meet volume targets without measuring the suitability and the quality of those sales". It also said there was an imbalance of information between banks and their customers, that could lead clients to be unable to make informed decisions.

However, banks insist that sales practices have improved in recent years. "On the issue of complexity, we have to be very careful with excessively complex products," says Andrew Popper, head of portfolio management at SG Hambros in London. "It has to be explained to the client in understandable terms. There was a tendency at one time in the industry to just put a bunch of formulas together and say, 'well I said so because there are all these epsilons and sigmas in there'. But obviously one cannot expect a client to understand the mathematical formulas, so we make a very big effort to explain this in plain English."

Gareth Gore

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