Numerous Swiss banks and wealth managers have in the past years encouraged their clients to take up loans in order to finance larger investments in their investment portfolios. The financial assets are pledged to the bank as collateral. Usually, the banks demand that the value of the assets must at any times be significantly higher than the amount of the loans. These so-called “lombard loans” are very attractive to the banks as they reap double profits:

a) the interests on the loans and

b) the increased revenues from the client investing the loaned funds in financial assets.

This seemes like a good idea when the share prices go up only (and as long as the interest rates on the loans remain low).

When turbulences hit the financial markets, the share prices on most stock exchanges suffer. This is even more the case for high-risk financial instruments. With the values of investment portfolios decreasing, they can fall below the thresholds (margins) defined in the loan agreements. Banks will then issue “margins calls” to those clients, i.e., they tell them to reduce the amount of the loans by paying in more cash or by selling parts of their assets.

Those clients who are not able or willing to inject more cash to reduce the loan in the amount demanded by the banks (within the short deadline set) have to face the situation that the banks sell their assets. This of course can lead to important losses, as the assets are sold in a depressed market situation, at the worst timing. In the most extreme cases, this selling of assets by the bank can lead to the whole value of the portfolio being lost. As the share prices usually recover after some time, it is hard to understand for the clients concerned, how the banks could act in such a way.

What possibilities do damaged investors have to obtain redress from the bank?

First condition for obtaining legal redress from the bank is that the client has been not a so called “execution only” client, who made investment decisions himself and on his own initiative obtained the loan but had either a wealth management agreement with the bank or an advisory agreement.

It has to be pointed out that in many cases, banks (and other financial institutions) hand out advice without an advisory agreement in writing. Client advisors and relationship managers make suggestions during meetings even if there is no written agreement for advisory services signed. It is just part of their job to sell any kind of financial services to the client. Such “informal” advice is also relevant, but often very difficult to prove for the client. This is rendered even more difficult by the practice of banks to have the clients sign documents which contain confirmations of all sorts, e.g. the confirmation that the bank has not provided any advice to the client and that the client has informed himself and has obtained independent professional advice.

Second condition is a breach of the contractual or legal obligations of the bank, i.e., it has been negligent. Such negligence could result from:

·  the increased risk arising from using loans to increase the volume of the assets was not appropriate / suitable for the specific client and his ability to carry risks.

·  the specific client has not been warned of the increased risks and has not given sufficient consent to such increased risks

·  the portfolio has invested in too risky assets, i.e. too high volumes of shares, derivatives, hedge funds etc. The risks of the overall portfolio were not adequate for the client and for his ability to carry risks.

·  the client has not been informed of the higher risks incurred by the portfolio resulting out of the leveraging (use of loans to increase the investments) and has not consented to these risks.

· often, the losses on the stock exchanges do not come out of the blue. The bank might have neglected its duty to monitor and to rebalance the portfolio according to the changing environment and also to report the changes to the client.

· the bank has not acted in line with the agreements covering the lombard loan, i.e. did not ask for instructions by the client or has set too short deadlines for adding new funds to the account. In consequence, it has sold the client assets without sufficient consent by the client and without giving him sufficient time to redress the situation.

·  if the bank has acted according to the letter of the loan agreement (which e.g. could provide for very short deadlines), it still needs to be checked whether such agreements are in line with Swiss rules for the protection of consumers.

The typical excuse of client advisors facing disgruntled investors has been: “This crisis has come totally out of the blue, it was not foreseeable at all.” This argument does not hold up to scrutiny: It is the obligation of banks and advisors to follow an investment strategy that protects the client in the case of downturns on the markets – this is exactly why the client seeks their advice. That the downswing in the financial markets was caused by a global pandemic is just one of the possible scenarios that can lead to a financial crisis. In other words, a downturn of the same scale could have been caused by any other reason, such as fears of a trade war, a security crisis an energy crisis etc. These are usual risks on financial markets and need to be taken into account by banks and wealth managers giving advice to their clients or building portfolios.