The infamous “AT1 bonds”, which were cancelled by FINMA, were not only held by large investors, but – surprisingly – also by common investors. This is surprising because these investments were not suitable for ” common ” investors due to the risk of total loss of the investment.

FINMA described these bonds as follows:

Instruments for institutional investors
AT1 instruments in Switzerland are structured in such a way that they are written off or converted into hard tier 1 capital before the bank’s capital is fully used up or written off. The instruments publicly issued by the major banks are mainly held by institutional investors in large denominations due to their risk profile and design.

While there was no prohibition on selling such bonds to retail investors, the risk of loss made them unsuitable for retail portfolios in many cases. If they nevertheless ended up in the portfolios of ordinary investors, it is therefore necessary to examine who is responsible for the damage that occurred (with the cancellation of the bonds).

The legal situation in Switzerland is as follows

(a) The investor himself gave the order to buy the bonds, the bank merely executed the order (so-called “execution only” relationship).

In this case, the bank’s fiduciary duty and duty of care towards its client are the least strict. The investor acts at his own risk. However, the bank has a special duty to warn the client spontaneously if there is a relationship of trust between the client and the bank based on the specific history of the relationship. This may be the case, for example, if the bank has a long-standing, close relationship with the client (e.g. it discusses investments with him, assigns him a personal relationship manager, meets with him regularly and knows his personal and financial circumstances). Where such a relationship of trust exists, the bank must warn a client if it sees that he is entering into a transaction that is inappropriate for his circumstances. Later, it must recommend that the securities be sold if the risk of loss increases over time (as was the case with the deterioration of Credit Suisse’s financial condition).

(b) The investor placed the purchase order on the basis of a personal recommendation by the bank (investment advice).

In such a case, the bank acted in breach of its duties if it did not carefully and comprehensively inform the investor of the risks associated with this investment prior to the purchase or if it did not ensure that the purchase of the AT1 bonds – in the specific amount – did not lead to an excessive risk for the investor. Similarly, the bank should have informed the investor that Credit Suisse’s financial position was deteriorating and should have recommended the sale of the securities in good time.

(c) The bank (or an asset manager) made the purchase for the investor under an asset management agreement.

In this case, the bank or asset manager bears full responsibility for the client’s assets. Investing client assets in a high-risk product such as AT1 bonds was only permissible if the investor was very wealthy and willing to take risks.

AT1 Bonds sold by Credit Suisse to own clients:

A special case occurs where Credit Suisse itself sold these bonds to its own clients. It is a well-known phenomenon that banks act in their own interests when it comes to selling their own securities (shares, bonds, structured products) to their clients. These are recommended for purchase or, in the case of asset management contracts, placed directly in the client’s portfolio. In this way, the bank makes a double profit: on the one hand, it receives fees from the transactions and, on the other, it covers part of its own financing. In this case, the bank has a conflict of interest, which obliges it to exercise particular care and loyalty towards its clients.