Investment advice

In order to avoid asymmetry between parties resulting in unreasonable outcomes, rules have been laid down in the Securities Trading Act and its regulations. The Act implements EU directive 2004/39/EF relating to markets in financial instruments (MiFID), which aims to bring about a high degree of investor protectionA HIGH DEGREE OF.

The Securities Trading Act sets a number of requirements to how investment firms must act in order to avoid official sanctions and liability for damages vis-à-vis the client. The overarching requirement is formulated thus in Section 10-9: “An investment firm shall conduct its activities in accordance with good business conduct. The firm shall act honestly, fairly and professionally in accordance with the best interests of the clients and ensure that the integrity of the market is attended to in the best manner.”

Thereinafter it declares that “the firm shall otherwise comply with the requirements of this Section and Sections 10-10 to 10-17, and regulations pursuant thereto.”

The abovementioned sections refer to provisions that make some specific stipulations concerning the modus operandi of the firms. These comprise:

• The requirement that all information given to clients or potential clients about all relevant matters is balanced, clear and not misleading, including that concerning “all costs and fees” (Section 10-10)
• The requirement that a sufficiently broad selection of products is offered, and not just the firm’s own products, if one is operating as an independent investment adviser (Section 10-11)
• An investment firm shall not receive any consideration from other sources than the client (Section 10-12)
• An investment firm shall not remunerate its employees in such a way as to impair its ability to ensure that the client’s interests are attended to in the best possible manner. (Section 10-13)
• Employee qualification requirements (Section 10-14)
• When providing investment advice, the firm shall obtain the necessary information on the client’s or potential client’s knowledge and experience in the relevant investment field, his risk tolerance and ability to bear losses (Section 10-15 (1))
• When providing other services than investment advice, a suitability assessment shall be undertaken and the client advised if the investment is inappropriate (Section 10-15 (2) and (3)

Breaches of one or more of the duties laid down in the Act may lead to official sanctions pursuant to Chapter 21, and may also provide grounds for a claim of invalidity and/or for damages against the firm. There is a legal basis, in Section 36 of the Contract Act, for claiming that an investment contract be rescinded as void. Such a claim may be justified as it would seem unreasonable and in contravention of good business practice to validate the contract. One can claim for the reimbursement of losses incurred due to the invalidity of the contract. The situation then would be as if the contract was never signed. Alternatively, a claim for damages might be based on Section 2-1 of the Damages Act, cf. professional liability, which is applied strictly in cases involving the provision of financial advice.

The Supreme Court of Norway has in a number of decisions declared that it is the investment adviser’s responsibility to provide clear and easily understood information, suited to the needs of individual clients, so that one can be sure that the potential investor has comprehended the risks involved, including the consequences of loan funding. The client shall not be exposed to greater risks than those which are understood and acceptable. Reference can be made to the decisions in Investa (Rt-2000-679), Fearnley (Rt-2003-400) and Røeggen (Rt-2013-388).

A typical problem in investment advice cases, is that the risk is greater than the client has understood and accepted. This is often associated with the fact that the costs are high because the contract “conceals” them; they have not been communicated clearly and comprehensively to the client. This may make it difficult for the client to profit from the contract even though market developments are positive. Contracts are often directly in conflict with the level of risk the client has accepted in the suitability assessment. In such cases, the contract will be in contravention of a number of the statutory requirements mentioned above.

High costs for the client often mean high revenues for the investment firm, directly or indirectly. This may signify that the firm has put its own interests before those of the client, which is a direct breach of the firm’s duty to act in the client’s best interests. It would also entail a breach of the duty to inform the client clearly of any potential conflicts of interest, cf. Section 3-10 of the Act.