– Why the Small Investor Protection Act does not protect against investment losses due to low interest rates –
Obligation to provide investor-friendly advice
According to the BGH Bond ruling (Federal Court of Justice ruling of 14.06.2007, Ref. XI ZR 12/93), all investment advice must be appropriate to the investor and the property. Investor-oriented advice
means that the client’s level of knowledge of investment transactions of the type envisaged, his financial circumstances, his risk tolerance and his investment objective must form the basis of the advice given. Investor-friendly advice includes ensuring that the recommended investment meets the customer’s wishes (Heidelberg Regional Court, judgment of 11 June 2013,
Az. 2 O 252/11).
Lack of understanding on the part of the customer leads to liability
In many cases, however, clients already do not understand the investment opportunities and risks because they have not been correctly advised about them. There is a duty of care in this regard,
correct, complete, timely and, above all, comprehensible advice to the capital investor (BGH, judgement of 07.10.2008, ref. XI ZR 89/07).
As a result, many financial investments generate returns that are too low by the millions if the risk accepted by the customer is not exploited for a better prospect of higher returns.
Too conservative investment leads to lost investment returns and high residual debts
For example, if an endowment policy (CLI) was recommended to refinance a mortgage loan, the policy still shows a loss after 12 years, even though a
equity fund would have yielded 11%, the advisory error to conservative investment is obvious.
The investor notices the consulting error after three years and investment of EUR 30,000 in a KLV, cancels this, receives only EUR 10,000 back and now invests in the
Equity fund that would have been the right thing to do in the first place. He claims the 20,000 loss from the KLV and the lost profit from the equity fund as damages.
Moreover, investing in an equity fund would have been far more flexible. It depends crucially on the investor fairness of the capital investment, which apart from the risk evenly also
encompasses the opportunity.
Millions in loss-making transactions via conservative life insurance policies
In the face of loss-making mass cancellations of meagre performing KLVs and perhaps other conservative investments, clients are asking themselves afterwards whether the advice they received was appropriate for the investor. After all, there are more than 80 million
KLV contracts, of which around 1 million are terminated each year, in some cases with a meagre result, and many more are terminated with a sometimes high
loss may be terminated. The Federal Court of Justice (BGH) (judgement of 14.06.2007, file no. III ZR 269/06) obliges insurance intermediaries, also in the case of CLI, to be guided by the needs and capacity of the customer.
This applies all the more to financial advisors who believe that they would not be able to offer their clients a KLV instead of any other financial product.
to be able to make mistakes.
In retrospect, customers often have every reason to be dissatisfied, if only because of the lack of transparency of products and the subsequent feeling that the advice given was incomprehensible.
or incomplete. This customer impression is further reinforced by the presence of a culprit in the form of the intermediary or advisor who, after all, has also received a large undisclosed commission or bonus. The customer then reads in the trade press that he was the only loser – but that the acquisition costs were up to more than
17% of his investment.
No return without investor-appropriate risk
There are probably few conservative investments that are terminated early at over 50% loss like a KLV. Especially in the case of early termination, it is well possible for customers,
to compare the disbursement and the premiums paid. In most cases, the discrepancy is already obvious from a rough estimate. Often, a riskier investment – but hardly a unit-linked life insurance policy – would have yielded more. If the intermediary should have advised a riskier but more promising investment according to the customer’s risk profile, the intermediary can often be held liable for the incorrect advice.
Conservative European corporate and government bonds as a safe losing proposition
Since 2013, the terms and conditions of government bonds have included a clause that capital repayment can be waived later “for bank or sovereign rescue” by political decision.
In the case of state-owned banks, too, there have already been government decisions to the effect that, for example, no redemption payments will be made at all when certain subordinated bonds mature.
Even conservative investments of this kind offer comparatively far too low a return.
Hardly any rescue of intermediaries and advisors through documentation
It is commonplace for clients to receive orderly form-based documentation from the advisor or intermediary in breach of duty on average less than one-third of the time. In terms of content, these are at best text modules generated by “specialist software” or empty phrases, which make it impossible to provide complete and comprehensible advice to customers.
can, as a rule, not be reproduced at all, of course. This makes the documentation the best evidence for consulting deficits. The often completely missing documentation leads to
into the reversal of the burden of proof to the detriment of advisors and intermediaries, especially insurance brokers and investment advisors.
Retail investor protection by law?
In future, other products, such as subordinated bonds and profit participation rights, are to be provided with a mandatory prospectus in addition to an intermediary investor information sheet.
It is well known that regulation through administrative requirements is unlikely to improve the quality of advice. This is likely to encourage intermediaries to focus even more on low-yielding but perceived safe products, in the hope of minimising their liability.
This leads however not only to million-fold Anlegerschädigung due to low interest with certain real loss, but also straight only into the adhesion of the mediators for it. The damages to be recovered will be readily apparent from an actuarial or financial appraisal.
Circumvention possibilities still exist
At the same time, it is still possible to legally sell the most dangerous financial products with a pure insurance intermediary license, without related advice, if they are included in a
are wrapped up in unit-linked life insurance.
This is because it is not formally the customer who buys the funds, but the insurer, which means that there is no obligation to provide advice as there is with direct fund investments. Even completely without admission any financial product can be mediated or sold, if necessary, in fund form, however, if it is encased by a used life insurance – even from the Caribbean -, gladly also one just concluded so to speak with day admission.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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