New opportunities for investors through the Federal Supreme Court (BGH)
It’s not enough to have a chance, you have to take it! (Michael Douglas)
Investment advisors are regularly overburdened when it comes to checking the “legal, tax and economic viability” of investments. Bank advisors often do not fare much better, although the Federal Supreme Court (BGH) demands that investment products be examined. Later it is then said “Dear investor, your money is not gone, it has only someone else!”. Indes leads the sometimes disastrous development of investments, once renowned product givers, to the fact that investors strive for a back completion – naturally plus interest and compound interest. Reversal because of hidden commissions The Federal High Court created by the current judgement of 19.12.2006 (Az. XI ZR 56/05) for investors a “new” possibility of giving bad Investments to loads of credit institutes and Finanzvertrieben back. In the core it concerns missing transparency, because investors are often concealed numerous unique and current commission payments of Investment fund companies at their mediators and/or credit institutes. The back completion leads factually to the fact that the investor can shift its investment risk on another person. The case is well-known for example that with switching of a closed participation not over critical negative reports in the technical literature one informed. Or the “soft costs” (e.g. commissions) are inaccurately represented in the folder, so that the investor does not recognize at all exactly, which part of its investment sum is really invested. Therefore all folders should be kept absolutely! Additional clearing-up obligations can result with “internal commissions” at the latest starting from an height of 15%, in particular with switching of closed participation. Another variant, known since the 1990s, is the reversal due to “hidden commissions, kick-back payments, retrocessions” etc.: In essence, this is about the fact that the investor was not told what an asset manager or the house bank receives in commissions from business partners. The hitch here is the lack of transparency, because the investor cannot see who is earning how much and through which channels. Liability in the case of remuneration sharing with the asset manager: Already by judgement of 19.12.2000 (Az. XI ZR 349/99) the Federal High Court decided that credit institutes owe their customers a compensation (back completion and compensation of all investor losses), if it pays a part of the commissions and/or depot fees computed by it to an asset manager without clearing-up of the customer. This duty of the bank to inform the client is based on the fact that the client’s interests are endangered by the bank’s concealed payment of commission. Exceptionally a limited legal protective purpose can exist, so that only such damage is to be replaced, whose entrance should be prevented (BGHZ 116, 206; NJW 92, 555). In the case of capital investments, however, the bank’s duties of disclosure relate to the overall success: Therefore, the bank is liable for all damages associated with the investment decision if it has breached a duty even in only one individual point. This results in a reversal of the entire investment, including all investment losses and lost interest. Liability of banks in the case of remuneration sharing with the customer’s authorised representative: On this line also a decision of the OLG Stuttgart of 16.02.2005 (Az. 9 U 171/03), in which the commission sharing was called serious Treuwidrigkeit of the bank, lay. The credit institute had made payments to a company from the environment of the authorized representative of a customer. Liability of the tax counsels with remuneration sharing with Finanzdienstleister: Under 12.11.2005 the Gerlach direct investor protection titelte: Provisionskassierende tax counsels before court – at least 20% of the tax counsels (StB) can be greased “. StB get likewise easily into the adhesion, if they receive a commission behind the back of their mandators (BGH judgement 20.05.1987, Az. IVa ZR 36/86): Also here the investor can separate – even if the StB otherwise no error ran off – to loads of its advisor completely from the plant, thus rückabwickeln. This is also popular in the areas of private and company pension schemes. Criminal judgements (Germany, Switzerland): Asset managers without awareness of wrongdoing: Not only the Federal Supreme Court (BGH) had repeatedly dealt with concealed commission payments under criminal law (e.g. decision of 11.11.2004, ref. 5 StR 299/03). The Swiss Federal Supreme Court sentenced asset managers in the double-digit millions to damages and criminally with imprisonment for commercial fraud (Ref. 6P.144/2005 and 6S.464/2005, judgement of 15 June 2006). The BGH reversal judgement of 19.12.2000 is not an isolated case. Also the OLG Cologne (Az. 13 U 28/01 of 20.02.2002) condemned a bank to the back completion because of hidden commission payment to an asset manager. Delicate is in this connection that the boss of a German fortune manager federation communicated in the technical press under 31.07.2006 that there were no supreme court decisions over the disclosure of commissions. Liability of banks/financial intermediaries in the case of commission sharing with investment companies: In its decision of 19.12.2006, the Federal Court of Justice (BGH) stated that a bank must inform the customer of the amount it has received from “issue surcharges”. [Abschlußprovisionen] and annual management fees” receives a rebate from a fund company. Some banking organisations believe that it is now sufficient to give the customer ‘a range’, because it is difficult to calculate the different variants of a rebate in each individual case and to disclose them in concrete terms. This new BGH decision can also be applied to fee-based advisors and their sales organisations: here, too, “independent advisors and their advisory associations” regularly finance themselves through “overheads, super commissions, etc.” – more often in addition to additionally accruing fees for the advice. Here, too, the core issue is an obligation to provide information so that the investor can recognise and understand what the bank’s revenue interest is in the investment recommendation: in other words, it is a question of endangering the customer’s interests through refunds: In order to ensure “investor- and object-oriented advice” in accordance with the so-called BOND ruling of the BGH, it does not matter whether the sales-related refunds are allocated to a specific transaction from the bank’s point of view, or whether the refunds are paid at certain intervals. According to the BGH, the fact that the customer was credited with part of the issue surcharge or the acquisition commission, as it were, as a discount does not change the obligation to provide information. Liability of the bank/financial service provider when offering “independent advice”: moreover, a credit institution must also provide objectively correct and complete advice on investment products of competing banks when offering “independent advice”. The deliberate concealment of commissions by employees must be attributed to credit institutions and financial product distributors. Errors will be the exception. Because already the bank apprentice learns that commissions flow to the bank – later as a customer advisor the amount is also reflected in the payment and the promotion chances: “Of course we prefer to sell the XX investment shares, because there is the highest commission for the bank, and for me a share through the salary”, it is then said in the professional training. The Federal Court of Justice, on the other hand, wants to ensure investor-friendly advice by means of information and transparency with regard to a risk to the customer’s interests in the case of refunds or commissions. Also independent financial service providers in the duty of disclosure? “The BGH forces financial advisors to inform their customers in the future about the commission payments directly and subsequently associated with the transaction before the contract is concluded. That is the law!” a renowned distributor of open-ended investment funds warns its intermediaries. If a structured sales company now presents itself as an “independent financial services provider” in its advertising, the investor can be practically certain that there is indeed a dependence on commissions. This is also a good opportunity for investors to get rid of bad investments. The rule is numerous consulting errors, so that the objection “we could not have known that the product provider would later behave criminally” does not apply. Typical scandals of this kind are then called “Phoenix” or “Falk-Fonds”, for example. It helps the investor little if the public prosecutor’s office accuses the wire-pullers – who invested its money will look first for errors of the mediator and/or bank advisor.
*by Dr. Johannes Fiala, Lawyer (Munich), Mediator (Univ.), MBA Financial Services (Univ.Wales), MM (Univ.), Certified Financial and Investment Advisor (A.F.A.), Lecturer in Civil Law and Insurance Law (Univ. of Cooperative Education), Banker (www.fiala.de)
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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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