The client, who was represented by a lawyer, was of the opinion that the bank had acted carelessly when enforcing the repayment of his Lombard loan by realising the securities portfolios he had pledged as collateral. It had not sent him a margin call in advance. A margin call is the lender’s request to the borrower to either provide additional collateral within a certain period of time or to reduce the loan to such an extent that the collateral is sufficient again. According to his statement, the client would have been both willing and able to provide additional collateral at short notice in order to prevent the forced liquidation. Furthermore, the client argued that at the time of the liquidation on 19 March 2020, there was no extraordinary situation in the markets that would have allowed a liquidation without a prior margin call, and that the liquidation was in any case inappropriate. In view of the interventions by governments and central banks to support the economy and the stock markets in particular, it was foreseeable that the situation would recover quickly.
In a first step, he demanded damages from the bank amounting to the difference between the value of his portfolio before the Corona crisis and the proceeds realised in the forced liquidation, plus the dividends on the securities sold for the next 10 years. To measure the latter amount, he extrapolated the dividends received last year over the 10-year period. After having received the bank’s opinion on his client’s claim, the lawyer amended the claim to require the bank to restore his portfolio. In return, his client was willing to provide additional collateral in the amount of the coverage gap identified by the bank at the time of the liquidation.
In its reply to the client’s lawyer, the bank was of the opinion that it was contractually entitled to carry out the forced liquidation without a prior margin call, as immediate action had been indicated due to the extraordinary market situation. In addition, the bank had informed the client six days beforehand in the e-banking system that the collateral situation was insufficient and had asked him to rectify the situation. Furthermore, she had tried to reach him unsuccessfully by telephone before the realisation. In the Lombard loan agreement, the client had been informed in detail about the risks associated with this type of business. Due to the relevant provisions of the Lombard loan agreement and the pledge agreement, he was also obliged to ensure the necessary collateral for the Lombard loan at all times and to regularly check and monitor his position for this purpose. Even without the bank’s notification, he could not have ignored the difficult situation on the markets, as this was generally known and had also been discussed outside the relevant trade press. It regretted the losses incurred by the client but was not prepared to meet his claim.
The client lawyer then contacted the Ombudsman again and essentially maintained his arguments. He continued to argue that a forced sale without a margin call was not lawful. There had been no exceptional situation. The bank had waited six days after the notification of the shortfall in collateral in e-banking before finally proceeding with the forced realisation in a hurry and after one single unsuccessful attempt to contact the client. Moreover, the unsuccessful call mentioned by the bank had been made anonymously and had not been recognisable to the client as an attempt by the bank to contact him. This was clearly insufficient, and the bank should have tried to contact the client by another means, for example by e-mail. The bank had also disposed of more assets than were necessary to eliminate the coverage gap.
The Ombudsman forwarded the client lawyer’s arguments to the bank and pointed out that, in his view, the Federal Act on Intermediated Securities required a margin call prior to the forced sale of securities mandatory for non-qualified investors. In its statement to the Ombudsman, the bank was still not prepared to make any concessions to the client. It added to the arguments already submitted to the client lawyer by stating that legal literature recognises a right of forced realisation without a prior margin call, as provided for in its contracts, in extraordinary situations. Such a situation had undoubtedly existed in mid-March 2020. Prior contact with the client was therefore not legally mandatory. However, the bank had nevertheless tried to reach him, which unfortunately had not been successful. It had only realised the minimum securities necessary to close the coverage gap. It had to be taken into account that the proceeds of realisation could not be predicted exactly, especially in very volatile markets. In addition, the valuation of the collateral had to take into account that not the full market value of a security was taken into account, but only its collateral value reduced by an individually assessed margin.
In view of the bank’s unwillingness to make concessions, the Ombudsman closed the case with a final notice to the client’s advocate. In his notice, he stated that, in his experience, the Lombard and pledge agreements used by the bank were in line with the usual standard in the Swiss financial market. One of the core obligations of a Lombard borrower was to ensure that there was sufficient collateral at all times. In the event of insufficient coverage, the bank was entitled to realise the assets at its own discretion. As a rule, a prior margin call was required for this. However, it was in fact the case that the prevailing legal doctrine granted the lender the right to carry out a forced realisation in an extraordinary situation, even without a prior margin call. The Ombudsman did not share the client lawyer’s argument that there had been no extraordinary situation on the stock exchanges in mid-March.
The Ombudsman had some understanding for the client’s anger. In retrospect, the timing of the realisation was very unfavourable in view of the relatively rapid recovery of the stock markets. However, future developments on the stock markets are uncertain and cannot be reliably predicted. According to the case law known to the Ombudsman, a borrower with insufficient collateral has no right to demand that the bank wait with the forced realisation in view of an expected price recovery, even if there are voices in the market forecasting such a recovery. The freedom to wait for a hoped-for positive price development, which an investor who uses his own money has, is limited in the case of a credit-financed investment by the borrower’s obligations contained in the loan and pledge agreement. If, contrary to expectations, a recovery does not occur, realisation is also in the interest of the borrower because it protects him from further losses. In the event of a further fall in the share price, he would even risk losing all assets and would still be obliged to repay any outstanding balance of the loan.