Loss with a structured product (Barrier Reverse Convertible)

A client claimed to her bank that she had received insufficient advice when purchasing a barrier reverse convertible and demanded that the bank share half of the loss she had suffered. The bank denied any advisory duty, referred to a long-standing execution-only relationship as well as the investment experience of the client and her authorized representative, and refused to make any concessions. The Swiss Banking Ombudsman concluded that there was no misconduct on the part of the bank and therefore closed the case with an explanatory notice addressed to the client.

The client had maintained a business relationship with the bank for many years. Her husband was appointed as an authorized representative and made various investments over a longer period, including options and structured products of the Barrier Reverse Convertible category. The client also had a documented investment strategy with an increased risk appetite.

In summer 2021, the authorized representative subscribed to three barrier reverse convertibles with a high coupon on behalf of the client. In all these products, the barrier was breached by at least one of the underlying shares. According to the rules of the product, the investor was therefore not repaid the invested capital but was obliged to take over the security that had performed the worst among the underlying shares.

Due to the very poor performance of one of the acquired shares, the client suffered a significant loss, particularly with one of the Barrier Reverse Convertibles. The client claimed that the responsible client advisor had not sufficiently informed her about the risks of this product and had recommended a too risky, tailor-made product to her. She demanded a share of the loss from the bank.

The bank took the view that an execution-only relationship existed at the time of the investment. The product was structured at the express request of the authorized representative, without any investment recommendation being made. In addition, the client and her authorized representative were experienced investors who were familiar with the functioning and risks of barrier reverse convertibles. All the shares underlying the barrier reverse convertible belonged to the bank’s investment universe and were assessed as being of sufficient quality at the time of the investment.

In order to minimize the loss as much as possible, the client later acquired another customized structured product. Due to changed guidelines of the bank, the conclusion of an investment advice agreement was required beforehand. In the client profile that was drawn up prior to the conclusion of the investment advisory agreement, the client confirmed a very high risk appetite. The advice and risk disclosure in connection with this additional product were carried out correctly and appropriately. The bank denied any liability.

The Ombudsman reviewed the submissions of both parties as well as the documents submitted by the bank, in particular the client profiles and the notes of the conversations with the client and her authorized husband. He stated that the client must be credited with the knowledge and experience of her authorized representative. Based on the documented investment experience and risk tolerance, he saw no indication that the client was unaware of the essential risks of the product. He was therefore of the opinion that, under the documented execution-only relationship when acquiring the barrier reverse convertible, the bank had no duty to warn or inform. Such a duty only arises by way of exception, for example if the bank should have recognized that a client is unable to assess the risks of a product he wishes to acquire. If such an exception does not exist, the bank’s obligation in the context of an execution-only relationship is generally limited to the prompt and proper execution of the client’s order in accordance with instructions. But even if an investment advisory relationship had already existed at that time, a recommendation of the product would have been compatible with the duties of an investment advisor under the given circumstances and, in particular, due to the client profile. The Ombudsman concluded that the loss occurred because the assessment of the future price performance of shares, in particular of a specific security, subsequently proved to be incorrect. This is a general investment risk that had to be borne by the client as an investor. There was no basis to persuade the bank to make financial concessions. The mediation procedure was therefore concluded with an explanatory notice to the client.