THE BOTTOM LINE
- 100% Liability: A financial institution that accepts business from an intermediary providing unlicensed, personalized advice is 100% liable for the client’s losses. The court will set aside any arguments about the client’s own negligence.
- “Should Have Known” is Enough: Companies cannot claim ignorance about the activities of their sales partners. If a “usual practice” of unlicensed advising exists among intermediaries, a firm is deemed to have constructive knowledge and a duty to investigate.
- Burden of Proof Shifts: Once a client credibly describes receiving personalized advice that aligns with the intermediary’s common sales practices, the burden of proof shifts to the financial institution to prove that no such advice was given in that specific case.
THE DETAILS
In a significant ruling for any company using third-party intermediaries, the Arnhem-Leeuwarden Court of Appeal upheld a decision holding financial giant Dexia fully liable for a client’s investment losses. The case revolved around securities lease agreements sold through an independent intermediary who did not possess the required license to provide financial advice. The court found that Dexia knew, or at the very least should have known, that this intermediary was not merely introducing a client but was providing a personalized recommendation to enter into a specific financial product.
The court’s reasoning hinged on the concept of a “usual practice” among such intermediaries. Based on evidence from Dexia’s own documents and previous cases, the court concluded it was common knowledge that these intermediaries routinely assessed a client’s financial situation and recommended specific Dexia products as “suitable.” This established a powerful presumption that the intermediary in this specific case also provided regulated advice. This finding effectively shifted the legal burden to Dexia to prove that its partner had acted differently in this instance—a burden Dexia failed to meet.
Crucially, the court affirmed that under the financial regulations at the time (specifically, Article 41 of the Nadere Regeling 1999), Dexia was prohibited from accepting clients from intermediaries it knew, or should have known, were giving unlicensed advice. By failing to perform due diligence on its intermediary’s sales process, despite being aware of the general industry practices, Dexia breached its regulatory duty. The consequence is severe: the court ruled that principles of fairness require Dexia’s liability to remain fully intact, nullifying any claim of the client’s own fault and making Dexia responsible for all payments made and any outstanding debt.
SOURCE
Source: Gerechtshof Arnhem-Leeuwarden
