Obligation to disclose reimbursements/commissions applies to banks, but not to independent financal advisors
In a decision of 19 December 2006 (File-No. XI ZR 56/05), the German Federal Court (Bundesgerichtshof, hereinafter “BGH”) found that a bank advising a customer with regard to investments and recommending shares in funds has to disclose any reimbursements/commissions hidden in the issue surcharge or the yearly management fees, which it receives from the investment company.
In the case decided by the BGH, a bank had placed shares in mutual stock funds with its customer. It received reimbursements from the issue surcharges as well as the yearly management fees. The bank paid the customer one-time “Bonifikationen” (voluntary payments) in the amount of 1 % in most cases and 2.5 % in one case. It did not, however, disclose the amount of the reimbursements to the customer.
After substantial stock market losses a claim for damages was made against the bank seeking reversal of the investments purchased.
The BGH found that a bank recommending shares in a fund has to point out that and in which amount it receives reimbursements from the investment company from issue surcharges and management fees. According to the decision of the BGH, the information about the reimbursements is necessary in order to disclose to the customer a conflict of interests of the bank (§ 31 para. 1 No. 2 WpHG) existing insofar. The BGH held:
Only by means of the information the customer is enabled to evaluate himself the interest of the bank in a sale and to assess whether the bank recommends a specific investment only because it profits from doing so. Where a bank advises a customer without involving a portfolio manager, makes investment recommendations and in doing so profits from the funds recommended by means of reimbursements, the interests of the customer are endangered by the reimbursements received by the bank. There is a specific danger that the bank does not make investment recommendations solely in the interest of the customer and based on the criteria of advice suitable to the investor and the matter, but acts also in its own interest to receive the highest possible reimbursements.
Therefore, according to the BGH, the customer needs to be informed of the amount of the reimbursements. Without such knowledge he is unable to correctly evaluate the interest of the bank in the recommended purchase of shares in the fund and the resulting threat to his interests.
In a decision of 15 April 2010 (File-No. III ZR 196/09) the BGH has decided that independent financial advisors are not obligated to inform their customers of their commissions entitlements resulting from an investment, provided the customer does not pay an open commission himself and is made aware of the issue surcharges respectively costs of the investment.
The Court argues that in this case it is obvious to the customer that the advisor is going to receive a commission from the payments made by the customer. In the absence of a respective question from the customer, the advisor cannot be expected to advise the customer of the amount of the commission.