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Execution only contract and investment advice contract

In the banking relationship between the client and the service provider, three types of legal relationship can be identified under Swiss and European law: i) execution only, ii) investment advice, iii) management mandate.

What distinguishes them is the degree of involvement of the service provider on the one hand, and the degree of protection given to the client on the other.

An execution-only contract, which, as its name suggests, consists of the provider's sole execution of client orders, will not confer any particular protection on the client. Indeed, the Swiss legislator and, to a lesser extent, the European legislator consider that in order to keep this type of relationship simple, cheap and fast, it is up to the client himself to safeguard his interests.

On the other hand, in more complex legal relationships such as investment advice and management mandates, it can be observed that the greater the activity of the service provider, the greater the degree of client protection.

In the investment advice contract, the decision whether or not to carry out a transaction is taken by the client, but the provider can make suggestions and thus influence the client.

In the management mandate, by delegation from the client, the service provider replaces the client in the decision-making process and in the conclusion of transactions.

While the distinction between the management mandate and other types of banking relationships is clear, the differences between the execution-only contract and the investment advisory contract may be more subtle.

In both cases, the decision on which operations to carry out rests with the client. If an operation goes wrong, the question arises as to who is responsible for the consequences.

In the execution only contract, at least from the point of view of Swiss case law, the service provider is not obliged to ensure the general safeguarding of the client's interests (BGer 4A_369/2015 of 25, recital 2.3), nor is he obliged to assume a general duty to provide information, either about the orders given by the client, or about the likely development of the chosen investments and the measures to be taken to limit the risks (BGE 133 III 97 recital 7.1.1; BGer 4A_336/2014, recital 4.2). Nor does he have to verify the appropriateness of the transaction requested by the client, or its suitability in relation to the client's portfolio as a whole.

Exceptionally, the Swiss Federal Supreme Court has accepted the existence of a duty to warn on the part of the service provider, in particular when the service provider realises or should have realised that the client has not identified the risk associated with the investment he is considering, or in the case of a special relationship of trust developed in the context of a long-term business relationship between the client and the financial services provider (BGer 4A_369/2015, recital 2.3).

In the investment advice contract, Swiss case law notes that the service provider's duties to inform, advise and warn are not set out in general terms, but depend on the type of contract concluded and the circumstances of the specific case, in particular the client's knowledge and experience (BGer 4A_336/2014, recital 4.2.; BGer 4A_364/2013, recital 6.2). In particular, when the provider makes a recommendation about a particular security, he must be aware of several factors, including the client's personal financial situation, the degree of risk the client is prepared to take and whether the advice he gives also relates to the suitability of the investment envisaged (BGE 133 III 97, para. 7.2; BGer 4A_444/2012, para. 3.2).

In conclusion, in an execution-only contract the service provider's duty to inform is the weakest and, as a rule, the client himself is liable for his transactions. In contrast, the investment advice contract entails more obligations for the service provider and the latter may, under certain conditions, be liable for the damage suffered by the client.

From a public law perspective, the European and Swiss legislators have adopted the MiFID II Directive and the Financial Services Act (FinSA), respectively, in order to ensure greater transparency in the markets and enhanced consumer protection. These laws, which detail the information obligations of financial service providers, will be the subject of a future article.

In addition to our many years of expertise in financial matters, our firm also succeeded in obtaining the highest compensation in the world for claims against a major US financial institution following the collapse of Lehman Brothers.