Bank has Burden of Proof, If Client Was Informed About Kickbacks

The German Federal High Court ruled that a banks themselves have the burden of proof on whether a client was informed about kickbacks and not the other way round. In the disputed case the plaintiff sued the bank for a payback of an investment of 250,000 Deutsch Mark in several mutual funds made in 2000. The investment was recommended by the bank adviser, but the bank did not disclose that it received kickbacks between 3% and 5% of the front load. While a district court ruled that the burden of proof lies with the client, the High Court made clear that if the bank cannot prove that a client was informed about kickbacks, then the client has the right to claim back his initial investment plus interest.

This verdict is the latest in a series of decisions by the German Courts strengthening the position of wealth management clients. Already in 2006 the High Court decided that wealth managers have to disclose all kickbacks including the precise amount. In a subsequent verdict it was ruled that a client does not only have the right to claim back the kickbacks, but also to get compensated for losses. The reasoning behind this was that the client would not have otherwise chosen the wealth manager if he had known that there was a conflict of interests.
Taking advantage of the favourable court rulings, German clients of wealth mangers should now take the matter into their own hands.

• Clients should demand a full disclosure from their wealth manager or bank of all kickbacks received from third parties from the beginning of the client relationship. These can be kickbacks paid by managers of mutual and hedge funds, issuers of structured products and as well banks used by wealth managers as custodian and transaction bank.

• Clients should ask for reimbursement of all kickbacks paid to the wealth manager for investments made in the past on behalf of his client.
  

• Clients who made investments in the past, which they would not otherwise have done if they knew about the kickbacks, should check with a specialist lawyer if they can demand the original investment amount back.
  

MyPrivateBanking.com expects that within the next few years the tough rulings of German courts will find followers in other European countries too. The Swiss High Court, for instance, has already taken a similar line on ruling with regard to kickbacks paid to wealth managers.

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