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No special duty to warn owed by financial institutions to investors, Spring 2006

Banks Not Providing Financial Advice
The Ontario Superior Court of Justice recently dismissed a claim by a group of investors against several financial institutions on the grounds that there was no duty to warn the borrowers of specific risks associated with loans for mutual fund investments which included margin call features.

The plaintiffs borrowed money for leveraged investments in mutual funds and incurred losses when the values of the funds declined. The plaintiffs invested money through a financial advisor who established a program whereby his clients could borrow funds from a financial institution for the investments. The advisor would provide his client with the documents required by the financial institution and the financial institution would then approve the application, or not, and fix it for a certain amount. The loan funds would then be advanced to the financial advisor for investment in the mutual funds. The group of investors as plaintiffs alleged that a fiduciary relationship was established and a subsequent duty was owed by the financial institutions to the plaintiffs.

The matter reported as Baldwin v. Daubney [2005] O.J. No. 5330 was heard on a motion for summary judgment brought by the financial institutions to dismiss the plaintiffs' claims on the ground that there was no triable issue.

In dismissing the claims and granting summary judgment, Mr. Justice Spence found that “the financial institutions did not owe a duty of care to the plaintiffs to advise them about the risks of investing their loans in mutual funds.”

The banks and trust companies did not communicate with the plaintiffs or give the plaintiffs any reason to rely on them and were not acting as agents for the borrowers. The fact that the financial advisors submitted loan documents directly to the financial institutions did not imply that the advisors were acting on behalf of the banks. The banks had no special duty to warn of the risks associated with the particular investments.

Mr. Justice Spence was of the view that there was no special duty established and no new duty of care to advise with respect to these loans. The banks were lending money, not providing financial advice.