Civil Liability Of Financial Institutions For Breaching Suitability Obligations

The complexity and professionalism of the financial sector mean that financial institutions,as "sellers," are significantly more aware of the trading patterns of financial products and financial market risks than investors,in a dominant status in financial transactions and that investors,on the other hand,often try to avoid normal investment risks by their vulnerable position.Therefore,"seller is responsible and caveat emptor" is the principle of financial transactions,and " seller is responsible”is the premise of " caveat emptor," the main content is that financial institutions should fulfill the obligation of suitability.Civil liability is the key to suitability obligations.If financial institutions breach their suitability obligation without civil liability,investors’ losses cannot be compensated,and administrative liability alone cannot curb the unsuitable distribution of financial institutions.Only by focusing on civil liability can investors be given more comprehensive protection and the continued healthy development of the financial market be genuinely safeguarded.This article combines the legislative and judicial experience of the United States,Japan and other foreign countries,and based on China’s national conditions,it starts from the origin of the duty of propriety system and returns to China’s practice for comparative analysis and research.Firstly,it clarifies the content and civil liability,and then proposes suggestions for improving the civil liability by taking into account the results of case studies and drawing on the rich experience of overseas practice.The first part is an overview of suitability obligations.Following the development of the suitability obligations system,a detailed review of the emergence of the United States,the evolution of Japan,and the current status of China’s legislation is conducted to clarify the obligation of suitability means that financial institutions should provide investors with appropriate financial products or services based on information such as their investment knowledge and experience when making recommendations.The purpose of this obligation is the reasonable allocation of transaction risks,and breach of this obligation entails corresponding civil liability.The second part is the civil liability.An analysis of the doctrine relating to the attributes of civil liability leads to the conclusion that the concurrence of liability should be adopted and that investors should be given the right to choose their remedy.At the same while,the two aspects of the subject of liability and protection are introduced,one is the bearer of liability,including financial institutions such as financial sales institutions,product issuers,and financial service providers that provide investment products or services,and investors can claim joint liability under the provisions of illegal agency;the other is that who suffers a loss may bring an action or arbitration based on the obligation of suitability,that is investors of financial transactions.The possibility of being a protected subject depends on the symmetry of information between the parties in a financial transaction and the professionalism of the investor’s knowledge and competence.The third part is the problems in the practice of civil liability in China.A case study of current judicial practice reveals the following issues:firstly,the nature of civil liability is ambiguous;secondly,the suitability obligation is indistinct from explanation obligation;thirdly,the burden of proof is incorrectly allocated;fourthly,the court awarded less liability.The four-part is how to improve the civil liability in China.The first is to strengthen the interface between legislation and the judiciary;second,raising the standards for suitability obligations;third,introducing a system of punitive damages;and fourth,diversifying dispute ways and exploring possible ways to resolve disputes between investors and financial institutions,make feasible suggestions for improving the civil liability.The conclusion advocates the importance of investor protection and creating a sound financial legal environment.Because of the issue in the practice of civil liability for breaching suitability obligations,while protecting investors who have suffered losses within the current legal system,we look forward to the legalization of the rules on suitability obligations for financial institutions and actively meet the challenges to the system in the process of transforming from big financial industry to financial power industry.