——Cai vs. CITIC Trust Co., Ltd. for a Dispute over Contract

[Principle of Adjudication]

The Trust Law provides that trust shall be established in written form, but the absence of a written contract between the parties does not necessarily mean that the trust is not established. Whether a trust contract is established shall be judged by whether there is consensus on trust between the parties, and cure by performance rule shall apply. Whether the previous investment experience of a financial consumer can exempt the financial institution from suitability obligations shall be comprehensively considered from the attributes, categories, investment amounts, investment periods and other factors of previous investment on financial products by the financial consumer, so that a judgement can be made based on whether the independent investment decision of the financial consumer is affected.

[Basic Facts]

Cai remitted RMB 7.777 million in total to CITIC Trust Co., Ltd. (hereinafter referred to as “CITIC Trust”) through two payments to purchase trust products, and the remittance summary specified which trust product to purchase. Due to the sharp drop in the securities market, the whole trust product was implemented position closure and liquidated, and Cai was distributed trust property interests of a little more than RMB 3.83 million. Cai then filed a lawsuit with the court on the grounds that the Trust Contract and the Client Questionnaire were not executed by him, the Trust Contract was not established and the trust company violated its suitability obligation, and requested CITIC Trust to indemnify him for losses. CITIC Trust argued that the trust contract was established, and that it shall be exempted from the suitability obligation because Cai possessed several securities accounts and had investment experience in securities trading and margin trading. Upon trial, the court holds that although the parties did not enter into a written contract, Cai paid for the subscription of the trust product and the trust contract was established. The attributes, categories, amounts and other factors of previous investment in financial products by Cai are quite different from those of the trust product involved in this case, therefore Cai’s previous investment experience is insufficient to exempt CITIC Trust from its suitability obligation. Since the evidence submitted by CITIC Trust is insufficient to prove that it has fully performed its suitability obligations, it shall compensate for the investment losses suffered by Cai.

[Judge Comments]

This case is a typical case of accurately applying relevant rules for the establishment of trust contracts and practicing the spirit of financial consumer protection. The establishment of a trust contract shall be subject to the Trust Law, as well as the Civil Code and the Contract Law. Article 8 of the Trust Law provides that trust must be created in writing. Article 36 of the Contract Law (Article 490 of the Civil Code) provides that if the parties fail to conclude a contract in writing but one party has performed its main obligation and the other party has accepted it, the contract is established. In this case, although the parties did not enter into a written contract, Cai paid the purchase price of the trust product through payment transfer and the trust company also accepted the payment. Therefore, the trust contract should be determined as established in accordance with the relevant provisions of the Contract Law. This reflects the accurate connection and application of the Trust Law and the Contract Law. How to perform suitability obligations by financial institutions and whether financial institutions may claim to be exempted from suitability obligations on the ground that investors have previous investment experience are difficult issues in current trial practice. In this case, analysis of contents of suitability obligations borne by financial institutions is conducted from perspectives such as knowing the customer, knowing the project, appropriate sale, review standards for suitability obligations of financial institutions are explored, the attributes, categories, investment amounts, investment periods and other factors of previous investment on financial products by the financial consumer are comprehensively considered, and analysis was conducted regarding the influence of investor’s prior investment experience on suitability obligations of financial institution. The case is of positive significance in unifying the review standards for suitability obligations of financial institutions, regulating the sales behaviors of financial institutions, protecting the legitimate rights and interests of financial consumers, and assisting in the creation of a good legal and business environment for the finance sector.

[Expert Comments]

Expert: Shi Tiantao, Professor, Law School, Tsinghua University

In recent years, under the influence of the macro-economic environment, defaults in financial products occur from time to time, financial consumers’ investment is damaged seriously, and some even lose everything, causing many social problems. Protecting financial consumers not only relates to the healthy development of the financial industry, but also relates to social stability. Financial consumer protection needs the joint efforts of legislative, regulatory and judicial organs. This case is a classic case of the financial court safeguarding the legitimate rights and interests of financial consumers. 

Financial products have risk attributes, and general financial consumers lack financial expertise, suffer from information asymmetry and have limited risk tolerance, which requires that financial institutions shall, when selling financial products, fully disclose the risks of financial products and accurately assess the investment capacity and risk tolerance of financial consumers, so as to help financial consumers invest in financial products suitable for them when they have a full understanding of risks. This case establishes the standards for financial institutions to perform suitability obligations in terms of clients, products and appropriate sales, etc., and provides guidance for financial institutions to correctly perform suitability obligations. With respect to the influence of financial consumer’ previous experience on the suitability obligation, the court of this case holds that the attributes, categories, investment amounts, investment periods and other factors of previous investment in financial products by the financial consumer shall be comprehensively considered so as to regulate the acts of financial institutions that avoid suitability obligation. As for the acts of failing to fully perform suitability obligations, the case requires the financial institution to bear liability for compensation for the losses of the financial consumer, which is of warning significance to the financial market.

As a certain proportion of the sale of financial products is carried out through agencies, if the agencies fail to perform the suitability obligations, the financial institutions shall assume the corresponding liabilities. In this case, although Cai, as a consumer, paid for the purchase of the trust product, the signature on the trust contract was not by Cai. This was not unrelated to the agency’s irregular sales activities, which also resulted in the default of the financial institution’s performance of suitability obligations. The court of this case holds that the financial institution shall bear the adverse consequences arising from the agency’s irregular sales behavior, which is conducive to regulating the sales order of financial products, urging financial institutions to practically fulfill their suitability obligations, and effectively protecting financial consumers.