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As population ageing intensifies, increasing numbers of investors aged 60 and above turn to purchasing financial products to save and grow their retirement funds. However, these investors often lack risk awareness and financial knowledge, relying solely on trust in financial product sales personnel or past successful redemption experiences. This leads to the blind purchase of financial products that exceed their risk tolerance.

In cases of investment losses, can elderly investors invoke suitability obligations as a legal basis to claim compensation from financial institutions? This article explores relevant regulations and judicial precedents.

Suitability obligations

The definition of suitability obligations is clearly outlined in article 72 of the Minutes of the National Courts¡¯ Civil and Commercial Trial Work Conference. It stipulates that financial institutions must fulfil obligations such as understanding their clients, understanding the products and ensuring that suitable products are sold to appropriate investors when offering high-risk financial products.

The purpose of these obligations is to ensure that investors make independent decisions based on a full understanding of the nature and risks of financial products and activities, and bear the resulting gains and losses. The fulfilment of suitability obligations is a core aspect of achieving caveat venditor, caveat emptor (buyer and seller beware).

According to article 75, financial institutions bear the burden of proof in demonstrating their compliance with suitability obligations. Specifically, they must provide evidence that:

• A risk assessment and corresponding management system for financial products has been established.
• The investor¡¯s risk awareness, preferences and tolerance have been assessed.
• The investor has been informed of the product¡¯s returns and key risk factors.

In recent years, cases involving the suitability obligations of financial institutions indicate that institutions have formally fulfilled their obligations and prepared comprehensive evidence systems, such as preserving written and video records of the required proof.

Therefore, in cases involving ordinary financial investors, unless there is conclusive evidence (e.g. documents issued by financial regulators) proving that the financial institution violated its suitability obligations, it may be challenging to claim compensation based on such grounds.

Case law

Are there special judicial protections for elderly investors due to their inherently vulnerable status? This question may be illuminated by examining the following representative cases.

In the case of Zhongrong International Trust v Cui (2021), Cui, aged 68 at the time, purchased a financial product.

Beijing Financial Court held the trust company had conducted a risk suitability assessment for Cui before signing the trust contract. Additionally, the investment risk confirmation letter explicitly warned that ¡°the risk level of this project may exceed the general risk tolerance for your age group¡±.

Cui also transcribed the following statement under the special warning section: ¡°I possess full capacity for civil conduct, fully understand and acknowledge the risks of this project, have read the special warning, and voluntarily assume the investment risks and losses of this project. I confirm my subscription to this product.¡± Based on this, the court dismissed all of Cui¡¯s claims.

In the case of Liu v Guangdong Yuecai Trust (2021), Liu, over 60 years old at the time, purchased a financial product.

Yuexiu District People¡¯s Court in Guangzhou held that, given Liu¡¯s age and vulnerable position, the trust company was obligated to exercise greater caution. However, the trust company merely sent documents, such as a trust plan subscription risk statement, without explaining key clauses, thereby failing to fully meet its duty of disclosure and explanation.

Nonetheless, an investor risk assessment questionnaire prominently highlighted in bold, next to Liu¡¯s signature, a statement that ¡°The trust plan does not guarantee principal or minimum returns and carries certain investment risks. In the worst-case scenario, the trust plan¡¯s returns may be zero, and the principal may be partially or entirely lost. Investment involves risks, decisions must be made cautiously¡±.

Additionally, Liu had prior experience with financial investments. Based on these factors, the court ruled the trust company bore 30% secondary liability for Liu¡¯s losses.

In the case of Lin v XX Securities Company (2022), Lin, aged 70 and illiterate, purchased a financial product.

Shanghai Financial Court ruled that illiteracy alone did not establish the securities company failed its suitability obligations. However, according to a decision by the Xiamen Securities Regulatory Bureau, discrepancies were found in Lin¡¯s questionnaire, including inaccuracies in recorded education level and investment experience.

Additionally, significant inconsistencies were noted between the risk assessment results for Lin¡¯s account opening and those for the asset management plan purchased on the same day. As a result, the court determined the securities company had not fully met its suitability obligations and ordered it to compensate Lin for 70% of the principal investment loss.

Summary

Judicial precedents indicate that elderly investors relying on suitability obligations as a basis for claims may face the following outcomes:

• In the absence of evidence proving that financial institutions failed to fulfil or fully comply with suitability obligations ¨C particularly when institutions have provided specific risk warnings regarding an investor¡¯s advanced age ¨C courts are unlikely to hold financial institutions liable for losses solely due to the investor¡¯s vulnerable position.
• If evidence demonstrates that financial institutions do not fully meet their suitability obligations, courts typically apportion liability based on the degree of fault of both parties, requiring institutions to compensate for a portion of an investor¡¯s losses.
• With financial institutions increasingly strengthening compliance and risk control measures regarding suitability obligations in recent years, cases of complete non-compliance are rare, and instances of full compensation for investor losses are almost non-existent.

In conclusion, investment carries risk. Elderly investors should prioritise stability, adopt a rational and scientific approach to investing, resist the allure of high returns and avoid investment risks.

Wang Ruolin is a partner at DOCVIT Law Firm