When the Court Says: It Is Not Always the Investor’s Fault
“Why did they get involved?” – or is it really that simple? A Supreme Court message to investors
In Hungarian legal practice, claims arising from losses caused by investment service providers have never been among the most high-profile disputes. This stands in sharp contrast to the large number of cases related to foreign currency lending. All this despite the fact that almost every year sees the collapse of one or more issuers, wiping out significant retail savings – and sometimes even public funds.
Yet losses suffered by retail investors typically attract public attention only in exceptional, large-scale cases. One reason is a deeply rooted perception that investment losses are ultimately the investor’s own responsibility – a view often shared by the affected investors themselves (“they should have known better”). This is compounded by the fact that the state, as a competing issuer, has little incentive to provide retail investors with strong and effective risk-mitigation tools against issuers whose conduct may even verge on criminality.
The Constitutional Court has also made it clear that the right to equity is not an individual fundamental right. As a result, investors who suffer losses cannot generally expect a state-funded safety net, except in a handful of politically or socially sensitive cases. For a long time, this mindset was also reflected in court practice: there was no clear framework for allocating civil liability, and investors were typically held solely and fully responsible for their investment decisions. This approach, however, is now – albeit gradually – beginning to change.
A few years ago, the Hungarian Supreme Court (Kúria), in a decision of precedential value (Pfv.20.371/2021/5.), held that an investment service provider cannot automatically shift responsibility onto the client if it failed to provide full and proper information on the material risks of the investment. The decision was the outcome of litigation lasting several years, brought on behalf of a retail investor. Behind the case stood a wider group of affected investors who had been awaiting the outcome – ultimately in vain, as the service provider was struck off the register shortly after the judgment, while the related criminal proceedings have been ongoing for more than a decade.
The Supreme Court’s message is nevertheless clear: not every investment loss can be automatically attributed to the investor’s own risk. In certain cases, the investment service provider’s liability for damages may be established. The decision narrowed the gap between the investor protection standards set out “on paper” in legislation and the actual civil law liability of investment firms, opening the door to claims even where the service provider argues that no investment advice was given or that the decision was made independently by the client.
The Court emphasised that investment service providers are subject to enhanced information obligations, particularly in relation to retail clients. It is not sufficient to provide generic risk warnings, nor is it enough to comply with MiFID requirements on a purely formal level. According to the judgment, “the information provided must be genuine, comprehensive and cover the material risks of the specific investment”.
Importantly, the Court also made it clear that liability cannot be avoided by arguing that no formal investment advice was provided. The duty to inform is an inherent element of the investment services contract and exists even in the absence of advisory services. Accordingly, a widespread market practice whereby a service provider claims to be “only making a recommendation” does not, in itself, shield it from liability arising from one-sided or misleading information.
A key issue in the case was whether the service provider knew, or should have known, that the issuer behind the investment was facing serious financial and liquidity risks. In this context, the Supreme Court stated unequivocally that identifying such risks and presenting them to the client falls within the scope of the professional diligence expected of an investment service provider. If this fails to happen and the investment collapses, the loss cannot be automatically passed on to the investor. In such cases, the affected investor may challenge the adequacy of the information provided in civil litigation.
One of the most significant aspects of the decision concerns causation. According to the Supreme Court, it is sufficient to demonstrate that the omission or downplaying of material risks influenced the investor’s decision. There is no need to prove intentional deception. While lower courts had previously taken a more restrictive view, the Supreme Court corrected this approach in a clear and instructive manner.
The judgment also treats the role of MiFID suitability and appropriateness tests as more than a mere formality. As the Court noted, these assessments are not administrative box-ticking exercises but tools designed to protect investors. Any inconsistency between the outcome of such tests and the information actually provided may work against the service provider in subsequent litigation.
At the same time, the Supreme Court did not make life automatically easier for investors. In damages claims, the burden of proof remains with the investor, who must demonstrate that the information provided was incomplete or one-sided and that the loss occurred as a result. However, the decision makes it clear that such proof is not inherently hopeless, particularly where supervisory findings or other objective circumstances support the investor’s position.
This Supreme Court decision therefore goes well beyond the individual case. It confirms that courts do not automatically treat retail investors as having “lost fair and square”, and that they are willing to meaningfully scrutinise the information practices of investment service providers. It also sends a clear message to the market: MiFID rules are not there to be ticked off – they are meant to be taken seriously.