Liability Regime for Financial Actors under Monegasque Law
The purpose of this analysis is to determine the nature, scope, and evidentiary rules governing the obligations incumbent respectively upon an external asset manager (licensed company) and a banking institution (custodian bank and provider of investment services) under Monegasque law within the framework of a discretionary management mandate with an investment profile.
This analysis aims to identify the legal principles capable of forming the basis of the contractual liability of these entities in the event of serious breaches of their obligations relating to safekeeping, information, diligence, supervision, and prudent management.
I. Liability Framework Applicable to the Asset Manager
The contractual liability of the external asset manager is based on three principal obligations arising from Monegasque financial legislation and the general law of mandate.
Enhanced Duty of Care: Prudence, Diversification, and Risk Management
The legislative basis for this primary obligation is found in Monegasque legislation — Law No. 1.338 of 7 September 2007 on Financial Activities and Sovereign Ordinance No. 1.284 of 10 September 2007.
Law No. 1.338 of 7 September 2007 on Financial Activities establishes the general legal framework governing financial activities in Monaco by listing the services concerned (portfolio management, transmission of orders, investment advice, etc.) and subjecting the exercise of such activities to prior authorization and supervision by the competent authorities.
Sovereign Ordinance No. 1.284 of 10 September 2007 specifies the implementing provisions, notably by establishing the organizational and financial requirements applicable to licensed companies, including rules concerning minimum capital and operational requirements for financial institutions.
The principal textual basis of the enhanced duty of care, including the obligations of prudence, diversification, and risk management, is found in Articles 5, 23, and 26 of Law No. 1.338 of 7 September 2007 on Financial Activities.
Taken together, the provisions of these articles establish that the management mandate is a continuing contract imposing upon the professional party the duty to act exclusively in the client’s interest.
These provisions further establish the essential principles governing portfolio management, namely the requirement of:
- prudent and appropriate management (Article 5),
- compliance with rules of professional conduct and strict professional standards (Article 23),
- as well as the obligation to execute mandates solely in the client’s interest and not to use them for purposes other than those for which they were entrusted (Article 26).
The assessment and evidentiary regime resulting from these statutory provisions implies that the manager’s obligation is assessed in abstracto, that is, by reference to the conduct that a prudent and diligent professional would have adopted under similar circumstances.
Although formally characterized as an obligation of means, this obligation is considered enhanced insofar as the asset manager automatically incurs contractual liability in the event of losses suffered by the client unless he can positively demonstrate that the mandate was executed with all necessary diligence and in accordance with the requirements of prudence and diversification.
Obligation of Pre-Contractual Information, Suitability Assessment, and Duty to Warn
This obligation is governed by provisions such as Article 23-3 of Law No. 1.338 of 7 September 2007 on Financial Activities and Article 17 of Sovereign Ordinance No. 1.284 of 10 September 2007.
Article 23-3 of Law No. 1.338 of 7 September 2007 requires licensed companies to obtain information from their clients, including prospective clients, concerning their knowledge and experience in investment matters in order to assess whether the proposed service or financial instrument is suitable for them.
If, on the basis of the information obtained, the service or instrument is deemed unsuitable, the client must be warned accordingly.
If the client fails to provide the required information, or if such information is insufficient, the licensed company is required to inform the client that it is unable to assess the suitability of the product in relation to the client’s profile.
These rules apply having regard to the nature of the service, the financial instrument concerned, and the client’s status (professional or non-professional investor), the classification criteria being determined by sovereign ordinance.
Article 17 of Sovereign Ordinance No. 1.284 of 10 September 2007 provides that, prior to the execution of the mandate referred to in the preceding article, the company is required to examine the client’s objectives, investment experience, and financial situation, and that the services offered must be adapted to the client’s financial circumstances.
In addition, the licensed company is required to provide the client with all relevant information.
Obligation of Ongoing Monitoring and Accounting
Pursuant to Article 23-2 of Law No. 1.338 of 7 September 2007, licensed companies are required to retain all relevant information and maintain detailed records of all services rendered and all transactions carried out.
II. Liability Framework Applicable to the Custodian Bank
The bank’s liability is twofold: it is governed both by the general rules relating to deposit under the Civil Code of Monaco and by the professional obligations applicable to providers of investment services.
Enhanced Obligation of Safekeeping and Immediate Restitution (Deposit Regime)
In its capacity as custodian of the claimant’s funds and financial instruments, the bank is subject to strict rules laid down by the Civil Code of Monaco, which establish a stringent obligation of safekeeping and restitution.
Under Article 1766 of the Civil Code of Monaco, the bank is subject to a duty of diligent safekeeping, requiring it to exercise the same degree of care in protecting deposited assets as it exercises in protecting its own assets.
Furthermore, pursuant to Articles 1771 and 1776 of the Civil Code of Monaco, this obligation extends to the identity of the asset itself, the bank being required to return it identically and exclusively to the person who entrusted it to the bank.
Finally, this body of rules culminates in Article 1783 of the Civil Code of Monaco, which establishes the principle of immediate restitution by requiring the custodian bank to return the assets to the depositor immediately upon demand.
Taken together, these provisions establish an enhanced obligation of safekeeping, loyalty, and immediate restitution of entrusted assets.
Obligations Relating to Professional Conduct, Vigilance, and Fundamental Supervision
As a licensed provider of investment services in Monaco, the bank is subject to public-law deontological and prudential rules based on Article 10 (paragraph 5) and Article 23-3 of Law No. 1.338, as well as Articles 7 and 13 of Sovereign Ordinance No. 1.284.
At the core of this regime lies the duty of diligence and loyalty, formalized in Article 7 of Sovereign Ordinance No. 1.284, which requires licensed companies to comply with strict rules of professional conduct in order to ensure investor protection and the regularity of transactions.
The bank must therefore act loyally and in the best interests of its clients and of market integrity, exercise its activities with the necessary competence, diligence, and vigilance, and ensure that its personnel possess sufficient qualifications and expertise.
It is likewise required to maintain effective resources and internal procedures enabling it to perform its duties, comply with applicable regulations, and endeavor to avoid conflicts of interest or, where unavoidable, ensure fair treatment of clients.
Concurrently, the obligations of assessment and information arise from Article 13 of the same Ordinance and Article 23-3 of Law No. 1.338.
Like the asset manager, the bank is required actively to examine clients’ financial situation, investment objectives, and investment experience.
The bank must provide all relevant information in an appropriate manner, warn clients of the risks associated with contemplated transactions, and formally alert them where market transactions appear unsuitable in light of their profile.
Finally, this liability regime is completed by the obligation to supervise the regularity of transactions, established by Article 10, paragraph 5, of Law No. 1.338, which legally requires the bank to carry out basic supervision of the regularity of transactions recorded in its books, as well as of the transparency of the fees applied.
Conclusion
In summary, Monegasque law governs investor protection in a strict and complementary manner.
Where losses are recorded on a portfolio with a contractually defined “balanced” profile, the asset manager incurs enhanced liability if he cannot demonstrate active diligence (enhanced duty of care) and compliance with his obligation as to result concerning the pre-contractual assessment of the suitability of risks.
The bank cannot be regarded as a passive third party: it is subject to an enhanced civil-law obligation of safekeeping and immediate restitution (law of deposit), combined with a statutory obligation to carry out fundamental supervision of the regularity of transactions, as well as an autonomous duty of vigilance and loyalty toward the client.
Accordingly, a characterized breach of these statutory and regulatory provisions constitutes a manifest contractual default giving rise to full compensation for the economic and moral damages suffered.
Med venlig hilsen / Kind regards
Cabinet Nicolas BRAHIN
Advokatfirma i NICE, Lawyers in NICE
Camilla Nissen MICHELIS
Assistante – Traductrice
1, Rue Louis Gassin – 06300 NICE (FRANCE)
Tel : +33 493 830 876 / Fax : +33 493 181 437
Camilla.nissen.michelis@brahin-avocats.com
www.brahin-avocats.com
