Recovery of Investment Losses Arising from Broker Misconduct and Financial Mis-Selling

The expansion of online investment services has substantially increased the accessibility of financial markets to private investors, including through trading platforms offering foreign exchange products, contracts for difference, derivatives and transactions involving crypto-assets. The development of these services has been accompanied by a corresponding increase in disputes concerning the adequacy of investment advice, the disclosure of financial risks, the execution of transactions and the conduct of intermediaries operating across national borders.

Claims arising from such activities require examination of the contractual relationship between the investor and the service provider, the regulatory status of the undertaking concerned and the circumstances in which the investor's funds were transferred or lost. The legal characterisation of the underlying conduct determines whether the investor may pursue contractual compensation, damages arising from regulatory breaches, restitution, claims founded on fraudulent conduct or remedies against payment service providers.

The regulatory framework governing investment services

Within the European Union, the provision of investment services is principally governed by Directive 2014/65/EU, commonly referred to as MiFID II, together with the directly applicable regulatory instruments adopted under that framework. The Directive was transposed into Greek law by Law 4514/2018.

Articles 24 and 25 establish substantive obligations concerning the provision of information, the assessment of suitability and appropriateness and the protection of investors. Investment firms are required to act honestly, fairly and professionally in accordance with their clients' best interests and to provide information that is fair, clear and not misleading.

Where an investment firm provides investment advice or portfolio management, it must obtain the information necessary to assess the suitability of the proposed investment in light of the client's knowledge, experience, financial position, capacity to bear losses and investment objectives. Different requirements apply where the firm provides other investment services without a personal recommendation.

The existence and extent of these duties depend on the service actually provided, the regulatory classification of the financial instrument and the investor's status as a retail or professional client.

Mis-selling, unsuitable advice and the allocation of liability

Financial mis-selling may arise where an investment product has been promoted or recommended in breach of applicable disclosure, suitability or conduct requirements. Potentially relevant circumstances include misleading representations concerning expected returns, inadequate disclosure of leverage risks, recommendations inconsistent with the client's financial circumstances and failures to identify or manage conflicts of interest.

The operation of contracts for difference is subject to particular regulatory restrictions designed to protect retail investors. These include limitations on leverage, requirements concerning the closure of positions, negative balance protection and standardised risk disclosures.

A breach of regulatory obligations does not, by itself, establish an enforceable claim for the entirety of an investor's trading losses. The claimant must identify the applicable legal basis of liability and establish the elements required under the governing law, including damage and the necessary causal connection between the alleged misconduct and the loss sustained.

Where Greek law governs the claim, contractual and non-contractual liability may arise under the relevant provisions of the Civil Code, depending on the facts and the legal relationship between the parties. In cross-border transactions, the applicable law must be determined through the relevant private international law rules.

Fraudulent platforms and unauthorised investment providers

A different legal analysis is required where an online platform operates without the requisite authorisation or has been established for the purpose of obtaining investor funds through deception.

Such cases may involve false representations of regulatory status, fabricated account balances, fictitious trading activity, refusal to process withdrawals or transfers of funds to entities unrelated to the purported investment provider.

The investigation must determine the identity of the contracting entity, the persons actually receiving the transferred funds and the banking or payment infrastructure through which those funds were processed. Where fraudulent conduct is established, civil remedies may be pursued alongside criminal complaints and appropriate applications for the preservation or recovery of assets.

The existence of criminal proceedings does not independently secure compensation. Any recovery strategy must take account of the availability of identifiable defendants, assets capable of enforcement and the procedural mechanisms available in the relevant jurisdictions.

Jurisdiction and applicable law in cross-border investment disputes

Online investment arrangements frequently involve a service provider established in one jurisdiction, an investor resident in another and contractual terms designating the courts or laws of a third country.

Where proceedings fall within the scope of Regulation (EU) 1215/2012, jurisdiction must be determined in accordance with its applicable provisions. The special rules governing consumer contracts may protect an investor who contracted outside the course of professional activity, provided that the relevant statutory conditions are satisfied.

The governing law requires a separate assessment under the Rome I Regulation for contractual obligations and, where applicable, the Rome II Regulation for non-contractual obligations. Contractual choices of law and jurisdiction must be examined in light of any mandatory protections available to the claimant.

These questions materially affect the enforceability, procedural cost and practical effectiveness of proceedings.

Claims against banks and payment service providers

Where investment funds were transferred through banks, electronic payment institutions or other payment service providers, the circumstances of the payment may justify separate legal examination.

Directive (EU) 2015/2366, transposed into Greek law by Law 4537/2018, establishes rules concerning payment transactions and the liability of payment service providers in cases of unauthorised payments.

The statutory consequences of an unauthorised payment differ from those of a transfer that the investor authorised after being deceived by a third party. The latter situation does not automatically give rise to the same reimbursement entitlement, and any liability of the payment service provider must be established by reference to the applicable duties and factual circumstances.

The tracing of payments may nevertheless be relevant to the identification of recipients, the preservation of evidence and the pursuit of available recovery mechanisms.

Investor compensation schemes and their limitations

Where an authorised investment firm is unable to return money or financial instruments belonging to its clients, investor compensation mechanisms may become relevant.

Directive 97/9/EC establishes the European framework for investor compensation schemes, which are intended to address specified failures by investment firms to return client assets. These mechanisms do not generally compensate investors for ordinary market losses arising from unsuccessful investments.

Eligibility, coverage limits and procedural conditions depend on the applicable national scheme, the status of the investment firm and the nature of the claim. The existence of a regulatory licence or participation in a compensation scheme should therefore be verified before an investor is advised to pursue this route.

Evidence and the preparation of claims

The evidentiary assessment is central to determining whether a claim can be pursued. Relevant materials may include account-opening documentation, investment questionnaires, trading histories, statements, payment records, contractual terms, risk disclosures and communications with representatives of the relevant platform.

The chronology of transactions and advice should be reconstructed in sufficient detail to establish the relationship between the conduct complained of and the resulting losses. Where necessary, expert financial analysis may be required to distinguish losses attributable to ordinary market movements from those alleged to have resulted from actionable misconduct.

Before proceedings are commenced, consideration should also be given to the applicable limitation periods, the financial position of the prospective defendant, the availability of interim measures and the prospects of enforcing any judgment obtained.

For investors affected by broker misconduct or fraudulent investment arrangements, effective legal recovery depends on a properly identified cause of action, a substantiated evidentiary record and the selection of a procedure capable of producing an enforceable result. The coordination of regulatory, civil and, where appropriate, criminal remedies is particularly important where transactions and assets are distributed across several jurisdictions.

This article is general information and not legal advice. For advice on a specific matter, contact us.