Key Points: Liability of Investment Service Providers in France
An investment service provider (PSI) is civilly liable when a fault causes damage to its client. Liability is usually contractual (C. civ. Art. 1231-1) but may be tortious for pre-contractual breaches or unauthorised conduct.
The PSI is responsible for the acts of its employees (C. civ. Art. 1242 al. 5) and for its delegees. Outsourcing a function does not relieve the PSI of its professional obligations toward the client (EU Delegated Reg. 2017/565 Art. 30).
The management mode — direct order execution, assisted (advice-added), or discretionary mandate — determines which obligations exist and which faults can be alleged. Under a discretionary mandate, the client has no ongoing duty to monitor reports and cannot be criticised for not reacting to avis d’opéré.
Under MIF 2, PSIs must conduct a suitability test (advice and discretionary management) and an appropriateness test (other services). The PSI cannot rely on client self-declarations; it must independently assess experience, financial capacity and risk tolerance. Failing to do so is a fault, but only gives rise to compensation if it caused an identifiable loss.
The loss of a chance (perte de chance) is the most frequently invoked head of damage. It covers the chance of choosing less risky management, limiting losses, or not contracting. Compensation is always partial — reflecting the probability of the favourable event, never the totality of losses.
Prescription: five years from the date the damage was realised or revealed to the client (C. com. Art. L 110-4). The clock runs from when losses became certain, not from when latent depreciation first appeared.

The Three Management Modes

French law distinguishes three ways in which an investor can manage their securities portfolio through a PSI. The mode determines the obligations owed and the faults that can be alleged.

Mode 1
Direct Management (Gestion Directe)
What it means: The client gives all orders themselves. The PSI receives, transmits and/or executes orders on the market.
PSI obligations: Execute orders promptly and accurately; warn non-sophisticated clients of speculative risks before each operation; duty of vigilance for manifestly abnormal orders.
No duty of counsel unless the client requests it (Cass. com. 9-11-2010). No right to refuse orders consistent with the contract and market conditions.
Mode 2
Assisted Management (Gestion Assistée)
What it means: A contract of advice is added alongside the order transmission contract. The PSI advises; the client retains the final decision.
Additional PSI obligations: Full duty of counsel; duty to warn; suitability assessment; liability for inadequate advice.
Distinct remuneration for the advisory service is standard.
Mode 3
Discretionary Mandate (Gestion Sous Mandat)
What it means: The client delegates all management to the PSI, which takes all decisions within the mandate parameters. The client does not give individual orders.
Key consequence: The client is not required to react to avis d’opéré or management reports. Silence does not ratify mandate breaches.
No ongoing duty to warn on individual operations. PSI acts as mandataire under ordinary mandate law (C. civ. Art. 1984).

The account-custody contract (convention de tenue de compte-titres) is entirely separate from the investment service contract. A portfolio management company cannot itself hold client accounts (C. mon. fin. Art. L 533-21) — it places orders through a separate executing bank. The account custodian’s obligations and the portfolio manager’s obligations are independent, though both can be held jointly and severally liable for their respective faults.

Pre-Contractual Obligations: Know Your Client

Duty to Inform

Before any relationship begins, the PSI must inform the client of the general conditions applicable, the characteristics and risks of the products and services offered, and — for leveraged or margin products — the obligation to maintain adequate coverage and the consequences of failure. The failure to deliver the required product information document (KID/KIID under PRIIPS and UCITS rules) is a fault. A simple statement that the investor “has read the notice” does not discharge the PSI of its obligation to actually deliver the document and verify understanding (CA Bordeaux 28-11-2011).

Client Evaluation: The KYC Obligation

MIF 2 rules (C. mon. fin. Art. L 533-13; Delegated Reg. EU 2017/565) require PSIs to evaluate their clients before providing any investment service (except execution only). The evaluation covers: knowledge and experience with the relevant product or service; for advisory and discretionary management services, additionally: the client’s financial situation (including capacity to bear losses) and investment objectives (including risk tolerance). The PSI must enquire — it cannot rely on the client’s self-assessment alone, and cannot presume that a sophisticated investor has maximum risk appetite. The evaluation must be individualised: spouses must each be assessed separately (Cass. com. 3-5-2011).

The suitability test (advisory and discretionary management) and appropriateness test (other services) are then run against the evaluation profile. The PSI must abstain from contracting for advisory and discretionary management services if the client refuses to provide information; for other services, the PSI must warn the client that suitability cannot be assessed.

The PSI bears the burden of proving it conducted the evaluation (CA Aix-en-Provence 30-5-2013). Failure to evaluate is a fault — but it does not automatically give rise to compensation. A causal link to identified damage must be separately demonstrated: the evaluation fault is relevant only if it prevented the PSI from discharging its information, advice or warning obligations (CA Paris 30-6-2016). The mere breach of the evaluation duty causes no autonomous prejudice (Cass. com. 3-5-2018).

Duty to Warn

The PSI must warn non-sophisticated investors of the risks of speculative transactions, regardless of the form of the contract (since Cass. com. 5-11-1991, the obligation is firmly established). Under a discretionary mandate, the manager does not owe an ongoing duty to warn on individual operations — they manage discretionarily. Under direct management and assisted management, each new speculative transaction by a non-sophisticated client calls for a fresh warning. A sophisticated investor (even if categorised as a “non-professional client” under MIF 2 — these concepts are not mutually exclusive: Cass. com. 27-3-2019) does not need to be warned.

ℹ️
Scope: When the KYC Breach Produces Compensable Damage

The breach of the KYC evaluation obligation is a fault but does not automatically generate compensable damage. It produces liability only where the gap in knowledge prevented the PSI from issuing warnings or advice it would otherwise have been required to give. Where the PSI would have given the same advice or recommendation regardless of the evaluation outcome, the breach is not causally linked to the damage and the claim fails on causation.

Contractual Obligations During the Mandate

Respecting the Mandate Terms

The portfolio manager must manage within the parameters fixed in the mandate: the investment profile, permitted/prohibited instruments, and any ratio constraints. Each investment must comply with these constraints individually and at the portfolio level; the fault is assessed at the time of the investment, not with hindsight (Cass. 1e civ. 21-6-2005). Excess over authorised investment limits or entering prohibited instruments is a fault constituting a mandate breach (Cass. com. 6-12-2017). Silence on the receipt of management reports does not ratify excess: “the mandate is precisely designed to free the client from the need to monitor his capital” (CA Paris 9-5-2003).

Under direct management, orders are to be transmitted/executed as given, without the PSI substituting its own judgment for that of the client (principle of non-ingérence), subject to the obligation to refuse manifestly abnormal, incoherent or contradictory orders. Multiple unsolicited transactions by the PSI in a direct-management context can be requalified as a tacit discretionary management mandate (CA Paris 24-2-2011).

Obligation of Diligence

The portfolio manager’s obligation to manage “optimally” is an obligation of means, not of result. Due to the inherent risk of financial markets, the manager cannot guarantee returns or even preservation of capital (unless there is an express contractual guarantee, which is exceptional). The fault is assessed against the standard of a prudent and skilled manager placed in the same circumstances (in abstracto). Jurisprudence specifically sanctions:

  • Inertia and failure to react to market developments (Cass. com. 8-11-2005);
  • Excessive and unconstrained trading, notably with the sole aim of generating commissions (“churning”/barattage: CA Nancy 6-9-2004);
  • Delayed execution of orders by the executing broker (Cass. com. 14-11-2006);
  • Failure to block orders when coverage is insufficient (Cass. com. 26-2-2008; Cass. com. 13-12-2011).

However, in the context of a generalised market collapse (e.g. the dot-com bust or the 2008 crisis), a manager’s decision to wait for a recovery or failure to rebalance more quickly does not constitute a fault when no one could have anticipated the extent of the decline (CA Paris 10-11-2005; CA Paris 18-6-2013).

📋
Practical Advice: Documenting Management Faults

In claims against PSIs for diligence failures, courts focus on what a prudent manager in the same market conditions would have done. Evidence of the fault requires contemporaneous documentation: the portfolio composition at the relevant dates, market data showing conditions at the time of the challenged decisions, and the mandate terms. Expert evidence from an independent portfolio manager is almost always required. A simple comparison of portfolio performance against an index is not sufficient to establish a management fault — it must be shown that the deviation was caused by a specific, identifiable breach of the manager’s duty of care.

Obligation of Loyalty

The PSI must act honestly, loyally and professionally, serving its clients’ interests at all times (C. mon. fin. Art. L 533-11). Specific breaches include:

  • Creating or maintaining conflicts of interest, including systematically investing in the PSI’s own group products without disclosure;
  • Commission-driven churning (Cass. com. 19-1-2022);
  • Retroactive reallocation of transactions between clients based on their results;
  • Failing to alert the client to the need to revise the management profile in a changing market context (CA Paris 18-6-2013);
  • Acting in the PSI’s exclusive interest — characterised as a détournement de mandat de gestion (Cass. com. 19-1-2022).

Obligation to Report

Under the management mandate, the PSI must provide: quarterly portfolio statements; semi-annual management reports (personalised, motivated, including forward-looking perspectives); annual management summaries including performance results and fee breakdowns; and, for leveraged mandates, monthly information where open positions exist. Documents must be clear, accurate and complete. A generic “from one crisis to another” letter does not constitute adequate reporting (CA Paris 11-4-2013). The PSI bears the burden of proving it dispatched the reports.

Prejudice

Establishing a fault alone does not engage the PSI’s liability. The three elements of civil liability must be present: fault, damage and a causal link between them.

Actual Loss and Lost Profit

The client’s damage is typically an actual financial loss (damnum emergens) representing the fall in value of the portfolio or specific positions, and/or a lost profit (lucrum cessans) representing the gain that would have been achieved absent the fault. Losses remain latent — and not compensable as certain damage — as long as the portfolio has not been liquidated: until the position is closed, the investor may still recover value.

Loss of a Chance (Perte de Chance)

The perte de chance is the dominant head of damage in PSI cases. It represents the disappearance of a probability of a favourable event — including avoiding a risk of loss. The Cour de cassation recognises the loss of a chance to:

  • choose less risky management and limit portfolio losses;
  • obtain a better performance or better portfolio valuation;
  • not enter a hazardous investment;
  • adjust coverage in time to avoid liquidation;
  • find better alternative investments.

Compensation for loss of chance is always partial — it reflects the probability that the favourable event would have occurred, never the totality of the losses suffered. Awards can be modest (10% of claimed losses is not uncommon). In cases of full mandate breach, the client can claim the entire identified loss directly rather than falling back on loss of chance.

Cases of Full Reparation

Full reparation (not just partial loss-of-chance compensation) is ordered where:

  • the mandate was expressly exceeded and not ratified (Cass. com. 13-6-1995);
  • the PSI continued to operate after the mandate was lawfully terminated (Cass. com. 10-5-1994);
  • the PSI failed to call for margin/coverage and aggravated the client’s debit position (Cass. com. 22-5-2012);
  • there was an unauthorised substitution of manager;
  • there was a contractual guarantee of returns or of capital (rare).
⚖️
Positive: When Full Loss Recovery Is Available

Where the PSI acted outside its mandate entirely — investing in prohibited instruments, continuing to operate after termination, or failing to call for margin when legally required to do so — the client can claim the full identified loss, not merely a fraction under the loss-of-chance doctrine. These scenarios convert the PSI’s obligation from one of means to one closer to a result obligation, and the causal link between the fault and the full damage is direct and uninterrupted by market risk.

Causation and Exoneration

Many PSI faults do not automatically produce compensable damage. Causation issues arise where: the client made the final investment decision despite the PSI’s advice; the client freely elected to delay liquidation; or the damage resulted entirely from market volatility rather than a specific management decision. Losses attributable to market risk (aléa boursier) alone are not compensable from the PSI.

Exoneration is available for force majeure under C. civ. Art. 1218: an unforeseeable and irresistible event beyond the PSI’s control. Examples accepted or discussed: exchange closures caused by attacks or extreme events; suspension of trading. Examples rejected: September 11, 2001 (where markets remained open: TC Paris 7-1-2003); market crashes (foreseeable in principle though not in timing). Temporary force majeure only suspends the obligation; definitive force majeure extinguishes it.

⏰
Prescription: Five Years from Knowledge of Damage

Claims against a PSI for contractual liability are subject to the five-year commercial prescription of C. com. Art. L 110-4. The limitation period runs from the date the damage was realised or, if the client did not know earlier, from the date it was revealed to them (Cass. com. 5-2-2013). For portfolio management mandates where losses accumulate gradually, the prescription does not start from the first loss but from when the total damage became apparent — typically when the client receives a statement confirming an unrecoverable loss, not when latent depreciation first appears.

💡
Key Distinction: Discretionary Mandate vs Direct Management

Under a discretionary mandate, the client cannot be criticised for failing to react to reports or avis d’opéré. Silence never constitutes ratification of a mandate breach. This is the opposite of direct management, where the client gives the orders and the PSI might argue the client approved the portfolio position by accepting the reports without complaint. Under a discretionary mandate, the manager bears full responsibility for all decisions made within the mandate; the client’s passive acceptance creates no contributory fault.

Summary: Checklist for Claims Against a PSI
Identify the mode: direct, assisted or discretionary? The mode determines which faults can be alleged. Under a discretionary mandate, the client’s failure to react to reports is irrelevant; under direct management, the client’s own instructions are central.
Was the KYC/suitability obligation met? If the PSI failed to evaluate the client properly, this is a fault — but damages require showing that the breach caused identifiable harm, not just that the evaluation was incomplete.
Was the mandate exceeded? Investments in prohibited instruments or outside the mandate profile are direct faults. These can produce full reparation, not just partial loss-of-chance compensation.
Was there churning? Excessive trading generating disproportionate commissions without a legitimate investment rationale is both a diligence fault and a loyalty fault (C. mon. fin. Art. L 533-11; Cass. com. 19-1-2022).
Quantify the damage carefully: determine whether losses are certain (positions liquidated) or latent (positions still open). Claim full reparation for mandate excesses; argue loss of chance for information/advice failures. Both heads can be cumulated where distinct faults caused distinct damage.
Check prescription: five years from discovery of damage (C. com. Art. L 110-4). If you received a statement confirming unrecoverable losses more than five years ago and took no action, the claim may be time-barred. Act promptly on discovery.
Concerns About How Your French Portfolio Has Been Managed?

Our French law practice advises on claims against investment service providers, including fault analysis, evidence gathering, loss quantification and litigation strategy before French commercial courts and the AMF.

Book a Consultation

Legal Notice. This article is provided for general information and educational purposes only. It does not constitute legal advice. PSI liability cases are complex and highly fact-specific. Always consult a qualified French lawyer before initiating any claim or procedure against a financial institution.