Setting the standards for advice
10 July 1997
Delaware amends its LLC act: managers and controllers owe fiduciary duties unless LLC agreement provides otherwise
27 August 2013
1 February 2013
28 January 2013
30 July 2013
19 April 2013
John Virgo and Philip Ryley look at the common law duty of care and the statutory liability imposed on financial advisers. John Virgo is a barrister at Guildhall Chambers and Philip Ryley is a solicitor at Ringrose Wharton in Bristol - both specialise in financial services litigation. Lawyers are well-known for getting excited about matters which leave other people cold. However, when the Financial Services Act 1986 came into effect on 29 April 1988, lawyers specialising in professional negligence claims soon focused on the effect of section 62.
While the Act has generally had a major impact on the regulation of the financial services industry, section 62 has proved to be a bit of an anti-climax. This article examines the common law duty of care imposed on financial advisers in parallel with the potential statutory liability created by section 62.
Historically dissatisfied investors have had difficulties persuading a court that an unprofitable investment decision was the result of negligent investment business advice.
The unpredictable nature of certain investments makes the court reluctant to impose a high standard of care in advising on the choice of investment. This is evident from three decisions.
In Briggs v Gunner an action brought by an investor against a stockbroker for allegedly negligent advice failed. The court held that "a stockbroker has no duty to advise and if he does he must do it honestly and to the best of his ability".
The investor's argument that the adviser owed a duty of care to investigate the financial status of the customer so as to protect him against improvident stock transactions was rejected by the judge as a "startling proposition".
A claim against a commodity broker in Stafford v Conti Commodity Service also failed, where the broker acted in 46 separate transactions for the investor, of which 26 resulted in heavy losses. The court held that an error of judgement in giving advice on the part of the broker dealing on an unpredictable market like the commodities market would not necessarily be negligence since, in relation to such a market, the broker could not always give correct advice.
In Drexel v El Nasr, a claim against commodity brokers was dismissed. The trial judge said: "I do not doubt that Drexels at any rate when they were acting as agents owed some duty of care to their clients like any other professional people. But in the man-made jungle of the commodity markets, red in tooth and claw, I do not consider that they owed a duty as wide as that proposed... I am not convinced the duty went further than to use reasonable skill and care in carrying out instructions which were given to them."
In none of these cases was the court asked to comment on the extent of the adviser's duty with reference to the industry's own sales practices and in-house self-regulatory requirements. In Lloyd Cheyham & Co v Littlejohn & Co, for example, the court viewed the Institute of Chartered Accountants' statements of standard accounting practice as setting the standard of care to be expected of an accountant in the discharge of the duties of his retainer.
The common law approach says that the adviser owes a duty to carry out the client's instructions with reasonable care and skill. The adviser is not obliged to advise on the wisdom of the client's instructions and is not expected to ask about the client's personal financial circumstances in order to volunteer financial advice.
Whatever comfort financial advisers may have taken from this apparent judicial reluctance to adjudicate on issues of negligent investment advice, the rights of action available to dissatisfied investors became more exacting as a result of the FSA regime.
The key provision in the statutory approach is section 62 of the Act, which creates a civil cause of action for loss resulting from a breach of any of the rules or regulations made under part V of the Act or certain other specified provisions contained in the Act.
Of particular importance in this context is the extension of the section 62 duty to breaches by an authorised person of any of the rules of its self-regulatory organisation (SRO). Since those so authorised are also liable for the acts or omissions of their appointed representatives, this statutory imposed duty is of wide operational ambit. It is in each of the SROs' rule book that the duty to "know your client" and to ensure suitability of product to his needs will be set out. For the IFA this will involve an obligation to comply with Fimbra's rules - as adopted by the PIA.
The combination of the requirements of the rule book backed up and enforced through section 62 creates that duty of inquiry which the common law approach did not readily recognise.
This right of action is confined to private investors who can demonstrate they have suffered a loss as a result of such a rule breach. It is unnecessary for the claimant to prove the adviser was negligent or that the breach was intentional.
Further, the section does not stipulate that the claimant must be a client of the adviser so that third parties may also bring a claim. The claimant will simply have to establish that a breach has occurred and that this was a material cause of any loss. This could give a right of action to dependants of the investor who suffer losses indirectly.
The obligation to comply with the SROs rule book means that any attempt by the IFA to exclude liability would be unlikely to be upheld by the court. It will, however, be open to the IFA to allege that investor losses have been caused by the client's failure to look after his own interests.
Despite the wide-ranging effect of section 62 it is an under-exploited right by dissatisfied investor claimants. Although it has been on the statute books for nearly 10 years there is no reported judicial decision dealing with its ambit and scope. This may be because many dissatisfied investors pursue their complaints through an extra-judicial complaints procedure and via the ombudsman.
There is a mass of litigation before the Commercial Court in Bristol over mis-sales of personal pension plan products. This may yet produce some judicial guidance on the section. It remains to be seen whether the court will take the content of an SRO's rules as setting the standard of the minimum duty of care owed by an IFA apart from section 62.
Nevertheless, the life industry as a whole and IFA's in particular will be keeping a close eye on decisions which delve into the section 62 tombola.