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Claim is the spur

The recent case of Seymour v Ockwell & Co creates interesting legal issues in relation to the promotion and sale of products by providers.

The case involved allegations of negligence in relation to the Imperial Consolidated alpha & fixed income fund. The interesting element of the case relates to the further claim brought by IFA Ockwell against Zifa.

The court reviewed the role of the broker consultant from Zifa in relation to her statements to the IFA regarding promotion of the fund. The stock defence in relation to an allegation against a provider is that no advice was given to the cli-ent and therefore no liability accrues. This argument was rejected in the Seymour case as the representations made by the Zifa representative were wrong. The judgment in this matter found the IFA one-third responsible and the product provider two-thirds responsible.

The facts of the case are complex. However, the principles are ones which could be applied to nearly any product which has been promoted to an IFA firm by a provider.

The promotion of endowment policies by product pro-viders to IFAs is something which happened in the main from the start of the Financial Services Act 1986 and ended in the late 1990s. The Fimbra rules relating to advice to cli-ents and promotion of products to clients are well known and well understood.

As an example, an IFA rec-eived key features and an illustration from a provider. The provider makes statements that the endowment policy is “low” risk. Many Financial Ombudsman Service decisions have gone against this stance and have stated that an endowment is higher than low risk due to the construction of the policy type. From the perspective of the IFA, the representation that an endowment policy is low risk from a provider is something which an IFA will rely on. The relaying of the information to the client leads an IFA in hindsight to a position where any claim brought will most likely succeed.

The other issue is the illustration issued to the clients. The Lautro rates of return were based on statutory set assumptions. These assumptions in many cases were plainly wrong as the provider’s internal product charges were more than the assumed charges under the Lautro rates. This means that the product was saddled from the start by incorrect projections.

If you have paid out on an endowment claim recently, then you may want to review the potential of bringing a claim. The ideal claim would be on two bases. First, that the representation by the providers that the policy type was low risk was overstated and incorrect . If the product description had been correct, then an endowment policy would not have been advised.

Second, that the issuing of illustrations based upon costs assumptions which were wrong and understated has led to cli-ents being charged more than they believed they would be.

In terms of quantum, we would look to bring a claim where the contribution sought from a provider would be less than the 5,000 small claims limit. We would be very interested to hear from IFA firms which have paid out damages where the two factors set out above are in existence.

Any product which has been promoted on a basis which subsequently turns out to be wrong is worthy of being looked at. The issues for providers following the Seymour case is how comfortable they feel in relation to their product range.

The case has opened up the door for a test case against a provider in relation to products which are alleged to have been incorrectly promoted. A small claims case will not create legal precedent. However, it will allow IFA firms the option of sharing the blame where a promotion is patently incorrect.

We wait to see whether there is stomach to bring such a case to clarify the law and level the playing field between providers and distributors.

Gareth Fatchett is a solicitor at Financial Services Legal


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