As the saying goes, “If you owe the bank £30,000. then it’s your problem but if you owe the bank £30m, then it’s the bank’s problem.” Perhaps that saying should now be extended to read “and if you owe the bank £30bn, then it’s the Government’s problem”.
Last month saw a run on the bank, in this case Northern Rock, something that has not happened in living memory. The event raises a number of issues, primarily around the role of the Bank of England and the Government.
No doubt, the problems were magnified by the confusing regulatory structure created by Gordon Brown in 1997. The Bank of England remained the lender of last resort but the role of banks were to be regulated by the FSA.
Some might legitimately ask why the Government would provide a guarantee for any shortfall experienced by Northern Rock depos-itors, yet did no such thing when it came to the pen-sions review and the endowment misselling consumer shortfalls?
The industry had to deal with these losses internally and many IFAs remember the events only too well. That is perhaps an argument (and an article) for another day but the point is a very valid one.
However, when it comes to IFAs and Northern Rock, are there any lessons to be learnt? The answer is, probably. Are there any danger signs or warnings for IFAs in the shape of future claims? Possibly.
Let us take the scenario that Northern Rock had gone under, or at least that investors funds were at risk. What if an IFA had, when advising a client on financial planning, recommended a cash or “safe” investment in the form of an account with Northern Rock? Could an investor later make a claim against the IFA in respect of any lost funds?
This would be difficult, I think. The investor would, of course, have to go further than simply make a complaint that the value of his investment had gone down.
Whatever investors (or indeed the Financial Ombudsman Service) may think, one can not make out a valid claim simply because the value of one’s investment has gone down.
For a complaint to be valid, in law or through the Ombudsman, a complainant has to go further and show that the IFA acted in breach of duty – the negligence issue. To succeed, the complainant would have to show that the IFA failed to carry out a proper analysis of an investor’s attitude to risk, etc.
Even then, the complainant would have to go further and show that any such negligence was actually causative of the loss. This causation test against a background of a bank going under would appear to be very difficult to overcome.
What is perhaps of more concern is the possibility of claims being brought against financial advisers or mortgage brokers who arranged a client’s mortgage with institutions such as Northern Rock.
Northern Rock were aggressive lenders. I think we can use that term in respect of lenders prepared to lend 130 per cent of the purchase price of a property and up to 5.9 times income. I would not want to go as far as to say this was a ticking time bomb but haven’t we been here before?
There is, however, nothing wrong with financial advisers recommending Northern Rock, or indeed other similar institutions, as a lender to clients as long as the risks were outlined to the client.
And so for IFAs, you may be pleased to hear that the likelihood of claims against you arising out of the Northern Rock experience, or indeed any similar bank experience, appears unlikely.
Saying that, complainants, and their advisers, are often ingenious in their methods and with events in this early stage, it may be too difficult to predict accurately. In any case, there are enough worries for IFAs ( such as geared traded endowments) as potential banana skins without IFAs worrying about Northern Rock.
But that is just my view.