A recent judgement of the High Court (Worthing and another v Lloyds Bank plc  EWHC 2836 (QB)) has provided some helpful guidance on continuing duties of care for financial advisers. The case involved a traditional client/adviser relationship, with initial investment advice being provided by the adviser followed by periodic reviews in subsequent years.
The clients involved alleged they had been provided with unsuitable investment advice at the outset. The date of the original advice was more than six years ago, outside the statutory limitation period, and so a claim simply that the advice had been negligent and the clients had suffered loss as a result was statute barred.
Instead, the clients argued the IFA was under a continuing duty (even in the absence of any subsequent reviews) to rectify the negligent advice they alleged had been provided at the outset and/or were negligent not to have rectified the advice in subsequent reviews that were in fact provided.
What is clear from the Worthing case is that a robust advice process will always be valuable. The judge dismissed the claim on the basis the original advice was in fact suitable. This was largely due to the adviser having kept full and contemporaneous records of the procedure followed and advice provided to the claimants. The records demonstrated a thoughtful and thorough process had been gone through to (a) assess the claimants’ risk category (b) arrive at the recommendations made, and (c) ensure the claimants understood the advice provided.
The issue of recording your advice process and how suitability is established is not new and the FCA recently emphasised again just how important it is to consider the client’s capacity for loss. This case really drives that point home.
What is also clear from the case is that it is in advisers’ interests to clearly set out the scope of their advice and duties in the client agreement or other contractual documentation between the firm and the client.
The judge in the Worthing case concluded the law did not support and the contractual documentation did not impose “a strict obligation, continuing from moment to moment, to correct any initial mistake in the original investment advice” (that is, in the absence of any agreed reviews).
It is important firms are clear in their documentation about what their duties are each time they advise a client, and indeed in between reviews. Firms should not unintentionally assume duties to their clients that apply “moment to moment” and should equally be clear about what is covered in subsequent reviews.
This does not prevent a client claiming for negligent advice that is within the six-year limitation period. It does, however, make it harder, if the contractual documentation is clear, for a claimant to try and circumvent the limitation period by claiming a continuing duty exists to correct the original negligent advice (provided outside the limitation period). This duty has been breached within the limitation period and is therefore not statute barred. If such a continuing duty did exist, it would ride roughshod over the principle of a six-year limitation period.
The more difficult question is what duties may apply where subsequent reviews involve an assessment by the adviser of the clients’ objectives and attitude to risk, etc, and consideration of whether those things have changed. The important thing is to be clear about what you are and are not agreeing to do.
This case relates to a very common advice model but the key points – to have a robust process and clear contractual documentation – are relevant to all aspects of financial advice. The case may also come as a relief for advisers who may sometimes consider no matter what they do, a successful claim is always possible.
While the court’s approach in Worthing is helpful it does not, of course, bind the Financial Ombudsman Service. The FOS does impose a similar six-year limitation period on claims (plus a three year “date of knowledge” period, but that was not relevant in this case) but it can decide cases on what it considers is “fair and reasonable” and is not bound by the law. On such a fundamental point, however, it will be interesting to see if the FOS does seek to depart significantly from the approach adopted by the court.