Peter Hamilton: Can advisers legally persuade clients to take more risk?

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How far is it legitimate for an adviser to go to persuade a client to take a risk, consistent with his duty to act with reasonable care and skill? This is a question that arose in a case in the High Court earlier this year.

A wealthy couple, Mr and Mrs O’Hare, sought investment advice from their bank, Coutts & Co. In accordance with its agreement with the clients, the bank developed an investment strategy. From time to time, it discussed with the clients their objectives, wealth and willingness to take risk. The bank then advised on appropriate products.

The adviser employed by the bank persuaded the couple to invest in products more risky than they were prepared to accept at first. But the adviser thought that, given their wealth and investment objectives, the clients should be prepared to take a higher level of risk. The clients accepted the advice and bought the investments.

In due course, the investments failed and the clients suffered substantial losses. They sued the bank on the basis the products were not suitable under COBS and that the bank had been negligent.

The judge, Mr Justice Kerr, decided there was no real difference between the duties under COBS and the common law duties to use reasonable skill and care when recommending investments. The clients were given full information about the products and had gone into them with “eyes wide open”. It was therefore impossible to complain that the products were mis-sold. He dismissed the claim.

It is instructive to follow the judge’s reasoning. The starting point is that the bank was under the same duty as any other adviser to use reasonable skill and care when giving advice. The relevant standard of care is whether the bank, in acting in the way it did, was acting in accordance with a practice accepted as proper by a responsible body of men and women skilled in that particular area.  That standard applies to all professions and is known as the Bolam test, after the case in which it was spelled out.

Another way of looking at that test is to ask whether “reasonable practitioners professing the expertise of the defendants could properly have given advice in the terms they did?”

There needs to be a proper explanation of what is involved and the attendant risks. The judge said “in the context of investment advice too, there must be proper dialogue and communication between adviser and client.” But, having heard from two industry experts, the judge thought there was “little consensus in the financial services industry about how the treatment of risk appetite should be managed by an adviser”.

As such, there was no responsible body of opinion by which to decide whether or not an adviser had acted with due skill and care when dealing with the riskiness of a product, the client’s attitude to risk and therefore whether the product was suitable in the circumstances.

The rules in COBS do not refer to any such responsible body of opinion within the financial advisers’ profession. Those rules require the adviser to do certain things, such as to provide appropriate information “so that the client is reasonably able to understand the nature and risks of the service and of the specific type of … investment that is being offered and, consequently, to take investment decisions on an informed basis”. See COBS 2.2.1 (1). The objective is that “a firm must take reasonable steps to ensure that a personal recommendation… is suitable for its client.” See COBS 9.2.1.

Because there was no such responsible body of opinion to which he could turn, and the COBS’ rules did not incorporate such a test, the judge decided that the Bolam test was not the right one to apply when having to decide whether, and in what circumstances, it was acceptable for an adviser to seek to persuade a client to accept a higher degree of risk than the client would have chosen for himself.

In this case, the clients “were wealthy and intelligent, but not … sophisticated or experienced investors. Mr O’Hare was astute in business and willing to take risk, but would always balance risk against caution”.

The judge thought it was acceptable to seek to persuade a client to accept a higher risk in order to make a sale. He said, “…there is nothing intrinsically wrong with [an adviser] using persuasive techniques to induce a client to take risks the client would not take but for the [adviser’s] powers of persuasion, provided the client can afford to take the risks and shows himself willing to take them, and provided the risks are not – avoiding the temptation to use hindsight – so high as to be foolhardy”.

The test in the end was suitability in all the circumstances. The clients understood the products and the risks, and were happy to proceed. Thus the products were not mis-sold.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk