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 

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Comments

There are 19 comments at the moment, we would love to hear your opinion too.

  1. Good article and raises some interesting points.

    The size of the claim (£3.3M) precluded it being pursued via the FOS but I would not be surprised if an ombudsman took a different view.

  2. “…is it legitimate for an adviser to go to persuade a client…”

    Just stop at that. No it isn’t acceptable for an adviser to persuade at all. He should be there to guide, explain and set out the options and allow the client to make an informed choice.

    Persuading is what SJP and their predecessors Allied Dunbar do.

    • Harry, I think that’s getting a bit unnecessary. Persuading simply means getting someone to act or believe. You can persuade someone to do something that is in their best interests. Advice is inherently persuasive.

      • I see your point, but I’m being literal.

        Advice = guidance or recommendations concerning prudent future action.

        Persuade – Cause (someone) to do something.

        Both from the New OED. Advising (as Nic has corrected me) is not the same as persuading.

        • If someones investment objectives require them to take a higher level of risk than they are initially comfortable with is the adviser then not persuading them to take a higher level of risk?

          I see the problem though, one mans reasonable persuasion is another (ombuds)mans miss-selling.

  3. Not enough information in this article to form an opinion.

  4. Hi Harry

    I notice you did not use the word “advise”

    Isn’t guide , explain and setting out the options what MAS and others do?

    If facilitating the client to make an informed choice (I have no problem with that by the way

  5. Someone should show this to the FOS!! They have no idea about the law, in their opinion if a client has lost money, it is the advisers fault!

    • The FOS find in the advisers’ favour in around 60% of cases.

      • It is important for more advisers to read the actual FOS decisions and in this case,the judges summation as the reporting can often place a different emphasis and spin on a story.
        On the whole, I agree with the majority of FOS decisions I have read, both those that go for and against the advisory firm, BUT some of their decisions are definitely questionable. Bearing in mind they cannot be challenged or appealed after the event and the FOS refuses to discuss openly any individual case after the event so that lessons can be learnt by both advisers and PI insurers we definitely need reinstatement of the Longstop to the FCA handbook and FOS practices.
        Precedent and case law allow businesses to mitigate risk, but the FOS system just causes fear and uncertainty for ALL parties.

    • Well there is a legal precedent now I guess, which must help everyone

      • You need to read the judges report Steve as I don’t think it does. the lesson i would learn is that without a “PACE” style system i.e. recording, judges decisions will continue to be based on those who actually turn up to the court. The main witness was “too busy”…… to attend. How does that square with the issue of an SPS by a professional body to somone who is to busy to give evidence?

  6. This seems to be an example of the clients having been persuaded to shift their investment strategy from one extreme (very cautious) to the other (extremely speculative). Just how risky can these alternative investments have been to have failed, presumably near totally? And did the clients really understand the implications of moving (perhaps only a portion of their overall portfolio) from one end of the risk spectrum to the other? It’s easy enough, after things have gone wrong (i.e. in this case down the pan) to say that everything was explained, that all the risk warnings were put before the clients and that they said Yes, okay let’s go for it. But did they really understand the balance of potential additional gains against the additional risks of loss? It’s tempting to surmise that they probably didn’t.

    Partially (and, needless to say, judiciously) restructuring a portfolio from predominantly cash and bonds to a prudent modicum of equity exposure by way of a broad selection of mixed asset and global equity funds is very different from what seems to have happened here.

    A few weeks ago, I visited a client to discuss the progress of his pension fund and he said he’d quite like to be able to retire partially at the age of 55 and reduce his working hours. I told him straight off that his fund is highly unlikely to have reached sufficient size by his 55th birthday to facilitate such a move and for his fund to provide better returns over the medium to long term than was likely to be achievable with his present mix of cautious funds, he would have to consider venturing more into equity territory. So we discussed this, I did my best to explain why a loss on paper today within a portfolio that you aren’t actually going to need to realise for another ten years doesn’t constitute an irrecoverable disaster, etc, etc.

    So, once he’d got his head round that and was comfortable with it, in the knowledge that I’ll continue to review his portfolio every six months, we agreed on not a wholesale change of strategy but a mix of ten funds now including five, broadly based pure equity ones. It’s all, I suggest, a matter of degree.

  7. It is worth bearing in mind that the investments in the case was pre-RDR and the judge acknowledged that Coutts were only paid if they ‘sold’ an investment to the client – though it still had to be suitable. There are quite a few complexities and nuances in the case link here for those interested http://www.bailii.org/ew/cases/EWHC/QB/2016/2224.html

    • Thanks I’ll have a read before I comment 🙂

    • Very interesting when the judge said at point 44 “Mr Shone’s explanation for declining to give evidence willingly, as reported to Mr Williams, is effectively that he, Mr Shone, was too busy. I am not confident that the explanation given to Mr Williams was a comprehensive or accurate statement of Mr Shone’s reasons for not wanting to give evidence. There is no document from him giving detailed reasons for not wanting to testify. There is no explanation about why he does not trouble to protect his reputation in court.”
      Mr Shone remains on the FS register, which means he must have an SPS from someone in view of the judges comments above…….

  8. An interesting article. The use of the word ‘persuade’ is interesting on the basis of who used the term. It is quite probable that the term ‘persuade’ was used by clients’ legal team in order to raise sensitivities and increase the chance of a successful claim.

    I believe that everyone here understands that advisers are providing professional advice and not persuading clients to invest at higher risk levels. The final decision has to be that of the client based on full information of the benefits and risks.

    I suspect that the bank’s documentation of the advice process to the client was full and sufficient to support their argument.

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