Exposing contradictions between the FOS and the courts

Simon Collins

Recent judgements in two complaint cases – one in the courts and one by the Financial Ombudsman Service – have provided interesting observations around suitability, financial sophistication and risk appetite.

In the legal case, the court produced a noteworthy approach as to how it may assess whether a professional has breached their duty of care around advice. The claimants, Mr and Mrs O’Hare, clients of Coutts, were deemed in the judgement to be “informed investors”. They had been clients for some time and during the period had two separate advisers. The investment strategy recommended and subsequently pursued resulted in significant losses during the financial crisis. They complained the advice they had received was negligent.

The judge dismissed the claim. He decided the bank had not breached its duty to exercise reasonable skill and care when advising the claimants on making certain investments and did not accept there had not been a lack of communication or explanation of this position.

The decision is of particular interest because of the judge’s approach to breach of duty. He held that the Bolam test (a medical negligence claim test) did not apply to the issue of whether the bank had breached its duty of care when advising the claimants.

Instead, he referenced another medical negligence case “Montgomery v Lanarkshire Health Board” and focused on what the claimant, as an “informed investor”, would expect to be told, as well as whether the bank had advised in accordance with a practice accepted as proper by a responsible body of persons skilled in the giving of advice.

While the judge had sympathy for the claimants he was influenced in his decision by the fact the evidence indicated there was little consensus in the industry about how to manage the risk appetite of clients. The decision suggests that the giving of investment advice “is not simply an exercise of professional skill; an informed investor, like a medical patient, is entitled to decide the risks that he or she is willing to take and has to take responsibility for his or her own mistakes”.

This legal case compares with a FOS decision in May against a financial adviser firm. In this case a customer complained she had lost money after being given the wrong investment advice by the firm.

The ombudsman, in deciding what was fair and reasonable, ruled against the firm despite stating in the judgement that its “business points (in the case) have force”, the “paperwork seems to be in order” and the way the customer responded to questions in relation to risk profile seemed to justify the attitude to risk it assigned her and the investments recommended fitted this risk profile. The customer had also stated she would not be overly concerned if the value of the investment fell by much more than it actually did.

Instead, it made a decision based around the view that a person nearing 70 years of age who had never previously held equity investments, had no dependants and was suffering a life threatening illness, should not have been advised to place a significant percentage of her assets in an investment that exposed 50 per cent of that money to the stockmarket. The ombudsman could not see why the customer would wish to subject themselves to an untried strategy and these risks at this point of time.

The two cases highlighted end up in quite different places. The FOS case, in particular, shows that an acceptable audit trail does not overcome wider potential suitability drivers related to age, vulnerability and investment knowledge and experience. The court case, meanwhile, illustrates how a different interpretation can be reached when considering “informed investors” and the industry’s lack of consensus on an approach to establishing risk, as well as the customer’s responsibility in deciding the level of risk they wish to take.

The conclusion we can draw from these cases is the importance of client classification, the mandate or agreement you come to around the service you are to provide and the detail of know your customer.

Simon Collins is managing director, regulatory, at Eversheds Consulting

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. And no-one will challenge how and why the Ombudsman seems able to still charge 8% interest despite the Courts having dropped that ‘guide’ years ago. Disgraceful – especially when one of the Ombudsman’s tenets is theoretically to adhere to Court judgements.

  2. It would be interesting to see what the client in the latter case deemed to be their aims and objectives.

    If capital security and a willingness to accept cash returns were the A&O then I agree with the FOS. If, however, the client is seeking above cash returns over a reasonable time horizon and also has the ability and willingness to take risk (which is often the case) then it’s a different matter.

    We need to be careful not to compromise a clients objectives simply because there is a fear of short term volatility or an aversion by the adviser to take risk for fear of retribution.

    Unfortunately, given the CMCs, some investors may feel that they are able to invest without risk – if the investment grows then great. If it falls, complain and get growth in any case.

    Whilst I’m certainly not suggesting that is the case here, having seen adverts from some CMCs, the implication is that you can invest with impunity.

  3. These are personal judgements that the FOS are making, against well documented files- no wonder the advisory firms are adding rules on rules to try and protect themselves against complaints- and no individual is the same so remote judgements aren’t always helpful- so how does this get resolved as this uncertainty is adding excessive regulation and costs to advice processes- do FOS have to rely on documentation more, do we record everything so there is proof on what has been agreed by both, or do we continue to put advice out of the reach of those without deep pockets.

  4. Putting aside the rights or wrongs of each individual case here, I believe there is moral issue (if you will) at play here, let me expand;

    The judge is playing out the law and as such, has no one sided favor (his or her moral obligation to English law)! now the FOS however, does not, we know they form part of this regulatory guise of being a consumer champion and must promote the protection they, FCA and FSCS provide , so they have to be deemed as judge and jury for the rights of the consumer, the advice is the conduit, so you will always get a leaning on their decisions in favor of the complainant (consumer) and in some cases no matter how wide the gap between good and bad advice or practice.

    I afraid, the answer is known well before the first word is read by FOS (in a lot of cases) you are guilty till we prove you innocent (and most of the time we cant be bothered to consider that eventuality)

  5. Isn’t the key phrase life threatening illness and 50% equity . In my humble opinion these don’t go together . I always invest in equities for clients with at least a 3 year plus view and much longer in reality ,unless they are existing experienced investors looking to change their risk rating . Surely in most cases this would be initially a low risk or no risk strategy until longevity could be determined . I have to agree ( begrudgingly ) with FOS .

    • You shouldn’t take the FOS decision at face value, I dug deeper in to the case and the FOS misrepresented facts. In my opinion that is FRAUD. If they want me to point to the misrepresented facts I will.
      As Marty says, they are not impartial in their decision making, they are biased in favour of the complainant. I will not deem to refer to the individuals as consumers as that is not how they should be viewed.

  6. The FOS in this admit that all the documentation to demonstrate right funds etc to match ATR are there so they could not pin that on the adviser. When all else fails, they move to the catch-all, which by the way there is no getting round for any adviser……. “In my judgment, it is not clear why this was done, and so……….” Its exactly like the regimental sergeant major used to dish out to a poor squaddi when all else failed…. “Im charging you under section 252 of Queens Regs”. The definition of which, if memory serves correctly is something like acting in a manner that is unsoldierly like which could bring the unit into disrepute. How wide is this??????? Wide enough for the FOS to use their version of it.

  7. “The ombudsman could not see why the customer would wish to subject themselves to an untried strategy and these risks at this point of time.”
    – what do they mean by “untried strategy”? Was this some form of structured product?

    Going forward, we have the prospect of a minimum 20% inflation over the next five years, with bank rates at 1%, so that is a guaranteed loss of value of 15% if we keep money on deposit. Are we going to get complaints about advising clients to be too low risk?

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