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