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High court ruling sparks fear over AR responsibility

Mark Wayman

A high court has found an appointed representative liable for a misselling claim after the principal firm’s authorisation ceased and has ordered the ex-adviser to pay more than £500,000 in damages and costs.

In a case heard in Manchester Civil Justice Centre last week, judge Mr Justice Hodge found Endowment Surrender Plus sole proprietor Mark Wayman missold life settlement policies to two clients, both professional trustees.

ESP was an appointed representative of Becque Wayman Investments Limited when Wayman gave the advice in 2003.

BWIL ceased to be regulated in April 2009 and the clients lodged the complaint in November 2009.

Wayman argued the advice contract was between BWIL as the principal firm and the clients.

But the clients argued that Wayman did not make it clear that BWIL was the principal firm. They said the letter of engagement, terms of business, restricted customer information sheet and additional correspondence showed the contract was with ESP.

Hodge found that while BWIL elected to monitor and supervise ESP and was liable for acts and omissions of ESP, the contracting parties were ESP and the clients.

The judge has ordered Wayman to pay £426,000 in compensation, plus interest of 1 per cent above base rate on that amount since November 2003 and court costs of £100,000.

Wayman, who gave up his adviser authorisation in 2009, says his professional indemnity insurance was through BWIL and the firm was unable to secure run-off cover when it ceased to be authorised. He does not have PI cover in place and says he and his wife will be forced into bankruptcy.

Wayman says: “We are checking with a specialist QC on whether this is worth appealing. We think it will be.

“This judgment has huge implications for the advice industry. All ARs should be very worried about this as they could be unprotected against claims for the rest of their lives.”

Fishburns partner Harriet Quiney says all ARs should take note of their PI cover.

She says: “While FSMA makes principal firms liable for ARs, appointed reps are still liable to their customers because they are the ones that give the advice.

“If a principal or network is no longer there for whatever reason, the AR is liable. I do not think many ARs are aware of that and they need to be wary of their situation with regards to PI cover when a principal firm or network restructures, goes bust, closes or the adviser moves to a new network.”

Foot Anstey partner Alan Hughes says: “Although I have not seen a case like this before, it is clear in all ARs’ terms of business that I have seen that it is the AR who is forming a contract with the client to give advice.

“The key question on any appeal will be whether the regulatory framework somehow extinguishes the direct relationship between the AR and the client and it is difficult to see why that would be the case.”

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. Derek Bradley ceo PanaceaAdviser 1st November 2012 at 9:08 am

    “This judgment has huge implications for the advice industry. All ARs should be very worried about this as they could be unprotected against claims for the rest of their lives.”

    He is correct, and this judgement should be considered alongside the lack of long-stop.

    It has been suggested in some quarters the ALL RI’s should actually have individual PI that they can carry from firm to firm and now may a time to look at that?

  2. Surely now is the time that RI’s and AR’s have their own PI Insurance.

    This judgement moves the goalposts somewhat and should make us all afraid, very afraid, to coin a recently departed senior regulator executive.

    That would mean that for the networks, their own business might see a significant reduction in PI costs as each adviser RI or AR would be covered for their own transgressions if found in breach.

    Food for thought.

  3. The risks for an AR of being pursued when the principal or network fails have been known for a little while, in fact since the FSCS decided to pursue former ARs of A20 (which had failed) for advice given via that network in respect of Keydata advice. We warned of the risk of future claims being laid at the door of ARs when Honister failed.

    The problem for any AR is that it may also remain liable, potentially indefinitely, where the principal or network still trades and has strong indemnity clauses and/or personal guarantees in place. These can apply where that network upholds (or is obliged by FOS to uphold) a complaint, perhaps over a decade after the former AR left it, and when run-off PI cover (usually limited to six years at best) would no longer be available.

    Had the AR been trading (sensibly) as a limited company, any such claim might have led to liquidation and a referral to the FSCS, so this claim might well have been capped. Of course, that would not have helped the claimants in this case. What would help both them and the adviser is for the industry to focus attention on how best to address the twin issues of maintaining PI and perhaps replacing the FSCS levy with a product levy. Most consumers would surely agree to pay this, if the FSCS cap were removed, to avoid the risks of needing to engage in such complex litigation (which may yet be appealed).

  4. From a legal point of view this still has some way to run and each case has to be treated on its merits but is it such a bad thing? ARs have for too long been able to shelter under the principal firm benefitting from their protection and reduced costs while sharing none of the risks. Ultimately the law may think differently I think the decision is fair.

  5. Derek Bradley

    The long stop applies in cases taken to court.

    This case is unique and doesn’t set a precedent.

  6. I’m no lawyer but

    “But the clients argued that Wayman did not make it clear that BWIL was the principal firm. They said the letter of engagement, terms of business, restricted customer information sheet and additional correspondence showed the contract was with ESP.”

    This seems to imply that ESP are liable, but then

    “Hodge found that while BWIL elected to monitor and supervise ESP and was liable for acts and omissions of ESP”

    seems to imply that BWIL accepted coimpliance coverage for ESP and is now trying to wriggle out of the responsibility and likely hike in its PI cover.

    despite the fact that

    “, the contracting parties were ESP and the clients.”

    Either BWIL were responsible or were not – presumably there will be some paperwork in place to clarify this.

    Ian Coey
    Partner
    Medical Investment Services

  7. Surely if the Principal Firm does not provide PI for its AR’s, then why become an AR. If one became Directly Authorised and used support services from these networks, would this then not be more favourable. Otherwise, what else do these Networks offer?

  8. Anonymous | 1 Nov 2012 10:39 am

    No Gabriel to complete for a start!

  9. Caledonia Consultancy 1st November 2012 at 2:02 pm

    BWIL and ESP complied with all FSA requirements and mandatory statements. The judge set aside FSMA and the FSA rules in favor of common law.

    Neither ESP or BWIL sought to avoid any liability but relied on section 39 of FSMA and the resulting FSA guidance.

  10. Per

    That was a fatally flawed strategy, who recommended it?

  11. Caledonia Consultancy gets it right. This is about who the parties to the contract were and nothing to to with the regulatory framework.

    Ideally a main purpose of being an AR is to provide the benefit of the risks remaining with the principal firm and the AR in exchange for paying the former for this benefit. The principal in return for this benefit who must protect themselves through suitable monitoring.

    Having a contract that failed to mention the principal firm seems to have been incredibly reckless. Mr Wayman needs to examine whether he is at fault for this or whether, by using proforma material imposed by BWIL, they were negligent and need to be sued by him for his subsequent loss. Sadly, if he gets made bankrupt I am unsure how how he will managed to do this.

  12. All documentation was fully compliant and did contain at the very least the compliant status disclosure – giving the principals name. BWIL and their Compliance Consultants checked and approved all documents used. So certainly not reckless.

  13. Caledonia Consultancy 15th November 2012 at 12:24 pm

    The Act was imposed by parliament. The interpretation by the FSA, who made the rules. ESP & BWIL complied with the rules. The client developed selective amnesia and pleaded lack of understanding. The judge accepted this and ignored FSMA and Section 39 as well as basic contract law. It is now going to appeal.

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