In financial services, it has always been the adviser rather than the product provider who is responsible for the advice given but the courts seem to think differently.
A recent judgment looks set to cost Scottish Equitable £700,000. In a case heard in the High Court in London last week, a Scottish Equitable representative who sat in on a series of meetings between an adviser and his client was found to have encouraged the client to transfer his pension, leaving the provider liable for giving poor advice.
The client, Michael Walker, obtained damages for past and future losses because of advice to take tax-free cash from his pension and transfer from his occupational scheme into a Scottish Equitable income drawdown scheme.
Between 1999 and 2001, Walker, who held a senior position with construction firm Taylor Woodrow, met with an Inter-Alliance adviser and Scottish Equitable rep.
Walker’s lawyers, Mishcon de Reya, decided to pursue the case against Scottish Equitable because Inter-Alliance had gone into administration. Scottish Equitable says it defended the case on its own for the same reason.
In his judgment, Mr Justice Henderson said: “The critical question is whether Scottish Equitable provided investment advice to Mr Walker at the meetings. On the basis of my findings of fact, it will be apparent that in my judgment this question must be answered in the affirmative.
“I find on the balance of probabilities that, if the Scottish Equitable representative had not advised Mr Walker as he did at the two key advisory meetings, Mr Walker would not have come to the decision he finally reached on February 2, 2001 and would instead have remained a member of the Taylor Woodrow scheme.”
Scottish Equitable says it is considering whether there may be grounds for appeal but stresses that the ruling found the consultant had gone beyond Scottish Equitable’s own compliance procedures and that its procedures as a whole were not at fault.
Yet some believe the case has wide implications. Compliance consultant Adam Samuel predicts that the practices of broker representatives will need to be reassessed to ensure they are compliant.
Samuel says: “Brokers should explain when they are in front of a client that they are only there to offer technical support. If this is not done, they could find themselves in breach.”
He says the judgment indicates that the broker consultant told the client at the meetings: “If it was up to me, I would do this…” which the court says constitutes advice.
Samuel says: “This case points so clearly to the need for a whole raft of retraining for the broker consultants of product providers.”
It may also embolden more clients to take cases against providers where the adviser has gone out of business and where a provider representative was present.
Haven Risk Management director Phil Billingham says broker consultants sitting in on meetings was industry practice many years ago, particularly with smaller and medium-sized advisers dealing with bigger cases.
He says: “Historically, it was common in inheritance tax and pension cases and sometimes offshore cases for someone to sit in with smaller and medium-sized brokers. But it is less common now than 10 years ago and affects a much smaller number of broker consultants.”
But what does it mean for the relationship between advisers and providers? Lawyers say this case adds to the growing body of legal opinion that providers may have some responsibility for advice and could therefore see advisers not being held fully responsible for claims against them or being able to hold a provider liable if the information given is wrong.
Another significant case is Seymour v Ockwell in May 2005 where Zurich IFA was ordered to pay two-thirds of the £500,000 compensation awarded after a fund within its offshore bond wrapper collapsed. In this case, the information supplied to the IFA by the broker consultant was deemed to have been wrong although the adviser had to pay a significant sum.
Fishburns solicitors partner Harriet Quiney says the two cases mean providers are no longer immune. She says: “The Scottish Equitable case is an interesting decision for financial advisers as it shows that product providers cannot always hide behind the fact that a financial adviser assisted a customer in making an investment decision. In this particular case it was found that a representative of the product provider attended two key meetings with the customer and provided advice directly to him which caused him to transfer out of his employer’s pension scheme.
“Had the product provider’s representative not attended those meetings or been found not to have given advice direct to the customer, it is likely that the financial adviser would have been liable rather than the product provider.
“It is still not easy for financial advisers to recover money from providers when their products prove to be unsuitable and customers bring claims. However, this case, along with Seymour v Ockwell, marks an important step away from providers’ apparent immunity from suit.”
The FSA’s most recent pronouncements on the relationship between advisers and providers underline the fact that providers have a duty to provide accurate information and advisers a duty to test that information.
Billingham says the most obvious grey area is wraps and platforms where clients might believe the presence of a fund on a platform involved an element of endorsement but this is still to be tested.
But what should an adviser be doing in instances where a consultant is still present? FSA spokesperson Samantha Bennett says: “Essentially, if a broker consultant is not authorised to give advice, then they should not do it. They should be very clear that they are not giving advice or any information they give is not advice.
“If an adviser is concerned that maybe they have had a meeting and there is somebody there who is giving advice, then the adviser, to protect themselves, could step in and say: “Disregard what they are saying. Listen to me because I am authorised.’
“If an adviser is concerned by anything said to their client, they need to clarify their position if they are the one giving the overall advice.”