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Peter Hamilton: Allegations of fraud should not be made lightly

Adviser sentiment can run high over some issues but you should be careful about making allegations of fraud.

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There is much talk about fraud at the moment, especially in the context of claims to the FOS. But fraud involves serious criminal conduct and allegations of fraud should not be lightly made.

It is useful, therefore, to consider what is fraud: both the criminal offence and its equivalent civil wrongdoing which gives rise to a claim for damages and is also known as deceit.

The criminal offence of fraud was redefined by the Fraud Act, 2006, and can be committed in one of three different ways:

  • by false representation;
  • by failing to disclose information;
  • by abuse of position.

It is important to note that dishonesty on the part of the defendant is an essential ingredient for each way. The definitions of the ways in which fraud can be committed are intricate, and require close consideration. But without going into all the details, the broad definitions are as follows.

Fraud by false representation is committed by a person “if he —

(a) dishonestly makes a false representation, and

(b) intends, by making the representation —

(i) to make a gain for himself or another, or

(ii) to cause loss to another or to expose another to a risk of loss.”

The Act goes on to define, in some detail, what a false representation is.

Secondly, fraud by failing to disclose information is committed by a person “if he —

(a) dishonestly fails to disclose to another person information which he is under a legal duty to disclose, and

(b) intends, by failing to disclose the information —

(i) to make a gain for himself or another, or

(ii) to cause loss to another or to expose another to a risk of loss.”

Thirdly, a person commits fraud by abusing his position “if he —

(a) occupies a position in which he is expected to safeguard, or not to act against, the financial interests of another person,

(b) dishonestly abuses that position, and

(c) intends, by means of the abuse of that position —

(i) to make a gain for himself or another, or

(ii) to cause loss to another or to expose another to a risk of loss.”

The Act adds that a “person may be regarded as having abused his position even though his conduct consisted of an omission rather than an act.” It also goes on to define what is a gain and a loss, as well as to define a number of related offences.

Although the statutory definitions of fraud are not as straight forward as might be imagined, the underlying principle is that it is a criminal offence for a person dishonestly to make a gain for himself or to cause another to suffer a loss by deception. On conviction the defendant is liable to a fine and a maximum of 10 years’ imprisonment, but that does not provide proper compensation for the victim’s losses. 

On the other hand, the civil courts provide a proper and complete remedy for the recovery of such losses – whether or not the fraudster has been dealt with by the criminal courts. In the context of the civil legal system, fraud is usually known as the civil wrongdoing of deceit.

A person is guilty of deceit if he –

(a) makes a false statement which he know to be untrue, or does not believe to be true or is reckless as to whether it is true or not; and

(b) intends that the claimant should act in reliance on it; and

(c) the claimant does act on it and suffers loss as a result.

The general, and unsurprising, similarity between the criminal and civil descriptions of fraud or deceit is clear. But it is also clear that the point of a civil action for deceit is the recovery of damages for the losses suffered.

A simple example of such a claim for damages would be as follows. An insured makes a claim under a home contents insurance contract stating that his expensive watch has been lost, whereas the truth is that he has sold it. If the insurance company pays out on the claim, but later discovers the truth, the company can recover the amount it paid out as damages.

Of course, if the victim in fact suffers no loss, it will not be entitled to recover any damages. Thus, if the company discovers the truth before paying the claim, it would not have lost anything and therefore would have no claim. The criminal offence of fraud would have been committed, and so the insured could nevertheless be prosecuted.

Another example would be if a financial adviser made a statement in the course of recommending a financial product which he knew to be false, and the client relied on that statement when buying the product. It would also be deceit if the adviser did not believe the statement to be true, or was reckless as to whether it was true or not. It would be reckless if the adviser did not know whether it was true or not, but could not be bothered to check.

An employer is not automatically responsible for the dishonesty of an employee, and is usually only responsible for the actions or omissions of an employee if the latter was acting within the scope of his authority or was doing his job. Normally an employer does not give his employee authority to do or say something dishonest. But if the employer did something to lead the victim to believe that the employee did have authority to say what he said, then the employer will be responsible.

Matters can get complicated if the employer, such as a company, has more than one employee. For example, if an employee A, makes a statement to the victim which A honestly believes to be true but employee B knows it is not true and also knows that the statement has been made and deliberately does nothing to correct it, the company will be liable on the basis of deceit when the victim relies on the statement and suffers loss as a result.

Here the statement was made by A on behalf the company and B had the guilty knowledge and intention which turned the statement into a false one by the company. Thus a salesman might make a statement about a product to a customer on which the customer relies when buying the product. The salesman might honestly believe that the statement was true but if the boss knows that the statement was made, was false and did nothing to correct it, the company which employs them both will be guilty of deceit.

In a civil court, the standard of proof is proof upon “the balance of probabilities”. In other words, that it is more probable than not that the fact alleged is true. But there are degrees of probabilities, depending on the subject matter and how likely it is to have happened.

As most people are honest and fraud is relatively uncommon, the courts will look for a higher degree of probability than it would when asking if the act in question was simply negligent.

Allegations of deceit should not be lightly made or upheld, and there is a professional duty on lawyers not to make such allegations on behalf of clients without clear instructions and based on credible evidence which will, if accepted, prove the fraud. Allegations of fraud should not be bandied about.

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 7 comments at the moment, we would love to hear your opinion too.

  1. Interesting.

  2. The internet and Pseudonames makes people a lot more likely to claim deceit or fraud than if they say it to someones face.

  3. “A person is guilty of deceit if he –

    (a) makes a false statement which he know to be untrue, or does not believe to be true or is reckless as to whether it is true or not; and

    (b) intends that the claimant should act in reliance on it; and

    (c) the claimant does act on it and suffers loss as a result.”

    So if an ambulance chaser tells a pack of lies which an adviser is forced to spend time and money defending can they sue the ambulance chaser – or the client who signed the form to say it was true?

  4. @Peter Turner – I would assume they can and look forward to Peter Hamilton confirming that.
    We include a section in our client agreements;
    Fraudulent Claims
    It is not unknown for people to be encouraged to make fraudulent inaccurate or frivolous complaints.
    Whilst we do not of course ordinarily charge for investing complaints, there are exceptions. Fraudulent,
    Frivolous or Vexatious complaints may raise unnecessary administrative burdens for both firms and the
    FOS alike. In these circumstances, we will to seek to reclaim our time cost and any third party costs
    and expenses reasonably incurred as a result of defending complaints of this nature.
    Our terms exclude any rights or contracts conferred under the Third Parties Rights Act 1999
    Please be aware, if you make or assist with a complaint about someone else (or us) and we believe it to
    be fraudulent, we may be legally obliged to report you to NCA (or any successor), the Police and the
    firm to whom you have made what we suspect to be a fraudulent complaint.

  5. I think the answer to Peter Turner’s question is Yes

  6. Thank you for the clarification, Peter.

    Obviously, there is a big difference between “knowing” and proving deceit or fraud.

    On the other hand, I have seen complaints that advisers told complainants that it was compulsory to take out PPI policies that never existed.

  7. When you re-read what Peter Hamilton has written and remove it from the context of FS and think about the context of Politics, it makes you think about the possible situation with “Plebgate”.

    …. the civil courts provide a proper and complete remedy for the recovery of such losses – whether or not the fraudster has been dealt with by the criminal courts. In the context of the civil legal system, fraud is usually known as the civil wrongdoing of deceit.

    A person is guilty of deceit if he –

    (a) makes a false statement which he know to be untrue, or does not believe to be true or is reckless as to whether it is true or not; and

    (b) intends that the claimant should act in reliance on it; and

    (c) the claimant does act on it and suffers loss as a result.

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