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Peter Hamilton: The dangers of out-of-depth advisers

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This time last year, I wrote about a High Court case in which the judge had rejected an application by Zurich Assurance Limited and Zurich Advice Network Limited (Zurich) to strike out a 96-year-old client’s claim for failing to advise her properly.

Since then, the judge upheld the claim and has awarded the claimant damages of around £225,000. It is worth revisiting the case and looking at what the judge said because of its importance to all advisers.

Mrs Lenderink-Woods, the claimant, was born in the UK. In 1944 she married a Dutch naval captain. As a result, under the law at the time, she acquired a domicile of dependency in the Netherlands. She left the UK in 1948 and has not been resident here since. She had an inherited portfolio of UK investments of nearly £567,000, with a potential inheritance tax liability of around £130,000.

In 2001, she sought advice from a Zurich adviser about how to mitigate her exposure to IHT in the UK. He advised her to convert the portfolio into a loan trust scheme, which involved lending the proceeds of the portfolio to the trustees of a discretionary trust. The trustees would invest the proceeds in investment bonds and repay the loan over time by withdrawing 5 per cent of the value of the bonds per annum. In that way, the growth in the bonds would not fall into the claimant’s UK estate and would not be subject to IHT. Of course, the outstanding balance of the loan would fall into her estate and so be subject to IHT.

The claimant followed that advice but did not understand how the scheme worked. In 2012 she sought advice from an IFA, who immediately realised the problem. She issued proceedings in 2014.

The claimant’s case against Zurich was that no reasonably competent adviser could have acted as he had done because such an adviser would have advised her:

  • To obtain the advice of a solicitor in relation to her domicile and IHT
  • To invest in exempt gilts or offshore unit trusts
  • That the loan trust scheme was inappropriately inflexible for her because of the rules on annual withdrawals from bonds, and the charges were too high when compared with direct investments.

The ruling

The judge found the adviser had been negligent. His starting point was the relevant test for assessing conduct: “the standard of the ordinary skilled man exercising and professing to have the special skill of [a] financial adviser. He will not be guilty of negligence if he has acted in accordance with the practice accepted as proper by a responsible body of his profession.”

He then turned to what the adviser had promised to do; what his retainer was. The adviser had said: “I advise you of potential problems and challenges, after finding out your needs and objectives for now and the future.

“I then present all the available alternatives to solve or achieve them. Further, I will point out what I believe is best for you with explanations of why.”

That was limited in two ways. First, his advice was centred on investing for income and growth and reducing IHT. Second, he was a tied adviser.

If he had “felt he had lacked the skill and competence to present all available alternatives or that the products available to him did not accord with what was best for Lenderink-Woods, then he would fulfil his retainer by telling [her] to take advice from an independent financial adviser”.

Indeed, the expert witness called for the claimant was of the view she could not receive competent advice from a tied adviser because the necessary scope of the advice (to do what was promised) was so wide only an IFA could do it.  That view was not challenged.

Thus the adviser fell well short of a competent discharge of what he had promised to do. A competent adviser would have known of the importance of domicile in tax planning. Everything the adviser said on tax showed he did not know the rules and was “completely out of his depth”. The judge found the adviser was negligent in all the respects set out above.

Two of the most important points from this judgment are as follows:

  • Frame what you promise to do with great care, because you will be held to it
  • Limit your advice to what you know you know, and refer the client on to an appropriate expert if necessary.

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

  1. Wise words and good article.

  2. While the authors summary points from the judgement cannot be disputed by any adviser I take issue with much of what precedes it. How an adviser operates: tied, multi-tied or an IFA has absolutely nothing what so ever to to with his or her ability or competence. By definition while it may limit their ability to select products to solve the issues once correctly identified it does not limit their ability to analyse and advise – unless the solutions are products that aren’t available to them. In this case Zurich had suitable products the adviser simply wasn’t competent. There is room for all advisers whatever form they chose to operate; it is part of a heathy financial services market that has too few new advisers entering it. Holing up a single tied adviser who was insufficiently trained and extrapolating this as justification for why IFAs alone are capable to provide such complex advice is patent nonsense.

    Would a competent adviser really have suggested:

    – that she took advice from a solicitor on her domicile and IHT. If they operate in the estate market there is a good chance they know as much if not more than many/ most solicitors. A private client solicitor may have greater knowledge but this case was not so complex that such advice and resultant costs were necessary
    – there is a world of difference, in investment terms between an exempt gilt ( historically poor returns ) and an offshore unit trust ( much higher risk profile ). The tax should not be the sole driver even if IHT is the primary issue particularly when other option are available, such as UK authorised unit trust ( as these are excluded property for non domiciles ) and International investment bonds.
    – the loan plan was not appropriate period but not because it was inflexible. Flexibility is one of its primary advantages over other lump sum IHT schemes. As for charges the comparison should be with other collectives not direct investment given that there was no indication that she had the risk profile or experience for DFM.
    The importance of this case is about ensuring competence whether we are advisers ( tied multitied or IFAs) trainers, support staff or managers. It is the only way to ensure we treat costumers fairly. What it is not about is a comment on trading styles or any form of hierarchy within them.

  3. UK unit trusts & OEIC’s were not excluded property while October 2002. As a good tutor will always tell you Tony, refer to the case study with your answer. As an IFA though, the status of the adviser in this case, as Tony says, tied or otherwise, is irrelevant!

  4. When I was a tied adviser with Aviva, L&G and finally Halifax (before moving into the IFA world) we were always told that if we could not meet the needs of the client through our available product range we were to inform the client that they should seek independent advice and never try to shoehorn our own product as the solution.

    This case is more an issue of an incompetent adviser than any inherent problem with tied advisers.

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