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 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