The job of every adviser in every profession is to give good advice. What is good advice depends on the facts of the case, and the law provides a set of principles by which the quality of advice may be judged.
In summary, the adviser must do the job he has undertaken to do with reasonable skill, care and diligence; not let his own interests conflict with his duty to the client and always to act in the client’s best interests.
Taking each of those aspects in turn, the starting point is that every adviser has a legal duty of care to advise his or her client with reasonable skill, care and diligence. The failure to do so amounts to negligence and entitles the client to damages for any losses sustained as a result.
There have been many judicial formulations of that duty. For example, in his judgment in ICS Ltd v. West Bromwich Building Society (No.2) in 1999 Mr Justice Evans-Lombe said (of an IFA, which in that case was a limited company) that in carrying out its tasks, an IFA “owed to its clients contractual duties to exercise the care and professional skills appropriate to an organisation presenting itself as an expert independent financial adviser; to provide its clients with independent advice in their best interests and not to allow its own interests to conflict with those of its clients”.
The standard of skill, care and diligence required to discharge the duty is the same for all professionals. The test for that standard is set out in the direction given by Mr Justice McNair to the jury in the case of Bolam v. Friern Hospital Management Committee (1957).
He said: “where you get a situation which involves the use of some special skill or competence, then the test as to whether there has been negligence or not is not the test of the man on the top of the Clapham omnibus, because he has not got this special skill. The test is the standard of the ordinary skilled man exercising and professing to have that special skill. A man need not possess the highest expert skill; it is well-established law that it is sufficient if he exercises the ordinary skill of an ordinary competent man exercising that particular art… [A doctor] is not guilty of negligence if he has acted in accordance with a practice accepted as proper by a responsible body of medical men skilled in that particular art… Putting it the other way round, a man is not negligent, if he is acting in accordance with such a practice, merely because there is a body of opinion who would take a contrary view.”
Although the Bolam case concerned a medical practitioner, what the judge said is of general application to any adviser professing a special skill, including IFAs. Thus it comes down to what other ordinary competent IFAs would have advised in the situation in question.
The ordinary competent IFA, who would be subject to the regulation of the Financial Conduct Authority, would be expected to know and comply with the regulatory rules relevant to the IFA’s activities. Those rules would not be conclusive of the question of whether the advice was negligent, but would be strong evidence of what was required in any specific case.
It goes without saying, however, that all IFAs, as persons regulated by the FCA, have to comply with the applicable rules in the FCA’s handbook in any event. The duty to comply with the FCA’s rules is separate from, but related to, the question of whether the advice was negligent under the general law.
An adviser often has to exercise a judgement as to what the right advice is in the circumstances of the case. Matters of judgement are frequently what give rise to later disagreements; and even if the adviser’s judgement was later shown to be mistaken, that does not necessarily mean that the adviser was negligent.
The test here is whether the error is one which no reasonably competent member of that profession would have made. Thus in a case decided in the House of Lords in 1981, Lord Fraser said: “Merely to describe something as an error of judgement tells us nothing about whether it is negligent or not. The true position is that an error of judgement may, or may not, be negligent; it depends on the nature of the error. If it is one that would not have been made by a reasonably competent professional man professing to have the standard and type of skill that the defendant held himself out as having, and acting with ordinary care, then it is negligent. If, on the other hand, it is an error that such a man, acting with ordinary care might have made, then it is not negligence.”
There are three aspects of the IFA’s role to consider. First, as it is impossible properly to advise a client without first fully ascertaining the client’s relevant personal and financial circumstances and objectives, it is an important part of the IFA’s job to carry out a full and proper fact-find. Secondly, it will probably be necessary to carry out research into the available products in order to make an appropriate choice to meet the client’s requirements. Thirdly, the overall advice, including any recommendation as to the course of action to be pursued by the client, needs to be complete and comprehensive so that the IFA is able to say to the client: I have done what we agreed that I would do, and in so doing I have acted with that degree of skill, care and diligence to be expected of a reasonably competent IFA doing that sort of work.
In addition to the duty to act with skill, care and diligence, an IFA has other duties. Because the IFA acts for the client in relation to transactions carried out on behalf of the client, the IFA is the client’s agent.
The relationship of principal and agent is one of trust and confidence, and is an example of a fiduciary relationship. In his judgment in Bristol and West Building Society v. Mothew in 1998, Lord Justice Millett described a fiduciary relationship in the following way: “A fiduciary is someone who has undertaken to act for another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of trust. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations.”
As all this shows, an adviser is under some heavy obligations when advising a client. But that is as it should be: after all, the adviser sets himself up as the expert, and the client comes to him for help and guidance, placing his reliance and trust in the adviser’s skill, care and diligence.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk