In essence, an IFA’s role is to offer independent advice on financial matters to his or her clients and recommend suitable financial products from the whole of the market. That simple statement conceals a significant number of legal and regulatory hurdles and pitfalls, one or two of which are explored below.
In this context, what is meant by advice?
Advice, in the context of professional advice, means the opinion or counsel of the professional person as to the appropriate course of action for the client, having taken into consideration the relevant facts, the client’s wishes and objectives and other matters, such as the tax consequences, in as dispassionate and objective a way as possible.
Independent advice must be unbiased and unrestricted, that is, not limited by any agreement with any other person, such as a product provider.
Lurking under the word independent are many questions which, thanks to the RDR, are absorbing much thought at present.
The starting point of the IFA-client relationship is the contract in which the IFA agrees what is to be done for the client. The contract will govern the relationship.
The most important part of the job agreed between the IFA and the client is usually for the former to advise the client on some aspect of the latter’s financial circumstances and requirements and how those requirements can best be met. The IFA’s first duty is to carry out the job as agreed.
One of the vital terms of the contract, which will be implied if it is not expressly stated, is that in carrying out that job, and in all the associated tasks and dealings with the client, the IFA must act with reasonable skill, care and diligence. The standard of skill, care and diligence required to discharge the duty is that exercised by the reasonably competent IFA in the circumstances.
In 1957, in a case known as Bolam v Friern Barnet Hospital Management Committee, the judge explained the matter to a jury in the following words: “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 sufficient if he exercises the ordinary skill of an ordinary competent man exercising that particular art.”
The case concerned a medical practitioner but what the judge said is of general application to all professions. If the professional falls below that standard, he or she will have been negligent and will also be in breach of contract.
The following points should be noted. First, the professional will not have been negligent if he or she has acted in accordance with a practice accepted as proper by a responsible body of practitioners skilled in the relevant area.
In the Bolam case, the judge said: “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.”
Second, the standard of care would normally include compliance with the regulatory rules relevant to the activities in question because the ordinarily competent person will normally comply with those rules. Those rules would not be conclusive but they would be strong evidence of what a proper standard would be.
Third, the standard of competence to be expected will vary depending on whether the professional in question has specialist expertise. For example, a solicitor in a specialist tax department of the firm of solicitors will be judged by reference to what firms with such departments will do and not by reference to what a high-street solicitor would be expected to do.
Fourth, some duties will be of an absolute nature and the mere failure to carry them out will result in a liability to a client. For example, the IFA may have agreed to notify an insurer that a client wanted to take up an option to increase the sum assured under a life insurance contract before the option expired. He will be liable for breach of contract if he fails to do so.
The regulatory duties relate mostly to recommending a client to buy a financial product such as an investment, and, as is well known, are far-reaching and very detailed. In summary, the rules require the IFA to get to know the client’s circumstances and to take reasonable steps to ensure any recommendation is suitable for the client.
Taking reasonable steps means what it says. The ultimate judge of what is reasonable will be the adjudicator, ombudsman or judge deciding the matter.
If the decision-maker is an FOS ombudsman, his or her view of what was reasonable in the circumstances will stand, unless that decision is so unreasonable that no reasonable person could reach such a decision, in which case, the matter can be subject to judicial review.
As well as taking the reasonable steps referred to above, before making the recommendation, the IFA must obtain information regarding the client’s knowledge and experience in the relevant investment field, his or her financial situation and investment objectives.
The information to be obtained must be at least enough to enable the IFA to understand the essential facts about the client, “have a reasonable basis for believing, giving due consideration to the nature and extent of the service provided, that the specific transaction to be recommended:
(a) meets his investment objectives;
(b) is such that he is able financially to bear any related investment risks consistent with his investment objectives; and
(c) is such that he has the necessary experience and knowledge in order to understand the risks involved in the transaction”.
The rules then go on to list in great detail the information the IFA must get as a minimum relating to the investment objectives, financial situation and the knowledge and experience of the client.
In relation to the transactions in question, an IFA will act as the agent of the client. If the client accepts the advice and instructs the IFA to take the necessary steps to give effect to the advice, the IFA will be acting as the client’s agent. This means that the relationship between the IFA and the client is a fiduciary one, with obligations of trust and confidence. The distinguishing characteristic of that relationship is that the IFA owes the client an obligation of loyalty.
This means the fiduciary must act in good faith, must not make a profit out of the relationship except as expressly agreed with the client, must not place himself in a position where his duty to his client conflicts with his own interests and must not act for another party in relation to the same transaction without the express consent of the client, obtained after full disclosure.
That is a daunting list of duties and obligations but IFAs can comfort themselves with the thought that as long as they act carefully and diligently, the requirements set out above will be no more than hazard signs by the side of the road are to a careful driver.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk