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Testing times ahead as court rules against Zifa

IFAs suffering from heavy compensation claims have been given new hope of recouping part of their losses where providers are in part to blame, after a case in the Bristol High Court.

Legal experts say the ruling could open the floodgates for IFAs who have paid out compensation to endowment, split-cap and precipice bond investors.

Judge Havelock-Allan ruled that marketing company Zurich IFA must share liability with an adviser over a collapsed investment product because of its inaccurate marketing literature and false risk warnings.

The judge awarded full compensation of 500,000 to a couple who, on the advice of Swindon-based IFA Caroline Ockwell & Co, invested the sum in the Bahamas-domiciled Imperial Consolidated alpha plus fund through an Allied Dunbar International-branded Zurich offshore bond.

The supposedly capital-guaranteed fixed-interest fund, which promised a 15 per cent annual return, turned out to be fraudulently run and collapsed, owing investors more than 200m.

Zurich IFA is being forced to pay two-thirds of the 500,000 compensation after the judge found it wrongly represented the fund as low risk and falsely claimed to have carried out due diligence on Imperial, which the judge termed “contributory negligence”.

Several other insurers offered links to the fund within their offshore bond wrappers, including the then offshore arms of Abbey, Scottish Life, Generali, Hansard and Irish Life.

Financial Services Legal solicitor Gareth Fatchett says the case raises the prospects for cases brought by IFAs who have been forced to compensate clients for products where the marketing material was specious, for example, where details such as Lautro projection rates were incorrect, leading to fund shortfalls, or clear misstatements of risk on precipice bonds.

Aifa director of policy Fay Goddard says IFAs are always in the front line when it comes to compensation pay- outs, even if they have been misled by the product provider, but they do have potential recourse through the Civil Liability (Contribution) Act, which enables IFAs to sue third parties such as product providers for contributory negligence.

She says: “This has been exceptionally rare, though, because it has generally been very costly, particularly on an individual policy basis. This case may set a precedent in that it is the first time it has been used in a high profile case.”

Given the high costs of bringing such cases, Aifa has previously attempted to sponsor class actions against providers, including split-cap firm Exeter, but none have come to fruition.

The Ockwell/Zifa case was brought in the High Court rather than through the Financial Ombudsman Service because it related to an offshore product that was not covered by the Financial Services & Markets Act.

However, Fatchett believes a test case could make a third-party claim for a contribution against a product provider for its part in the liability for contributory negligence on the grounds of the Ockwell/Zifa case.

Law firm Bevans associate William Ellerton, whose firm secured victory in the Ockwell/Zifa case, says although the judge ruled that the provider was guilty of contributory negligence, he stopped short of saying Zurich had a duty of care to the investor although it is possible in law to have this duty to a third party.

Despite this, Ellerton believes the case does set a precedent in that advisers will increasingly look to providers to share the blame where their marketing material has clearly influenced the adviser.

“The case does provide a useful precedent. It is IFAs who have predominantly been targeted in litigation going back several years but I expect shared liability to be more common in the future. IFAs and sales representatives will look much more closely at the marketing material given to them,” says Ellerton.

He cautions that the specifics of this case mean it is not setting a clear-cut precedent. During the trial, it emerged that an internal Zifa memo, which indicated that the provider was aware this fund was not low risk, was not passed on to the IFA. There were also other features that would not apply in other cases.

Law firm Reynolds Porter Chamberlain partner Harriet Quiney is cautiously optimistic about the ramifications of the case. She says: “This case makes the point that IFAs cannot be used as a letterbox by even the most respectable product providers and it could have implications for split-cap and precipice bond cases.”

However, Quiney says the contributory negligence argument would be unlikely to succeed in claims against Aberdeen over the failure of its fund of split-caps, Aberdeen progressive growth, which was infamously marketed as “the one-year-old who lets you sleep at night”. Although this slogan could be argued to have been misleading as to the fund’s risk profile, she points out that the ad was not introduced until October 2001, at which time splits were already sliding into freefall. Quiney says any cursory check of the market should have made an IFA realise that this product was actually high risk.

“This case has parallels with splits if the provider made statements it should not have made because they were false and the IFA reasonably relied on it but there is also a question of context. If you relied on this piece of Aberdeen marketing in December 2001,when the FSA had already published a discussion paper on splits, which were underperforming badly by then, then people would think you were a fool,” she says.

Fatchett is convinced that the precedent is worth testing, however, and he is looking for an adviser who has had to compensate a client in the past three years for a sum less than 5,000 so the small claims court can be used in a test case. He is keen to find an IFA with clear evidence of misrepresentation in a product provider’s literature.

He believes that if IFAs can be seen to be winning these cases, then increasingly they will be able to look to the courts for redress with less fear of the costs of the action.

Even if the Ockwell/Zifa case extends the grey area around providers’ duty of care to advisers, it does prove that advisers should be willing to take on providers if they feel they have been duped into selling an ultimately duff product on the back of their communications.

At the very least, compliance departments should take note and up their game accordingly.

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