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The blame game

If you have ever had the misfortune of watching daytime TV, then you, too, must have found yourself wondering first whether you have not in fact stumbled across hell on earth and second, marvelling at what a litigious country we have become if the volume of no win, no fee ambulance-chasing ads is anything to go by at that time of day.

Whatever your feelings about such firms, the fact remains that they exist due to demand. So if as a nation we now look to point a finger of blame for every slip and trip, it should come as no surprise that the same is bound to happen for market tumbles.

We have been here before and the lessons are clear. In times of market turbulence investors who have made a loss also start looking for a source to recoup some of those losses.

I am certainly not alone in thinking this. The Financial Ombudsman Service is bracing itself for a spike in claims in the next six months as investors pay closer scrutiny to their money and become more likely to spot examples of perceived bad practice by investment houses and advisers.

The sheer scale of the sums lost to date means we can expect an avalanche of claims against the full spectrum of professions and financial institutions. At times like these accountants, surveyors, auditors and valuers will all start to feel the heat as the finger of blame swings from one potential source of compensation to another.

We saw it with the last bout of sustained market downturns and we can expect history repeat itself. The difference for financial advisers this time being the additional area of scrutiny – risk matching.

For the first time advisers will be called upon to defend their investment choice on the basis of it matching the client’s risk profile.

For those firms with adequate resources and qualifications this is not a cause for concern as they will be able to refer back to catalogued evidence of their risk profiling and the client’s understanding of how that impacts on the advice given at the time. Some will even be able to refer to psychometric testing results to back up their investment choice. However, for those who are unable to produce tangible evidence there lies ahead many sleepless nights.

The chickens are coming home to roost for firms that have not been paying enough attention to, or investing in, record keeping. The obvious first port of call for a disappointed investor looking to recoup losses is the ‘human face’ of finance – their adviser.

Naturally, retrospective action cannot be taken to prevent claims, but there are simple steps a firm can take to understand the implications for their company should a claim arise and, importantly, they can equip themselves now with the means to minimise the reputational and financial damage once it has arisen.

At such times advisers will come to rely more than ever on their professional indemnity insurance broker to guide them.

In the majority of cases I am sure it will simply be a reflection of desperate measures in desperate times. But there will doubtless also be a number of cases to be answered. The question then for the rest of the market is what lasting impact the oft-cited ‘bad apples’ will have on the rest of the sector, and what it will mean for professional indemnity insurance premiums.

As with most storms, the true damage is only ever fully apparent once it has passed. And the forecasts point to the storm raging for some time yet.

All we can know for certain is that the advice profession will emerge, as it always does from times of flux and turbulence, at first a little battered but ultimately stronger.

This latest shock to the financial system will result in a great deal of introspection and recrimination but if the ultimate upshot of all of that is to drive up standards and lead to greater professionalism long term, then it will have been worth all the short-term pain.

Sheriar Bradbury is managing director at Bradbury Hamilton

The Financial Ombudsman Service is saying some things about the current crisis which should be of comfort to advisers.

In an interview in this week’s Money Marketing, lead investment ombudsman Caroline Mitchell says that FOS would not have expected advisers to have anticipated the collapse of highly rated institutions in their advice.

This suggests that the Lehmans Brothers collapse and its impact on structured products will be taken into account in the event of complaints against the adviser. It also says it will not be adjudicating with hindsight.

The ombudsman would not be drawn in detail on the AIG fund although it suggested that events affecting very large numbers of people may fall under the FSA’s remit not FOS.

Nevertheless if advisers do face complaints around this fund, we hope the same perspective on hindsight applies.

Much will depend on the explanation of risk by the adviser and the understanding of that risk by the client says the ombudsman. In practice this means there will still be problems. Some clients will argue that their adviser should not have sold them a product which had any counterparty risk attached. They will seek to find holes in the advice if they have made a loss. They will try and make what might be called “new ombudsman law”.

We also know that advisers will fear being treated differently by different adjudicators and concerned that a whole lot of expensive arguments will happen all over again.

Adviser leaders should be asking the ombudsman to make sure that any approach is applied consistently.

But it is on the concept of hindsight that we worry most. We think the definition of risk may change because of what happened. Removing hindsight from human decisions is very difficult, no matter how much people may try, particularly when people are complaining with the benefit of hindsight. How else would people complain of course? But we hope the ombudsman manages to be robust otherwise its decisions will not be fair.

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