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The edge of reason

Imagine a situation where you can claim anything you like in a document and, so long as it is outside the bounds of reasonable expectation, that claim will probably not come back to haunt you.

That is the tricky legal position that 180 IFAs will have to confront if their case against product providers makes it to court. They will have to prove that marketing material supplied to them by product providers was wrong, that they had no reason to assume it was wrong and, as a result, it led to the missale of products.

The IFAs are asking Anth-ony Speaight, QC, to examine if they have a case to argue that product providers breached contracts with advisers with marketing material used in sales of precipice bonds, endowments, with-profits and split-capital products.

City law firm Reynolds Porter Chamberlain partner Harriet Quiney – who is not involved in the case – is acutely aware of the legal hurdle that reasonable expectation could play in a legal case.

The point is essentially that if a statement by a product provider is outrageous, then an IFA who uses that claim in a sale will be responsible for it because they are a professional, trained person who should have thought to question it.

However, if the claim is only slightly inaccurate, then the IFA has a reasonable expectation that the information is correct, so the product provider should be responsible.

Quiney says: “It is really going to depend on case to case. While the IFA has a reasonable expectation that the product information is correct, the client has a reasonable expectation that the IFA has done research.

“The thing is that the reasonable expectation can change with the climate. It may be that the product information is correct but that, say, as with the case of precipice bonds, concerns had been raised. You could argue that any client would have a reasonable expectation that they would not be recommended this product in an environment where the IFA should have know better, despite what providers were saying.”

This is a major bone of contention for the IFA Defence Union, which is backing the legal bid. Slighted by many IFA trade bodies, it has grown its membership to nearly 500 advisers – no mean feat. The group is obviously striking a chord somewhere.

The IFADU has been gathering opinions from legal and actuarial experts as well as questioning the FSA on the subject of marketing material.

No one denies that consumers should have a route to complain against a missale. They should be able to go back to the adviser and then to the ombudsman. But who is the adjudicator who can resolve arguments between product providers and IFAs who believe information provided was wrong?

FSA managing director David Kenmir recognises the regulatory and cost burden that IFAs are being laden with. He acknowledges that times are tough for advisers and that now, more than ever, they need the regulator to be open and honest about its intentions.

But what is the FSA’s official position on providers’ marketing material? The simple answer is that is does not have one.

However, a letter sent by FSA head of themes Chris Rexworthy to former Aifa director general Paul Smee, uncovered using the new Freedom of Information Act, reveals informal guidance for regulators.

The first issue that the FSA looks at is how any marketing material is used by the adviser. If the adviser relies on the material for making a customised recommendation, hands over the material as it is or repeats or reproduces any element of the material, then they will be held responsible. Even if the adviser hands over the material as it is, they are still likely to make some comment on the merits of the product, concludes Rexworthy, making the adviser immediately liable.

However, the FSA rulebook is clear on the fact that one regulated firm can reasonably expect the literature of another regulated firm to be correct.

New Aifa director general David Severn wants to see product providers take more responsibility for what they distribute.

He says: “If someone puts out something that is clearly wrong, they should be held responsible for that. Having said that, IFAs are professional people and use their expertise to question and challenge anything they get that looks like it might be wrong. It is a difficult line.”

Money Marketing asked product providers and the ABI whether they thought IFAs should be held responsible for marketing material supplied to intermediaries if that material was used in a sale and later found to be wrong.

Halifax says it would look “to put right any wrongs”. Spokesman Paul Fincham says: “We are responsible for the marketing material but advisers are responsible for the advice they give. The adviser can come back to us if he believes that the product information is wrong.”

Legal & General says: “Where marketing material is produced by the provider and supplied to IFAs, that provider clearly has a responsibility for ensuring the content inaccurate, clear and fit for purpose. The IFA remains responsible for the way in which they promote the material and, of course, for the advice that they give to customers.”

Prudential, Standard Life and Friends Provident failed to comment but ABI head of media and political affairs Alan Leaman says: “I do not think one part of the industry attempting to sue another is going to make anyone look better in the eyes of consumers. All firms of providers and advisers, large and small, have responsibilities towards their customers.”

The problem remains that many of the disputes over responsibility are down to interpretation and the precise nature of each case. If IFAs sold any products that they did not understand, as many suspect with precipice bonds, then some difficult questions will have to be answered.

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