Wed, 28 May 2014
This is a wide field and the barristers of No5’s commercial and chancery group frequently advise and act for clients in their claims for professional negligence and breaches of the regulatory regime against their erstwhile professional financial advisers. What follows below are some pertinent and recurring themes encountered in this area of practice:-
Investors seeking financial redress for losses suffered may have received advice from an independent financial adviser or a bank or may have bought an investment product directly from a product provider. If a recommendation was made or advice was given in relation to the investment product the adviser will have come under a duty of care to give that advice with all the reasonable care and skill expected from a competent professional adviser (at the time the advice was given).
Experienced and sophisticated investors will mostly be locked out of relief because the court is likely to find that such an investor would have assumed the risk of incurring trading losses and, absent an express contractual duty, an advisory duty at common law will not be found: Springwell Navigation Corp v J P Morgan Chase. The decision at first instance in Springwell was confirmed in the Court of Appeal and has been followed in a number of first instance decisions since. A further hurdle faced by the sophisticated investor is the courts’ willingness to uphold the ‘no representation’ and ‘no advice given’ disclaimers in the banks’ transactional documentation which have the effect of excluding the possibility of any compensation claim for misrepresentation or for breach of an advisory duty: Peekay Intermark Ltd v ANZ Banking Group, Cassa di Risparmio della Republica di San Marino v Barclays Bank, Grant Estates Ltd v RBS (Scottish Court of Session).
The non-sophisticated investor, by contrast, enjoys far greater protection both pursuant to the common law and as a result of the adviser’s regulatory duties set out in the rules made by the FCA (formerly the FSA) pursuant to the Financial Services and Markets Act 2000 (FSMA):-
Clients sustaining losses as a result of money or property transactions with unauthorized persons carrying out regulated activities are protected by ss. 26 and 27 FSMA, which render such transactions unenforceable and give rise to rights to recover the money paid by the consumer and for any loss sustained as a result.
Under s.138D (formerly 150) of FSMA a client who is a “private person” (corporate entities have been excluded from this definition: Titan Steel Wheels v RBS) and who suffers loss as a result of a breach by an authorised person of a rule made by the FCA may bring an action for damages to compensate them for their losses. The rights under s.138D are available with respect to breaches of all FCA conduct of business rules including:-
· the Code of Business Sourcebook (“COBS”) in relation to designated investment advice (including advice relation to swaps, shares, warrants, life policies, unit trust type investments, stakeholder pension schemes, private pension schemes);
· the Banking Code of Business Sourcebook (“BCOBS”) in relation to the activity of accepting deposits from banking customers in the UK;
· the Insurance Code of Business Sourcebook (“ICOBS”) in relation to insurance mediation activities including effecting and carrying out contracts of insurance;
· the Mortgage and Home Finance Code of Business Sourcebook (“MCOBS”) in relation to advising and selling in the mortgage context.
The most frequently encountered complaints against financial advisers relate to misleading communications or advice which induced the client to enter into an inappropriate transaction and, where advice was given, the complaint that the product recommended was unsuitable for the client. All four codes impose regulatory obligations on the authorised person to the effect that any information and financial promotions must be communicated to the client in a clear, fair and not misleading manner. Where advice is given, the codes provide minimum standards, which must be met by the authorised person in order to comply with the suitability requirements. In practice a client who is able to point to regulatory breaches by the financial adviser is in a strong bargaining position when it comes to compensation. In that context one extremely helpful feature of the regulatory regime is the prohibition against authorized persons (firms) seeking to exclude or restrict any duty or liability it may have to the client under the regulatory regime.
Eligible complainants (private individuals, small businesses (‘micro-enterprises’) and organisations) may ask the Financial Ombudsman Service (FOS) to resolve their complaint. If FOS determines the complaint in the client’s favour the ombudsman may make a money award of “fair compensation”, an interest award, a costs award and/or give a direction. The maximum money award is currently £150,000. Many clients seeking redress in cases of financial mis-selling have suffered capital and interest losses far in excess of the FOS limit. In a recent decision the Court of Appeal determined that once a complainant had accepted an award made by the ombudsman an estoppel arising under the doctrine of res judicata prevented the complainant from starting legal proceedings to pursue a damages claim relating to the same complaint (i.e. the complaint which the FOS had already decided): Clark v In Focus Asset Management and Tax Solutions. For clients who have suffered substantial losses in excess of £150,000 the FOS route is therefore often distinctly unappealing.
At common law an advisory contract normally gives rise to a duty of care, both by way of an implied term of skill and care in the contract and in tort. Two potentially problematic areas arise in this context.
In the first instance the issue of the extent and nature of the duty the adviser owed to the client when giving the relevant advice or making a recommendation. Generally, the more sophisticated/knowledgeable/experienced the investor, the lower will be the content of the duty owed. The content and breadth of the duty of care in an advisory context depends critically on all the relevant circumstances. It may range from a duty to provide full advice on the merits of the proposed transaction where the adviser selects, recommends or advises on the merits of the proposed investment to a low level duty of care attaching to a statement made by a dealing floor representative of the firm. There is compelling case law (which has recently been cited with approval - although strictly obiter- in the Court of Appeal in Green and Rowley v RBS) to the effect that the test for determining the scope and extent of an adviser’s duty of care will include the question whether the adviser has complied with the relevant regulatory regime while giving the advice or making the recommendation.
The second potential hurdle to a successful damages claim is frequently presented by the firm’s disclaimers included in the transaction documentation. ‘No reliance’ exclusions (which are aimed at preempting any potential claim for damages under the Misrepresentation Act 1967) have to be reasonable in all the circumstances and are subject to the reasonableness test under the Unfair Contract Terms Act 1977. Disclaimers stating that the contractually basis of the transaction was that the adviser/the firm would give no advice give rise to a contractual estoppel (Peekay, Springwell), which will be very difficult to dislodge.
If claims at common law and for breach of the regulatory regime arise together on the facts of the case, the client will have the strongest possible case on liability against the adviser/firm. Claims directly against product providers are usually framed as claims for damages for misrepresentation.
The prospects of financial loss claims, once breach of duty is established, require the client to prove that the breach has caused him/her loss. Loss must not be too remote from the adviser’s breach, otherwise the client will be unable to make any recovery from the adviser/firm: in Camerata Property v Credit Suisse the court concluded that the losses incurred by the investor in buying a Lehman Brother’s note were unrecoverable because the collapse of Lehman Brothers had been unforeseeable when the note was sold.
Claims for financial redress become statute barred 6 years after the relevant breach. Where the client has a strong claim and limitation is about to expire, banks and larger adviser firms are usually prepared to enter into a ‘standstill agreement’ to enable investigation and possibly settlement of the client’s claim without resort to legal process. Otherwise, and always assuming limitation has not yet expired, it is frequently advisable to issue the claim form but delay service of the claim form and particulars of claim (up to 4 months when service must occur) and engage in pre-action correspondence and an alternative dispute resolution process such as mediation.
Written by Susanne Muth