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Claims against financial advisers for negligent investment advice and breach of statutory duty

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Posted by Susan Hopcraft on 01 December 2015

Susan Hopcraft Partner

We regularly make claims for clients who have lost money through bad financial advice. Often these claims result from advice to invest in products that are unsuitable for the client. An investment in high risk ventures for a client whose preference and risk profile were for cautious, safer investments, leaves the adviser exposed if losses result.

The rules on limitation can create difficulties for claimants if financial loss is slow to reveal itself and novel arguments sometimes need to be used, as a recent case shows.

The risk assessment and investment advice/decision can take place long before losses are made, but typically court claims need to be made within 6 years of the breach of FCA Conduct of Business rules. If the loss is discovered after six years then a claim in negligence might still be possible, but only if the claim is made within three years of a claimant knowing they had a claim. 

Recent case

The approach taken by Mr and Mrs Worthing in a recent case against their bank was that there was a continuing duty to advise on the suitability of the investment, which was continually breached from the moment the investment was made.  By this route they attempted to say that their claim was within 6 years of the bank’s breach of duty.

Mr and Mrs Worthing were high net worth individuals.  Lloyds bank advised them in relation to investing £700,000 in an investment portfolio.  After the bank’s standard risk profile questionnaires were completed they were deemed to be “Balanced” risk (the second rung on the scale from Cautious to Balanced to Progressive to Adventurous).  The investment was made in January 2007.  By March 2008 the portfolio had made losses and by July 2008 they asked for it to be sold at a loss of around £43,000.    

Breach of duty

A claim was issued against the bank for breach of duty in March 2013.  The claim was that the Worthings considered themselves to be cautious investors but their monies were invested in a higher risk product, in breach of duty.  Even though the original investment was made in January 2007 and a claim relating to that breach was time barred, the claim being brought more than 6 years later, they argued that there was a continuing duty to correct the bad advice given in 2007 such that there was a similar ongoing breach of duty throughout later 2007 and 2008.  They tried to argue that the claim in March 2013 was within 6 years of that ongoing breach.

The judge carefully reviewed the contemporary documents and the bank was able to show, by its strong documentary record, that it had complied with its duties.  The judge was not persuaded that the risk assessment had been carried out negligently, that the investment was in the wrong category by reference to the appropriate risk profile of the customers or that the customers did not understand what was being advised.  

Whilst that essentially meant the claim failed, the court went on to consider the attempt to create an ongoing duty.  He rejected the idea that a financial adviser was continually obliged to correct bad advice.  There were three possibilities that the judge thought might apply;

  1. The original contract to provide compliant non-negligent advice continued, since that had not been carried out; or
  2. A new contract to correct non-compliant advice arose immediately following negligent advice; or
  3. Periodic future reviews were required in which a duty arose to correct bad previous advice.

He decided that the first could not apply because there was no contract that the advice was given under (it was an implied statutory duty), nor could the second because again there was no contract with such a term.  Three could have applied, but the future periodic reviews only required a review with reasonable care, no more.  This, he decided, was what the claimant received in March 2008 and so there had been no breach of that type of duty.

Although the attempt to set up an ongoing obligation to advise failed on the facts of this case, the judge nonetheless gave some indication as to how that type of argument might succeed in the future.  Claimants will no doubt continue to try to find ways of bringing claims within the rules on limitation, since discovering you have suffered a financial loss, but then that it is too late to bring a claim is undoubtedly an unfair position in which to be.

If you have suffered financial loss by a professional’s negligence, whether an accountant, tax adviser or IFA, we are able to help.   

About the author

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

Susan Hopcraft

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

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