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The need for “proper dialogue and communication between adviser and client” in the context of investment advice

In O'Hare v Coutts & Co [2016] EWHC 2224 (QB) (a non-medical claim) the High Court declined to apply the traditional “Bolam test” (see Bolam v Friern Barnet Hospital Management Committee [1957] 1 WLR 582). Instead the standard of care to be applied regarding the required extent of communication between financial adviser and client to ensure the client understood the advice and the risks was to be governed by the test in Montgomery v Larnarkshire Health Board [2015] AC 1430.

Mr and Mrs O’Hare were wealthy individuals who had engaged Coutts as their private bankers. Mr O'Hare was an experienced businessman and Mrs O'Hare's background was in business administration. The O'Hares opened accounts with Coutts in 2001; Coutts advised them on various investments pursuant to an agreement that required Coutts to "work with" the O'Hares so Coutts could understand their “circumstances, objectives and requirements to enable us to develop an investment strategy". The obligation on Coutts under the agreement was to provide “advice and recommendations in writing at such time or times as we consider appropriate or as agreed between us." Coutts advised them to invest in five products between 2007 and 2010 which resulted in losses. They alleged that Coutts’s investment advisors had negligently advised them which amounted to a breach of the duty to exercise reasonable skill and care when advising and for breach of duties arising under the Conduct of Business Sourcebook (COBS).

Kerr J held that whilst the Bolam test applied to the recommendation of suitable investments, the requirement for communication between financial adviser and client to ensure that the client understood the advice and the risks attendant on a recommended investment was not governed by the Bolam test. Instead the test under Montgomery v Lanarkshire Health Board [2015] UKSC 11 was to be applied as in that case it was held medical professionals must “take reasonable care to ensure that the patient is aware of any material risks involved in any recommended treatment, and of any reasonable alternative or variant treatments”. There was, in Kerr J’s view, a direct analogy in the present scenario to the relationship between doctor and patient as “in the context of investment advice there must be proper dialogue and communication between adviser and client”. Further, since there was little consensus within the financial services industry on how to treat risk appetite there was no generally accepted and responsible practice by which to apply the Bolam test. Instead, as the COBS regulatory regime mandated investment advisors to properly explain risk to their clients before a decision was taken it was “strong evidence of what the common law requires”.

The factual history of the case spanned more than a decade and there were numerous discussions about the claimants' investments. Therefore on the facts there was no lack of adequate communication and explanation so uultimately Kerr J decided the claim had to fail.

The decision is being appealed although no date has been set for a hearing as at the date of this blog entry. If the appeal is unsuccessful there is now High Court authority in a non-medical case that the Montgomery standard of care is the appropriate one for cases involving advice on risk given by all professionals who must ensure “proper dialogue and communication between adviser and client”. That would have a very broad significance particularly to negligence claims against solicitors. Therefore the decision on the appeal for this case is one to watch out for.

The consultation to HM Treasury’s paper on amending the definition of financial advice in article 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order (SI 2001/544) (RAO) closed on the 15 November 2016. Therefore it remains to be seen as to what impact this consultation or this case may have on COBS.

 

 

 

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