Business Money
talks to City barrister Professor Mark Watson-Gandy about
liability for investment advice
Q
So the question is really whether or not the advice was
wrong?
A The first
question is whether this is a specified investment. The
answer to that question can be found if one checks against
the list in Part III of the Financial Services and Markets
Act 2000 (Regulated Activities) Order 2001.
Next one needs to
ask whether or not the person giving the advice was
authorised to give it. The law treats differently the
situation where a person who is unauthorised gives advice
and the situation who is authorised under the FSA exceeds
his authority and gives advice he is not permitted to do.
Q
What if they aren’t authorised?
A
Then they’d be in breach section 19 FSMA. Section 26 renders
the agreement unenforceable against the other party. The
other party is entitled to recover any money or other
property paid or transferred by him under the agreement and
compensation for any loss sustained by him as a result of
having parted with it.
Q
And if they’re authorised but, say, given advice when
they’re not allowed to?
A If
an authorised person carrying on a regulated activity in the
United Kingdom outside the scope of his permission, the
agreement is not invalidate but contravention may, in
prescribed circumstances, be actionable by a person who
suffers loss as a result of the contravention: Section 20(3)
FSMA 2000. The prescribed circumstances are where the claim
is brought by a private person or his trustee: Article 4,
Financial Services and Markets Act 2000 (Rights of Action)
Order 2001.
Q So
the trick is to ensure that the contract says that anything
you say is not advice?
A I
do not think that necessarily works. The court is entitled
to have regard to the reality of the trading relationship
not just the formal position expressed in the contract:
Geniki Investments International v Ellis Stockbrokers
[2008].
Q
How do you know what is being said is investment advice?
A To count
the advice must be specific to the person being advised and
based on a consideration of the client’s circumstances. The
advice should not be general advice about the market or
certain categories of investment but a recommendation of a
specific investment. Implied in any such recommendation is
that the adviser has made it in preference to alternative
investment possibilities which had been considered and
compared: Wilson v MF Global.
Investment advice
also includes statements which are calculated to guide or
persuade someone to take out an investment: Walker v
Scottish Equitable plc [2007]. The concept of investment
advice is broad enough to include any communication with the
client which, in the particular context in which it is
given, goes beyond the mere provision of information and is
objectively likely to influence the client’s decision
whether or not to undertake the transaction in question.
Q
And if they are authorised to do what they did, what
remedies do you have?
A
You next need to consider whether or not they are in breach
of the Conduct of Business Sourcebook. Only the rules marked
with an R are actionable. A breach of COBS sounds in a claim
in damages for breach of statutory duty under section 150
FSMA 2000.
Q
And there is one set of rules that apply generally?
A
No. The parts of the rules will differ dependent on what
service is being provided. Thus different provisions in COBS
will apply dependent on whether an advisory service is being
provided or an execution only service.
Q
What should one expect if one is being provided with an
advisory service?
A A
wide range of rules apply. Examples include:
That the authorised person must act honestly, fairly and
professionally and in the best interests of its client:
COBS 2.1.1R.
The authorised person must issue appropriate guidance on
and warnings of the risks with investments COBS 2.2.1R.
If the authorised person is to make a personal
recommendation of an investment, it must first assess
whether the investment is suitable for its client: COBS
9.2.1R. It must also make such enquiries to ground it
with a reasonable basis for believing that the
transaction meets the client’s investment objectives and
that the client has the resources, experience and
knowledge to enable him to understand the risks: COBS
9.2.1R.
The authorised person must not trade with the client or
make a personal recommendation to him before making the
assessment: COBS 9.2.6R.
Q Does it need to check
suitability of the investment for an execution only
customer?
A No. The
authorised person only needs to satisfy itself of the
appropriateness for the client: 10.2R COBS.
Appropriateness is
not about whether the investment is in the client’s
interests but whether, having regard to the client’s
experience and knowledge, he can understand the risks
involved with the investment.
Q
But surely they are liable in negligence if they sell an
investment which is plainly not suited for the client?
A
Not necessarily. To give rise to an actionable duty of care,
the authorised person must have assumed responsibility
voluntarily for the task. For these purposes the contractual
matrix for these purposes does not itself exclude the duty
of care in tort but is relevant as to whether a duty of care
existed: Peach Publishing v Slater [1998]. Factors include:
The relationship between the parties.
The circumstances in which the relationship came into
existence.
The circumstances in which the advice came into
existence.
Its purpose of the advice.
The degree of reliance by the client.
Whether other advisers were present.
Whether there was an opportunity to disclaim
responsibility for the advice.
Key is not the parties’ intentions but the knowledge of
the adviser and the circumstances of the case.
BCCI v
Price Waterhouse Coopers (No 2) [1998]
Q
And in an execution only transaction?
A The court
in Titan Steel Wheels v Royal Bank of Scotland [2010]
rejected an argument that any duty of care arose towards an
execution only customer.
Of course, the fact
that the contract provides for an execution only service
does not prevent the bank from being found to be a client’s
adviser.
As to whether the
bank was to be treated as the client’s adviser as to a mere
salesman of its own investment products, the court in Titan
Steel Wheels v Royal Bank of Scotland [2010] asked the
following questions:
Was there any documentary evidence of the bank’s status
as an adviser?
Was the bank being paid for its advice?
Was there evidence of the bank being asked for advice?
Was there any advice from the bank in writing?
Was there any evidence of an agreement by the bank to
give advice?
How the client was characterised by the bank? Was he,
say, a retail customer or an intermediate customer?
Did the client shop around? If so, did the client get
advice elsewhere?
Was an opportunity given to the bank to comment on the
relative merits of it’s and rival products?
Was the client an ingénue in this area of investment?
Did the
client adopt without query the advice he was being given
by the bank or did he exercise his own judgment?
Whether the bank or the client was more sophisticated in
this area of investment?