In the recent case of Worthing v Lloyds Bank (2015), the High Court dismissed a claim that the Defendant bank had breached its obligations by failing to correct its recommendation of an investment portfolio which was alleged to have been unsuitable. The original advice had not been wrong, but even if it had been, the Claimants had not established any duty on the Defendant to rectify that advice.
In January 2007, the Claimants invested £700,000 in an investment portfolio with the Defendant's private bank. The portfolio was categorised as "Balanced." It was one of a range of available portfolios, which were, in order of increasing risk: Cautious, Balanced, Progressive and Adventurous.
The Claimants invested in the Balanced portfolio following a series of meetings with the Defendant in which the appropriate risk level was discussed. The Claimants completed a Risk and Planning document to assess their risk appetite and received a Financial Planning Report containing warnings and risk factor information.
In March 2008, the Defendant carried out a contractually mandated periodic review of the Claimants' circumstances. By this point, the value of the portfolio had fallen to £675,712. In addition, the Claimants had paid off a capital gains tax liability of £400,000 using a separate overdraft facility provided by the Defendant. The Claimants planned to pay off the overdraft through the sale of some commercial premises. However, with the premises still unsold at the date of the review, the Claimants were increasingly concerned about their debt levels.
During the March 2008 review meeting, the Defendant explained that the value of the portfolio could be expected to recover and also advised on options to make the Claimants' debt levels more manageable. However, the Defendant ultimately recommended that the Claimants maintain the current portfolio until there was greater certainty around the commercial premises sale.
The sale of the premises subsequently collapsed and in July 2008, the Claimants sold the portfolio to pay off their overdraft. They only received £657,388.21 of the £700,000 originally invested.
The Claimants' case
The Claimants argued that a Balanced portfolio had been unsuitable for their requirements and that a Cautious portfolio should have been recommended instead.
The Claimants alleged negligence, breach of contract and breach of statutory duties pursuant to their right of action under s 150 of the Financial Services and Markets Act 2000 and relevant rules in the FSA's Conduct of Business sourcebook. Given that a claim in relation to the initial advice in January 2007 was time-barred, the claim focused on an alleged continuing duty to correct the initial advice and the Defendant's failure to carry out a fresh risk assessment at the March 2008 review meeting.
The Court found that the recommendation of the Balanced portfolio was perfectly suitable. The Defendant had taken adequate steps to establish the risk profile of the clients. The Defendant had been entitled to use standardised documentation and questions for the purposes of explaining the portfolio and the risk to the Claimants.
Even if there had been an error in the initial advice, the Defendant had no duty to correct it. The contract between the Claimants and the Defendant did not contain an absolute obligation to correct any previous advice. The Claimants needed to identify a particular contractual obligation which remained unperformed to establish a continuing duty, and they had not done so in this case.
There was no obligation on the Defendant to carry out a new risk assessment at the March 2008 review. Under the contract and the Conduct of Business Sourcebook rules, the Defendant was only required to identify any changes in the Claimants' circumstances and adapt the profile accordingly if necessary, and to do so with reasonable care and skill. The Defendant had responded to the changed circumstances of the Claimants in a satisfactory way. Given the uncertainty about the sale of the Claimants' premises, it was perfectly reasonable to advise the Claimants to maintain the portfolio for the time being until the position was more certain.
This is an encouraging decision for financial institutions, particularly when dealing with long-term portfolios. It provides reassurance that in the absence of any express continuing contractual duty to update advice, the usual rules of limitation will apply to prevent claims based on historic recommendations. The Claimants' allegations necessarily required the court to examine the original advice in this case. However, the court made it clear that this approach would not open the back door to a time-barred claim.
The case also provides helpful practical clarification of the expectations on financial institutions when assessing a client's risk profile. The Bank was perfectly entitled to use standardised documentation and there was no need for potential risks to be put to clients in percentage terms.
Finally, financial institutions must not overlook the importance of keeping records and file notes of meetings and decisions: as the events in this case had taken place some years ago, the court placed significant reliance on the available written evidence.