An earlier version of this article first appeared in the December 2016 issue of Butterworths' Journal of International Banking and Financial Law.

A recent High Court case O'Hare v Coutts [2016] EWHC 2224 (QB) (O'Hare) has considered the standards expected of banks when giving investment advice to clients. Emphasis is placed on the bank fully explaining the risks of investment products to its client, as well as properly understanding the client's personal circumstances and attitude to risk. However, the court sought to strike a balance with the client's own responsibility to bear the consequences of a properly informed investment decision, whatever the outcome of that decision.


Mr and Mrs O'Hare, two very wealthy customers of Coutts with some limited investment experience, entered into an investment management agreement with the bank in 2001. Under the auspices of that agreement Coutts recommended to them various investments, the material ones being made in 2007, 2008 and 2010. The main question for the court was whether Coutts had negligently breached various duties it owed to the O'Hares, such as to give rise to a claim for damages, by recommending investments which were unsuitable for them.


The court determined that Coutts was not negligent in recommending the investments. The judge reasoned that Coutts had given "full consideration" to the O'Hares' requirements and made "full and adequate disclosure", providing the O'Hares with "extensive and full" information about the products, such that Mr O'Hare was properly aware of their risks. The claim against the bank was accordingly dismissed.


In the course of his judgment the judge made various observations which have a wider practical implication and which will therefore be of general interest to those involved in preventing or defending mis-selling claims. First, when assessing whether Coutts had breached the legal obligations it owed to the O'Hares, the court moved away from the traditional objective standard of whether the bank acted "in accordance with a practice accepted as proper by a responsible body of [...] men skilled in that particular art" (even if another responsible body advocated an alternative practice). Instead, influenced by the fact that the expert evidence found little consensus within the banking sector as to how clients' risk attitudes should be managed, the court determined that a more subjective test was relevant, requiring the bank to ensure the investor is aware of the material risks of the investment. Borrowing from a medical negligence case, but finding no reason not to apply the same principles in investment cases, material risks comprise those to which a reasonable person in the investor's position would attribute significance, or to which the investment adviser knows or ought to know the particular investor would likely attribute significance.

It is therefore incumbent upon banks, when giving investment advice, to ensure a "proper dialogue and communication between adviser and client" so as to properly understand the client's investment objectives and risk attitude. However, a bank will have discharged its dutyeven if the client does not fully "absorb and digest" that information, although it is suggested there are limits to this proposition (the same judge finding in an earlier misselling case that a banker is under an obligation to correct his client's obvious misunderstandings).

Second, the court had no objection in principle to a bank using sales techniques "to induce a client to take risks the client would not take but for the banker's powers of persuasion, provided the client can afford to take the risks and shows himself willing to take them, and provided the risks are not [...] so high as to be foolhardy". What constitutes a foolhardy risk depends, of course, on the individual client's circumstances a point the court forcefully made in the O'Hare case. Banks must therefore ensure that the risks of a recommended investment are not only properly understood by the client but also appropriate for that particular client to take. This reinforces the first point above it is crucial that the bank knows its client well and understands (and fully documents) his investment objectives and risk attitude. Where that is the case, it is not the bank's responsibility to ""save [the client] from himself" by talking him out of [his] confident attitude" and the court in these circumstances endorsed the established principle that "investors take responsibility for their investment decisions including mistaken ones".


Banks can take cautious heart from the O'Hare decision. Whilst it may have changed the legal test in investment cases, at least where the evidence does not justify the adoption of the traditional "responsible body of opinion" test, it does not impose any greater practical burden on the bank than already exists by virtue of the relevant regulatory regime. The case thus serves as a helpful reminder that banks must know their client and understand his investment objectives and risk attitude when advising on investment strategy. Provided they do so, they may be protected from claims of mis-selling when an investment's performance is disappointing to the client, even where the bank's sales process has influenced the client to take more risk in the investment than he would otherwise have taken.