The High Court has dismissed a claim that, in advising on investments, a private bank breached its duty to exercise reasonable skill and care.
The claimants, Mr and Mrs O’Hare, were a wealthy couple with backgrounds in business and business administration but were not particularly sophisticated or experienced investors. They opened accounts with Coutts in 2001 and the bank entered into an Agreement to Provide Investment Advice with them. The advice was provided free of charge, Coutts benefiting only if the O’Hares took out the recommended products. The Agreement required Coutts to “work with” the O’Hares “to understand your circumstances, objectives and requirements to enable us to develop an investment strategy” for them. Advised by Coutts, the O’Hares made a number of investments in 2007, 2008 and 2010.
The O’Hares claimed that, in advising them on the investments, the bank had breached its duty as a financial advisor to exercise reasonable skill and care. They also claimed £250,000 under an alleged agreement to settle a complaint about another Coutts product that had been sold to them.
The issues that the court had to determine were:
- Whether the investments were suitable, or whether it was negligent to recommend them.
- Whether the bank had undertaken a binding legal obligation to resolve the complaint.
The court found that, read in its proper context, the obligation to “develop an investment strategy” meant that the bank had an obligation to work with the O’Hares to develop an investment strategy and advise them from time to time on investments to implement the strategy. On the facts that had happened and the question was whether the investments were objectively suitable and not whether the O’Hares had been fully informed about them.
The O’Hares had been persuaded by Coutts to take considerably higher investment risks than they had previously done. The judge noted, however, that there is nothing intrinsically wrong with a private banker using persuasive techniques to induce a client to take risks, 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. An investment advisor must not take advantage of a reckless gambling streak in a client nor advise him to hazard all he has in a very high risk product. But, as long as he does not irresponsibly encourage foolhardiness, he does not breach his duty of care if he advises a client to take higher investment risk than the client would otherwise have taken. The O’Hares did not fall into the category of clients who need “saving from themselves and their own ignorance” and the fullness of the information given to them about the 2007 and 2008 products meant that they could not complain that the products had been mis-sold to them.
By 2010, when the turbulence of the economic crisis was fully apparent, Coutts advised the O’Hares on how to “derisk” the portfolio by investing in RBS structured products. Although this involved placing a large amount of money with a single banking institution, that risk was fully explained and the O’Hares had not shown that the investments were objectively unsuitable.
On the bank’s settlement of the earlier complaint made by the O’Hares, the bank argued that this had merely been a “gesture of goodwill” whereby it had intended to provide US$250,000 through future discounts or credits to the claimants’ accounts, but had not been a legally binding agreement. The court noted that a gesture of goodwill can be binding or non-binding but that where an offer is made in the course of pre-existing legal relations, the onus on the party claiming not to be bound is a heavy one. In this case the bank had not come near to showing that the parties had not intended to be legally bound by the settlement agreement. They had been in an ongoing commercial relationship which was threatened by the O’Hares’ grievance about the manner in which the product had been sold to them. To preserve the commercial relationship, Coutts had been prepared to compensate the O’Hares. Although the bank had formally rejected the complaint, that prior denial of liability had not made the subsequent compromise any less binding.
It is interesting to note that the judge was prepared to find that it was not necessarily inconsistent with the adviser’s duty to give suitable advice to also seek to sell products to his client; provided that full and proper explanations and information about the product are provided. Advisers will, however, need to continue to take great care when dealing with financially unsophisticated clients. It remains to be seen whether the decision will be appealed.
Further reading:O’Hare and Another v Coutts & Co  EWHC 2224 (QB)