Bolam Over? A new standard of care for financial advisers

Since 1957 the test for standard of care in professional negligence claims has been the so-called "Bolam test", namely “whether the defendants, in acting in the way they did, were acting in accordance with a practice of competent respected professional opinion”[1]. In the recent decision of O'Hare and anor v Coutts & Co [2016] EWHC 2224 (QB) the Court held, finding for the defendant, that the Bolam test did not apply to certain aspects of giving financial advice. The decision is of interest to professionals as it says that provided that the investments have been properly recommended, "the required extent of communication between financial adviser and client to ensure the client understands the advice and risks attendant on a recommended investment" is not governed by the Bolam test.

The case concerned financial advice provided by private banking firm, Coutts, to Mr and Mrs O'Hare, who were high net worth individuals. Mr and Mrs O'Hare alleged that Coutts had breached its duty of care when advising them about particular investments.

In determining the question of the overall suitability of the investments, Mr Justice Kerr held that the Bolam test applied. However, when considering the required level of communication about the risks of an investment, Kerr J held that it was inappropriate to determine this by reference to industry standards, preferring the approach of the Supreme Court in the Scottish case of Montgomery v. Lanarkshire Health Board [2015] AC 1430, which concerned the duty of a doctor towards a patient in advising on the risk of treatment. In Montgomery the Court held that the relevant duty was to: "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"

The test for materiality of risk was whether "in the circumstances of the particular case, a reasonable person in the [client]'s position would be likely to attach significance to the risk, or the [adviser] is or should reasonably be aware that the particular [client] would be likely to attach significance to it."

Kerr J reached the conclusion that the test as set out in Montgomery was to be preferred to the Bolam test because:

  • there is little consensus in the financial services industry about how the treatment of risk appetite should be managed by an adviser; and
  • the FCA's Conduct of Business Sourcebook (COBS) rules make no reference to a responsible body of opinion; instead they prescribe obligations similar to those set out in Montgomery.

Kerr J found that Coutts had not failed to fully inform Mr and Mrs O'Hare about their investments. Notably, he found that Coutts had not breached any duties by engaging in salesmanship which may have resulted in the O'Hares taking on more risk than they otherwise would have, noting:

"there is nothing intrinsically wrong with a private banker using persuasive 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 – avoiding the temptation to use hindsight – so high as to be foolhardy".

Goodbye Bolam?

O'Hare does not represent a wholesale rejection of the Bolam test in a professional negligence case. The common theme between O'Hare and Montgomery is that they relate to situations in which the client is called upon to exercise some discretion or autonomy in making a decision. To the extent we will see a further erosion of the Bolam test, it is likely to be limited to this area, at least in the short term.

In particular it seems there is potential scope for the rulings in O'Hare and Montgomery to apply to some solicitors' negligence claims. In the 2015 Court of Appeal of Northern Ireland decision of Baird v Hastings[2], the court did not specifically address the Bolam test but did refer to Montgomery and draw analogies between the solicitor client relationship and that of a doctor and patient, noting that “as in the medical context, the advisory role of the solicitor must involve proper communication and dialogue with the client”.