What must advisers do to ensure that their clients understand their advice and the risks of investments they recommend? And when does 'sales patter' open them up to claims for bad advice?
These were amongst the questions that the court considered in the recent case of O'Hare v. Coutts  . In its judgment, the court clarified the standard of care required by financial advisers – and potentially other professional advisers such as accountants and tax advisers – when advising clients who retain autonomy concerning the decisions in question.
The decision in O'Hare
Mr & Mrs O'Hare agreed with Coutts that their advisers would periodically put forward potential investment opportunities for their consideration which were judged to be suitable for them and which they would either take up or decline as they saw fit. The O'Hares sued Coutts alleging that certain investment advice had been negligent, in part by reason of the fact that the adviser's salesmanship had caused them to shoulder more risk than they might otherwise have done.
In what appears at first glance to be a departure from the long-established approach to this type of claim, the judge drew a distinction between: (a) the suitability of the investment advice; and (b) the adequacy of the steps taken by the adviser to make his clients aware of the relevant risks.
On the first issue, and in line with the orthodox approach, the court held that the suitability of investment advice should be determined by reference to whether the adviser acted in accordance with a practice accepted as proper by a responsible body of people skilled in that particular art.
The judge explained that in broad, practical terms, this test – known as the Bolam test after the 1957 case1 – equated to asking whether the adviser discharged his regulatory duties including in particular those outlined in COBS.
The judge took a different approach to the second question. He held that the adequacy of the steps taken by the adviser to make the O'Hares aware of the relevant risks should not be subject to the Bolam test, citing the lack of industry consensus on the way in which issues of risk ought to be approached. Instead, he held that the question was whether the adviser had taken reasonable care to ensure that the O'Hares were aware of any "material risks" involved.
The judge based this approach on the test adopted by a Scottish Court in a case concerning the explanation of risk by medical professionals to their patients, namely Montgomery v. Lanarkshire Health Board . "Material risks" in that case were defined as risks to which, in the circumstances of the particular case, a reasonable person in the client's position would likely attach significance or risks to which the adviser was (or should have been) aware that the client in question would likely attach significance. There is little in the way of judicial guidance as to what might constitute reasonable steps to ensure that material risks are communicated to a client.
Dismissing the claim, the court found that, notwithstanding the adviser's salesmanship, the advice given by Coutts was reasonable, the risk warnings given were adequate and the O'Hares should therefore be left to take responsibility for their decision to invest.
It is notable that even if an adviser provides suitable advice by reference to COBS, they will still be at risk if their client did not understand – or, perhaps more cynically, if the adviser is unable to demonstrate that their client understood – the attendant risks. Courts following the decision in O'Hare will investigate what the client understood about the risks and will expect to see a level of dialogue between adviser and client concerning risk that is tailored to and appropriate for the client in question.
In practical terms, advisers will be better placed to defend claims if they hold a file which demonstrates not only their compliance with COBS but also the fact that they communicated the material risks to their clients and that their clients understood the same. This will be particularly important in cases where advisers persuade clients to assume more risk than they might otherwise have done and where the decision to invest might otherwise appear to be at odds with clients' stated attitude to risk or objectives. The judge noted in this context that "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" (emphasis added).