I “Financial Advisers”
I shall deal with only one category of financial adviser and will not attempt to deal with the myriad of individuals that may fall within the title. This paper is limited to those who provide services to ordinary members of the public in relation to investments such as blue chip stocks and shares, unit trusts, open-ended investment companies, investment trusts, personal pension schemes etc.
II “Financial Advice”
The term is usually used to describe the nature of the service provided by the relevant categories of financial adviser. The word “advice” however in the sense of offering counsel or opinion as to action, is not always correct.
A financial adviser is required to provide their client with independent, objective advice. On the other hand, a representative is essentially a sales person who can sell only the financial products offered by their principal. It follows it is generally more accurate to describe what is said to the client as recommendations rather than as advice.
The “advice” in question is likely to be given as a preliminary to selling an investment of some sort.
III The Legal Framework
The system under the Financial Services Act 1986 Act has now been superseded following that Act being repealed. Most areas of financial services therefore, including investments, insurances and mortgage business are now regulated by virtue of Financial Services and Markets Act 2000 [“FSMA”].
FSMA is based on statutory regulation by a single regulator, namely the Financial Services Authority [“FSA”]. Section 19 imposes a general prohibition on the carrying on of any regulated activity without being authorised under the Act to do so, or exempt from the requirement.
It is a criminal offence to carry on a regulated activity contrary to the general prohibition or to wrongly claim to be authorised or exempt.
Regulated activities are defined in statutory instrument, Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, SI 2001 No 544. This is known as the “Regulated Activities Order” or “RAO.” The detailed rules by which all regulated activities are governed are set out in the FSA’s handbook which is freely accessible on the FSA website, ww.fsa.gov.uk. The Handbook is updated daily but it is possible to ascertain the text of the rules applicable as at a particular date by setting the search criteria.
To be authorised, the person needs to have been granted permission under Part IV FSMA to carry on one or more regulated activities. Such authorised person must not act outside the scope of the permission granted. If they do, they will be in breach of the FSA’s rules and liable in damages in respect of any loss arising therefrom.
Notwithstanding that, it is important to note the breach will not necessarily make the resulting transaction void or unenforceable.
IV Regulated Activity
Under FSMA there are two limbs to the definition of “regulated activity.” The first is that the activity itself has to be specified in the RAO; for example giving investment advice. The second is that the activity has to relate to an investment of a specified kind. These are also set out in RAO and include all the usual investments such as deposits, stocks and shares, debentures and government and local authority securities. They also include rights under insurance contracts, collective investment schemes, derivatives.
A financial adviser is independent of product providers and does not represent any of them. They are consulted and act for members of the public who become their clients. The adviser will enter into a contract with his client under which he advises his client in relation to the problem or requirement they may have, in consideration of a fee or the opportunity to earn commission on any business resulting from the advice
The FSA has decided to set new standards for the provision of independent advice. With effect from 1 January 2013 there will be a new definition of independent advice which will require the advice to be unbiased and unrestricted, and based on a comprehensive and fair analysis of the relevant market.
This is intended to reflect the fact of a genuinely independent adviser being free from any restrictions that could affect their ability to recommend whatever is most suitable to the client. Advice which will not be independent in the above sense, will have to be labelled as restricted advice and clients will have to be told that that is what is being provided, FSA Factsheet for financial advisers “Improving your understanding of the Retail Distribution Review [RDR] – Independent and Restricted Advice” (09/10)
CONTRACTUAL AND TORTIOUS DUTIES
Unlike a representative, which is not dealt with in this paper, a financial adviser will be in a contractual relationship with his or her client. Part at least of the express terms of this contract will be in the document known as terms of business or terms of engagement or client agreement. It follows that the financial adviser will be subject to contractual duties as well as duties imposed by the regulatory regime created by statute.
Financial Advisers are also subject to the duties imposed by the general common law (including, of course, the rules of equity.) Many of the rules of the FSA overlap with the common law rules, but it is necessary to consider the common law rules separately as each set of rules may give rise to a separate cause of action.
A COMMON LAW
At common law, an IFA may become liable to a client under one or more of the following heads:
- breach of contract;
- negligent misstatement under the principle in Hedley Byrne v Heller  AC 465. In this context, a misstatement includes both the provision of wrong advice and the provision;
- for deceit under the rule in Derry v Peek  14 App Cas 37
Although financial advisers are subject to the same rules of the general law relating to misrepresentations as representatives, section 2(1) of the Misrepresentation Act 1967 operates in a different way in claims against them. The wording of that section gives the representee a cause of action for the misrepresentation only if the misrepresentation was made by another party to the contract which resulted from the misrepresentation. Of course, the financial adviser will not, ordinarily, be a party to the investment contract.
Further, since the financial adviser was acting as agent of the client at the time, the other party to the investment contract will not be vicariously liable for them. But, in such a case the misrepresentation will probably have involved a breach of the financial advisers duty to act with skill, care and diligence and it follows that the client will be able to recover for any damage suffered in that way.
On the other hand, there will be cases in which the product being sold by the financial adviser is actually the product of the financial adviser. For example, the product may be a discretionary investment portfolio operated by the financial adviser. In that case, the adviser will be a party to the agreement which is in essence the product itself. If that agreement was induced by a material misrepresentation then a claim pursuant to the Misrepresentation Act 1967 will be available to the investor.
B IN CONTRACT
IFAs must enter into a written basic agreement with the client setting out the essential rights and obligations of the firm and the client. The terms of business or client agreement will continue to govern the relationship between the IFA and the client until ended by notice. But the terms of business or client agreement will not necessarily set out what the IFA has been asked to do at a particular time; it merely provides the framework within which the IFA will work. Thus, although an IFAs primary duty is to carry out what he has agreed with the client who is his principal, it may not be easy to ascertain precisely what the IFA was asked to do on a particular occasion. In such circumstances the scope of the mandate will be inferred by surrounding circumstances.
- Duty to Exercise Reasonable, Skill, Care and Diligence
The contract between the IFA and the client will include an implied term, if not an express one, that the IFA will carry out his mandate and the tasks associated with it with reasonable skill, care and diligence. He must exercise that degree of skill, care and diligence that would be exercised in the ordinary and proper course of a similar business and employ the skill usual and necessary in the business for which he receives payment.
In ICS Ltd v West Bromwich Building Society (No2)  Lloyds Rep PN 496 at 504 Evans-Lombe J said that in carrying out its tasks for a client, an IFA:
“…owed to its clients contractual duties to exercise the care and professional skills appropriate to an organisation presenting itself as an expert independent financial adviser; to provide its clients with independent advice in their best interests and not to allow its own interests to conflict with those of its clients…”
The rules of the FSA require that the contractual terms of business must not exclude or restrict any duty or liability and IFA may have to a client under the regulatory system. This duty of skill, care and diligence arises primarily in contract but its breach will also amount to the tort of negligence.
The contractual duty to exercise due skill, care and diligence will apply to those tasks in respect of which judgment of experience or analysis is necessary, such as analysing the facts and circumstances relating to the client and his objectives, giving advice and making a set or recommendations. There may however be other contractual duties of an absolute nature, and the mere failure to carry them out will create a liability to the client.
The standard of skill, care and diligence required to discharge that duty is that exercised by the reasonably competent IFA. The test applicable to all professionals is the test in the direction given by McNair J in the case of Bolam v Fiern Hospital Management Committee  1WLR 582 at 586-587:
“…where you get a situation which involves the use of some special skill or competence, then the test as to whether there has been negligence or not is not the test of the man on top of the Clapham omnibus because he does not have the specialist skill. The test is the standard of the ordinary skilled man exercising and professing to have that special skill…”
- Execution-only transactions
Occasionally, the client will know exactly what he wants. For example, they will know exactly how a particular sum of money is to be invested. The IFA will be instructed to effect the investment. There will be no question of a client asking for, or the IFA giving, any advice or exercising any judgment as to the suitability of the investment for the client. The IFAs only duty is to carry out the instructions accurately and with reasonable expedition.
In those circumstances, the IFA will be liable for a failure to execute the instructions given to him, but not for a failure to advise or exercise any judgment as to the suitability of the transaction for the client. Further, the duty of care in tort would be negative by the fact the client did not rely on the IFA to exercise any skill or judgement, or give any advice.
It should be emphasised that the FSA and the courts will accept an assertion that a client was instructing a financial adviser on an execution-only basis only after close examination of the facts. This is because true execution only transactions by members of the public are comparatively rare.
- Fiduciary Duties
An IFA acts for their client in respect of the transactions carried out on behalf of the client. In other words, the IFA is the agent of the client. The relationship of principal and agent is one of trust and confidence, and is an example of a fiduciary relationship.
One of the consequences of this fiduciary duty is that when the IFA decides which product to recommend to the client, the IFA must not let that decision be influenced by any differential rates of commission applicable to the competing products. Another consequence of the fiduciary duty is that an IFA must disclose any commission he may be paid by a product provider, the FSA has detailed rules relating to the disclosure of charges, remuneration and commission, COBS 6.4
C IN STATUTE
The Financial Services Act 1986 Act
The main provisions of FSMA took effect on 1 December 2001 and regulate the position thereafter. The liability for financial advisers for acts and omissions occurring prior to December 2001 in the context of investment business regulated by the 1986 Act will still be determined by reference to the provisions of the 1986 Act and the principles and rules established thereunder, to which the relevant financial adviser was subject at the time of the act or omission in question. Those duties are not dealt with specifically in this paper but rather their existence simply highlighted.
Financial Services and Markets Act 2000
FSMA is primarily intended to make provision for the regulation of financial services, including most, if not all, of the activities of financial advisers. As under the 1986 Act there are two aspects to this regulation:
- permitting only authorised persons to act as financial advisers, and prohibiting persons who are not so authorised from acting as financial advisers or giving investment advice; and
- regulating the activities of persons who are authorised to act as financial advisers and to give investment advice.
Under FSMA certain general functions are imposed upon the Financial Services Authority [“FSA”] including making rules, issuing codes and giving general guidance. Their aim is to secure the regulatory objectives of FSMA which include generating “market confidence,” promoting “public awareness” and perhaps most significantly ensuring the “protection of consumers.”
As far as the protection of consumers is concerned, the objective is “securing the appropriate degree of protection for consumers” having regard to
- the different degrees of risk involved in different kinds of investment or other transaction;
- the differing degree of experience and expertise that different consumers may have in relation to different kinds of regulated activity;
- the needs that consumers may have for advice and accurate information; and
- the general principle that consumers should take responsibility for their decisions, sections 5(1) and 5(2) FSMA.
Pursuant to these powers, the FSA has issued “The Handbook” comprising several “blocks” of rules and guidance directed at FSA members. There is no doubt that to many, including financial advisers and clients, these rules and this guidance will appear excessively complex, detailed and opaque.
The FSA has used its rule-making powers to create The Eleven Principles. Of particular relevance to the professional liabilities of financial advisers are the Conduct of Business Rules [COB] and the Conduct of Business Sourcebook [COBS, which contain detailed regulation and guidance applicable to all financial advisers.
I The Eleven Principles
The FSAs Eleven Principles, known as “Principles for Businesses” or “PRIN,” are applicable in whole or in part to all persons regulated under FSMA, including of course financial advisers and are intended to represent the fundamental obligations of firms operating under the regulatory system.
In full, they ares:
A firm must conduct its business with integrity;
- Skill, care and diligence:
A firm must conduct its business with due skill, care and diligence;
- Management and Control:
A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems;
- Financial Prudence:
A firm must maintain adequate financial resources;
- Market conduct:
A firm must observe proper standards of market conduct;
- Customers’ interests:
A firm must pay due regard to the interests of its customers and treat them fairly;
- Communications with customers:
A firm must pay due regard to the information and needs of its clients, and communicate information to them in a way which is clear, fair and not misleading;
- Conflicts of interest:
A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client;
- Customers: relationships of trust:
A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment;
- Clients’ assets:
A firm must arrange adequate protection for clients’ assets when it is responsible for them;
- Relations with regulators:
A firm must deal with its regulators in an open and co-operative way, and must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice.
A breach of one or more of the Eleven Principles does not of itself give rise to a right of action for damages under FSMA. But the principles are relevant to the question of the standard of care in a claim based on negligence. They are also relevant in determining the fitness and propriety of financial advisers, both in the context of applications for permission to become an authorised person under FSMA and of the supervision of authorised persons and the consideration as to whether they remain fit and proper.
A breach of one or more of the Eleven Principles may however render a firm liable to disciplinary action by the FSA and to disciplinary sanctions; or may also provide the basis for an application by the FSA to the court for an injunction restraining a contravention or compelling action to remedy the contravention, or for a restitution order requiring a firm to make restitution where a financial adviser has profited from the contravention. They principles are also relevant to the FSAs powers of information gathering, their power to vary the category of permission granted to a financial adviser; and the FSAs powers of investigation and intervention.
II Conduct Of Business Rules
COB apply to all the regulated activities of authorised persons with investment business customers unless the rules and guidance indicate otherwise.
While certain of COB rules and guidance apply to all financial advisers conducting designated investment business, the application of the bulk of the rules and guidance is more limited. Financial advisers must not, by any oral or written communication, seek to exclude or restrict any duty or liability arising under the regulatory system.
A detailed examination of COB is beyond the scope of this paper. The rules and guidance however that are most likely to be relevant to claims against financial advisers are considered below.
In many cases the rules considered below closely resemble the equivalent rules created under the 1986 Act (on which they are evidently based).
(i) Know Your Client/suitability of investment
Principle 9 of the Eleven Principles requires financial advisers to take reasonable care to ensure that their advice to, and discretionary decisions effected for, any customer entitled to rely upon their judgment are suitable; and the FSA has elaborated upon this Principle in more detailed and specific rules and guidance concerning suitability contained in The Handbook.
Financial advisers transacting designated investment business are required to take reasonable steps to ensure that they do not: (a) make any personal recommendation (i.e. a recommendation made to a specific person) to a private customer (who is afforded greater protection by the FSA than other customers) or to buy or sell a designated investment; or (b) effect a discretionary transaction for a private customer; unless the recommendation or the transaction is suitable for the private customer, having regard to the facts disclosed by the customer, and other relevant facts about the customer of which the financial adviser is, or ought reasonably be, aware.
The FSA has noted that the requirement is “to take reasonable steps” to obtain information about a customers circumstances and to make suitable recommendations, and that those twin duties are, therefore, not absolute.
In communicating their recommendations to private customers, financial advisers must, moreover, take reasonable steps (having regard to the customer’s knowledge of the designated investment business to which the recommendation relates) to communicate in a way which is clear, fair and not misleading.
Financial advisers who act as investment managers for private customers must also take reasonable steps to ensure that the investment portfolios or accounts of such private customers remain suitable, having regard to the facts disclosed by each customer and other relevant facts about each customer of which the financial advisers are or should be aware.
(ii) Understanding of risk and risk warnings
Financial advisers are obliged to take reasonable steps, when communicating their recommendations to private customers (having regard to the customer’s knowledge of the designated investment business to which the recommendation relates), to communicate their recommendations in a way which is clear, fair and not misleading.
All financial advisers transacting designated investment business on behalf of private customers are specifically required to ensure that they do not:
- make a personal recommendation of an investment transaction;
- act as a discretionary investment manager;
- arrange or execute a deal in a warrant or a derivative; or
- engage in a stock lending activity; without taking reasonable steps to ensure that the customer understands the nature of the risks involved.
The purpose of these requirements is obviously to ensure that investors understand the risk inherent in specific transactions or, in the case of the discretionary management of an investment portfolio or account, the risks inherent in the process of having an investment portfolio or account under discretionary management.
The FSA has identified certain situations – in particular in respect of investments liable to fluctuate in value, or investments with features which may not be obvious, but which may render them unsuitable for a particular investor – where financial advisers are required to exercise particular caution, or to use standard risk warnings, or risk warnings which contain certain specified information.
(iii) Best and timely execution
The duty to provide best execution reflects Principle 2 (to exercise due skill, care and diligence in the conduct of its business) and Principle 6 (to pay due regard to the interests of its customers and to treat them fairly) of the Eleven Principles.
The duty is concerned with the execution of customer orders in designated investments (particularly securities and derivatives) and in particular, obtaining for the customer the best price available to the financial adviser in respect of the transaction in question, having regard to the nature and size of the transaction. To provide best execution on behalf of a customer, a financial adviser must:
- take reasonable care to ascertain the price which is the best available for the customer order in the relevant market at the time for transactions of the kind and size concerned; and
- execute the customer order at a price which is no less advantageous to the customer, unless the firm has taken reasonable steps to ensure that it would be in the customer’s interests not to do so
The duty is owed to all customers and not merely to private customers. In taking reasonable care to provide best execution a financial adviser should amongst other things ignore the remuneration payable to it and should advise the customer of the price at which it has executed the transaction (without marking up or marking down that price)
(iv) Churning and related breaches of duty
Before transacting any designated investment business on behalf of a private customer, financial advisers must disclose to the customer, in writing, the basis or amount, of their charge for the transaction in question, and the nature or amount of any other remuneration (usually commission paid to the financial adviser by the product provider/provide firm) payable to the financial adviser or any third party, which is attributable to the transaction in question.
This disclosure should cover any product-related charges which are deducted from the sum or sums that the investor invests. As a result, independent financial advisers who recommend packaged products, for example, must disclose the fee which they are proposing to levy, or the commission which they are to receive from the product provider, and the charges which the product provider will impose in respect of the investment in question.
In addition to disclosing their remuneration and any other payments made and any other charges imposed, financial advisers are also obliged to ensure that their charges to private customers in connection with any designated investment business are not excessive. In determining whether their charges are excessive, financial advisers should have regard to
- the amount of the charges for the service or product in question as compared with the charges imposed by others for similar services or products in question;
- the extent to which the charges may represent an abuse of trust that the customer has placed in the financial adviser;
- the nature and extent of the disclosure made to the customer in respect of the charges imposed.
This requirement reflects the obligation of financial advisers (enshrined in Principles 1 and 6 of the Eleven Principles) to act with integrity and pay due regard to the interests of the customers and to treat them fairly. With these considerations in mind, financial advisers are also obliged to take reasonable steps to ensure that they (and any person acting on their behalf) take reasonable steps to ensure that they do not “offer, give, solicit, or accept an inducement.”
- Conflicts of Interest
When acting for any customer financial advisers are obliged to ensure that any conflicts of interests (as between the customer and the financial adviser or as between two or more customers of the financial adviser) are managed fairly.
Firms may manage such conflicts of interests as arise by disclosing their interest to the customer, by relying on a policy of independence, by establishing Chinese walls, or by declining to act for a customer or customers.
The churning of a client’s investments will ordinarily be contrary to the client’s interests although it commonly benefits the adviser) and therefore conflicts with the duty of financial advisers to pay due regard to the interests of their customers and to treat their customers fairly. Having regard to this principle, financial advisers should not:
“...churn a customer’s account, that is, enter into transactions with unnecessary frequency having regard to the customers agreed investment strategy. They should also not switch a private customer within or between packaged products unnecessarily, having regard to what is suitable for that customer….the customers interests are paramount…”COB 7.2.2.G
A transaction or series of transactions which are not in a customer’s best interests either because they are unnecessary or too frequent are inevitably unsuitable, and the rules on suitability will also have been breached in these circumstances.
III The Conduct of Business Sourcebook
COBS reflects requirements brought in with effect from 1 November 2007. The statutory context and structure are similar to the formerly applicable COB. In general terms COBS applies to the activity of designated investment business, as well as the further activities of long term insurance business in relation to life policies.
A comprehensive review of COBS is beyond the scope of this paper but those parts most likely to be relevant to a claim against a financial adviser are considered below. The focus is on retail clients, although there are more limited regulatory requirements in relation to professional clients.
(a) The client’s best interests rule
A financial adviser must act honestly, fairly and professionally in accordance with the best interests of its client. This principle is know as the “client’s best interests rule.”
(b) Information disclosure before providing serviced
A financial adviser must provide appropriate information in a comprehensible form to a client about designated investments and proposed investment strategies, including appropriate guidance on and warnings of the risks associated with investments in those designated investments or in respect of particular investment strategies. The client must be reasonably able to understand the nature and risks of the specific type of designated investment that is being offered and, consequently, to take investment decisions on an informed basis. Similar rules apply to appropriate information about the financial adviser and its services, execution venues, costs and associated charges.
Financial advisers may receive fees, commissions or non-monetary benefits paid or provided to or by the client or a person on behalf of the client. In relation to third parties, such payments and benefits are acceptable only if the following requirements are satisfied:
- the payment of the fee or commission, or the provision of the non-monetary benefit does not impair compliance with the financial adviser’s duty to act in the best interests of the client; and
- the existence, nature and amount of the fee, commission or benefit, or where the amount cannot be ascertained, the method of calculating that amount, is clearly disclosed to the client, in a manner that is comprehensive, accurate and understandable, before the provision of any service by the financial adviser to the client.
(d) The fair, clear and not misleading rule
Financial advisers must ensure that a communication or financial promotion is fair, clear and not misleading. This rule applies in relation to a communication by the financial advisers to a client in relation to designated investment business (other than third party prospectus), a financial promotion communicated by the firm (other than an excluded communication, a non-retail communication and a third party prospectus), and a financial promotion approved by the adviser.
The additional guidance indicates that this rule applies in a way that is appropriate and proportionate taking into account the means of communication and the information that the communication is intended to convey. A communication addressed to a professional client may not need to include the same information, or be presented in the same way, as a communication addressed to a retail client.
(e) Communications with retail clients
The provision of information by a financial adviser in relation to its designated investment business and the communication or approval of a financial promotion must comply with the following rules, where such information or financial promotion is addressed to, or disseminated in such a way that it is likely to be received by a retail client:
- the name of the firm must be included
- the information must be accurate and should not emphasise any potential benefits of the relevant business or investment without also giving a fair and prominent indication of any relevant risks;
- the information is sufficient for, and presented in a way that it is likely to be understood by, the average member of the group to whom it is directed, or by whom it is likely to be received;
- the information must not disguise, diminish or obscure important items, statements or warnings;
- if information compares relevant business, relevant investment, or persons who carry on relevant business, the comparison must meaningful and presented in a fair and balanced way; and
- if any information refers to a particular tax treatment, there must be a prominent statement that the tax treatment depends on the individual circumstances of each client and may be subject to change in future
There are also detailed provisions concerning the provision of information about past, simulated past and future performance, COB 4.6R
(f) Client Agreements
Where a financial adviser carries on designated investment business, other than advising on investments, with or for a new retail client, it must enter into a written basis agreement, on paper, with the client setting out the essential rights and obligations of the financial adviser and the client.
(g) Assessing suitability
A financial adviser must take reasonable steps to ensure that a personal recommendation of a decision to trade is suitable for its client. When making any such recommendation or managing a investments, the adviser must obtain the necessary information regarding the client’s knowledge and experience in the investment field relevant to the specific type of designated investment or service, their financial situation and investment objectives.
The financial adviser must obtain from the client such information as is necessary for the adviser to understand the essential facts about the client and have a reasonable basis for believing, giving due consideration to the nature and extent of the service provided, that the specific transaction to be recommended, or entered into in the course of managing, meets the client’s investment objectives.
The information regarding the financial situation of a client must include, where relevant, information on the source and extent of his or her regular income, assets, including liquid assets, investments and real property, and regular financial commitments.
A financial adviser is entitled to rely on the information provided by its clients unless it is aware that the information is manifestly out of date, inaccurate or incomplete. If the financial adviser does not obtain the necessary information to assess suitability, it must not make a personal recommendation to the client or take a decision to trade for him.
(h) Best execution
A financial adviser must take all reasonable steps to obtain, when executing orders, the best possible result for its clients taking into account the execution factors (namely price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of an order.)
The application of the best execution obligation will vary according to the particular type of financial instrument concerned.
When executing a client order, a financial adviser must take into account the following criteria for determining the relevant importance of the execution factors:
- the characteristics of the client including the categorisation of the client as retail or professional; or
- the characteristics of the client order;
- the characteristics of the financial instruments which are the subject of the order; and
- the characteristics of the execution venues to which the order can be directed.
(i) Provision of information about investments
A financial adviser must provide a client with a general description of the nature and risks of designated investments. That description must explain the nature of the specific type of investment concerned, as well as the risk particular to that specific type of investment, in sufficient detail to enable the client to take investment decisions on an informed basis. The description must include, where relevant to the specific type of investment concerned and the status and level of knowledge of the client, the following further elements:
- the risks associated with that type of investment including an explanation of leverage and its effects and the risk of losing the entire investment;
- the volatility of the price of the investment and any limitations on the available market for such investments;
- the fact that the investor might assume, as a result of transactions in such investments, financial commitments and other additional obligations, including contingent liabilities, additional to the cost of acquiring the investment; and
- any margin requirements or similar obligations applicable to the investments of that type.
The requisite information must be provided in good time before the financial adviser carries on the investment business for the client.
IV Section 150 FSMA
Like the 1986 Act, FSMA confers a civil right of action on investors who, in certain defined circumstances, suffer a loss as a result of a breach by a financial adviser of the FSAs rules.
To enjoy a cause of action under s150:
- a rule created by the FSA under FSMA must have been contravened by an authorised person;
- the contravened rule must not be a rule which provides that s150(1) is inapplicable to it (i.e. the rule must be an actionable duty); and
- a loss must have been sustained “as a result of the contravention: and that loss must have been sustained by a private person.
Even where these conditions are met, the financial adviser may still rely upon the defences applicable to claims for the breach of a statutory duty. Financial advisers must not however by any oral or written communication seek to exclude or restrict any duty or liability arising under the regulatory system, including those actionable duties which arise from the rules created by the FSA under FSMA, or the causes of action potentially arising under section 150 of FSMA in respect of contraventions of those rules.
The measure of damages for breach of the rules is no different from that which can be recovered for breach of contract or tort. If the claimant has relied on his own judgement and not the advice given, he will not be able to show that he had suffered loss as a result of that advice.
A breach of any of the Eleven Principles does not give rese to a cause of action under section 150 FSMA. As the FSA develops its approach of regulation based more on principles such as the Eleven Principles, and less on detailed rules, so the opportunities to rely on breaches of the rules in, for example COBS, as breaches of statutory duty are likely to diminish. Instead, the Eleven Principles will be relevant to the question of the appropriate standard of care for a claim in negligence (as well as to enforcement action by the FSA against firms perceived to have breached the principles)