Decades-old legal test not suitable for assessing if investment advice met professional standards, says High Court

Out-Law News | 20 Sep 2016 | 4:08 pm | 3 min. read

A long-standing legal test, that helps to determine whether professionals meet their duty of care to clients is not appropriate for determining whether UK investment advisers have sufficiently communicated with investors to be said to have provided suitable advice, the UK High Court has said.

Mr Justice Kerr said that the 'Bolam test', which has been established in case law for more than 50 years, is unsuitable for assessing financial advisers' conduct towards investor clients.

The judge said that he did not think "the required extent of communication between financial adviser and client to ensure the client understands the advice and the risks attendant on a recommended investment, is governed by the Bolam test".

His view was influenced by expert evidence given during the trial hearing which Mr Justice Kerr said "tends to indicate that there is little consensus in the financial services industry about how the treatment of risk appetite should be managed by an adviser".

The High Court was ruling in a case in which a high net worth couple, Les and Janet O'Hare, claimed nearly £3.3 million from Coutts & Co. for losses they said they sustained as a consequence of being provided with unsuitable advice from the company. The O'Hare's claims were dismissed by the court.

Dispute resolution expert Michael Fletcher of Pinsent Masons, the law firm behind Out-Law.com, said: "The Bolam test focusses on a defendant’s conduct and helps to determine whether, for example, they have been negligent. The test involves assessing whether they were acting in accordance with a practice of competent respected professional opinion. However, here, there was not obviously a consensus in the industry about how financial advice should be delivered. The judge’s approach in this case was to focus instead on what the O'Hare's legitimate expectations of Coutts could be said to be in respect of the provision of financial advice, and on what the regulatory regime required of Coutts."

"Given this, and given the applicability of the Conduct of Business (COBS) rules to investment advisors, the judge determined that the Bolam test was not a useful tool for identifying the appropriate standard of conduct by which to assess the suitability of advice provided by Coutts to the O'Hares," he said.

In his ruling, Mr Justice Kerr said that the regulatory standards that apply to financial advisers were "very difficult to square with the application of a conventional Bolam approach" and further examined existing case law on the standards of conduct that professionals can be expected to adhere to.

The judge considered factors such as the experience of Mr O'Hare in business and in making investments, as well as the sales practices deployed by Coutts, in determining the suitability of the advice provided in the case.

"As I read the authorities and the COBS regulatory scheme, 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," Mr Justice Kerr said.

"The authorities include mention of the adviser sometimes having to save the client from himself, but also of the principle that investors take responsibility for their investment decisions including mistaken ones. The duty of care must reflect a balance between those two propositions, which pull in opposite directions," he said.

"Thus, an investment adviser 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 I do not think it is the law that a private banker breaches his duty of care if, without irresponsibly encouraging foolhardiness, he advises a client to take higher investment risk than he would otherwise take. I do not see that proposition in the authorities. I do not think it can be right. In my judgment, the authorities do not exclude the proposition that in an appropriate case, advice from a private banker may condition the client's risk appetite, rather than the other way round," the judge said.

Mr Justice Kerr dismissed the O'Hares' complaints that they had been persuaded by Coutts to invest in riskier propositions than they had indicated a willingness to invest in, in a way which constituted a breach of Coutts' duties to them. Coutts had countered the complaints by claiming they were "informed by hindsight" and were not reflective of it having failed to have provided suitable advice

The judge also said that Coutts had stuck to its obligation to "work with the O'Hares to develop an investment strategy and advise from time to time on investments to implement that strategy".