James is a Partner and Head of the Dispute Resolution team and primarily handles commercial…View Profile View all
In a recent High Court case the Judge has dismissed a claim against a bank finding that it had not breached its duty (either in contract or negligence) to exercise reasonable skill and care when advising the claimants when making investment decisions.
The Judge looked at whether there had been a breach of duty by the bank in a new way; the contract between the claimants and the bank (and the law of negligence) imposed a duty upon the bank to use reasonable skill and care when recommending investments. Generally the test applied by the Courts had been, “whether the defendants, in acting in the way they did, were acting in accordance with a practice of competent respected professional opinion … in accordance with a practice accepted as proper by a responsible body of … skilled men in that particular art”. Whilst that test had been expounded in a medical negligence case, it had been applied to other professional fields, the test being whether, “Reasonable practitioners professing the expertise of the defendants could properly have given advice in the terms they did.”
The Judge found that in the context of investment advice there has to be proper dialogue and communication between the advisor and the client to ensure that the client understands the advice and the risks of any recommended investment. The Judge decided that the traditional test did not apply and preferred the reasoning of another, more recent medical negligence case in which the Court said that there was a duty, “to take reasonable care to ensure that the patient is aware of any material risks involved in any recommended treatment, and any reasonable alternative or variant treatments.” The test of materiality was said to be, “Whether, in the circumstances of a particular case, a reasonable person in the patient’s position would be likely to attach significance to the risk, or the doctor is or should be aware that the particular patient would be likely to attach significant risk to it.”
Whilst the Judge acknowledged that there were differences between the medical and financial fields, he did not feel that they were so different as to lead to the conclusion that how much to say to a client is to be decided according to whether the advisor acted in line with a practice accepted as proper by a responsible body of those giving financial advice. Expert evidence in the case demonstrated little consensus in the financial services industry about how the treatment of risk appetite should be managed by an advisor. The Judge felt that the Conduct of Business Source Book rules gave good guidance as to what ordinarily would be enough to comply with the common law duty to inform, being part of the duty to exercise reasonable skill and care.
The Judge said that the bank had a duty to ascertain the claimants’ requirements and objectives and to advise on, and inform them, about investments that were suitable. Discussions between the parties had been full and were supplemented by letters, emails and presentations. In the circumstances, looking at it on the revised test to which he had referred, the Judge focused on what the claimants, as an informed investor, could expect to be told. The judgment implies that giving investment advice is not simply an exercise of professional skill, an informed investor is entitled to decide the risk that he is willing to take and to shoulder responsibility if he makes a bad investment decision.
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