13 December 2016

In considering whether a professional acted negligently, lawyers know to apply the test from the 1957 case of Bolam v Friern Barnet Hospital Management Committee. The “Bolam” test asks whether the defendant was acting “in accordance with a practice accepted as proper by a responsible body of... men skilled in that particular art”. It has also generally been accepted that the same test is applicable in claims about investment advice.

In a judgment published in September this year, however – O’Hare v Coutts & Co – the High Court has taken a different approach, applying the test used by the Supreme Court in the 2015 Scottish case Montgomery v Lanarkshire Health Board.

As is commonly the case, the court found that the extensive regulatory regime (in this case the COBS rules) helped determine the standards against which actions and advice are to be judged. The Judge focused particularly on the rules which deal with the defendant (1) obtaining information about the client’s knowledge, experience and objectives (COBS 9.2R) and (2) providing to the client appropriate information including warnings of the risks of investments and strategies being proposed (COBS 2.2.1(1)R).

On the face of it, the regulatory provisions are difficult to square with the Bolam test: there is, for example, no reference in COBS to “the practice considered acceptable by a responsible body of professionals skilled in the art” (or similar). The test in Montgomery focusses, as COBS does, on the dialogue between adviser and client and ensuring that the client is sufficiently informed about the risks.

O’Hare is viewed positively by advisers and banks as supporting the conclusion that there is nothing wrong with persuading a client to take risks that he might not otherwise have taken, provided that full information and risk warnings are given.

There are practical difficulties though: COBS 9.2.1R requires the adviser to take reasonable steps to ensure that the investments recommended are suitable but the Montgomery test does not help with the assessment of whether this requirement has been met. Taken to its logical conclusion, O’Hare means that it would be difficult to see how any recommendation could be held to be negligent provided that sufficient explanation was given to the client.

News is currently awaited of whether the O’Hares’ request for permission to appeal the decision has been granted so the story may not be yet finished…

The other pending development in this area is HM Treasury's consultation on amending the FSMA Regulated Activities Order 2001 in order to bring an end to the complexity of having two different definitions of “financial advice”. The intention is to achieve a single definition of advice applicable across the board and thereby to ensure “clear blue water” between the regulated activity of providing financial advice and the provision of financial guidance (not regulated).

The hope is that this would provide greater clarity to firms reducing their regulatory risks and costs and thereby simultaneously encouraging them to provide (and charge appropriately for) more comprehensive and useful guidance to clients who do not wish to pay for regulated advice.

Sounds like a good idea? Let's see what 2017 brings!

If you would like any further information, please contact Tim Pope or your usual contact from our financial services disputes and enforcement specialist team.

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