In the recent decision of O'Hare v Coutts & Co1, the English Court departed from the traditional Bolam2 test in assessing whether a private banking financial adviser had breached its duty to exercise reasonable skill and care when advising on certain investments.
The key facts
Mr and Mrs O'Hare (being two high net worth individuals) purchased five investments from 2007 to 2010 on the advice of Coutts, eventually suffering losses. A claim was brought for approximately £3.3 million, alleging that Coutts had recommended unsuitable investments with no capital protection. In its defence, Coutts contended that the advice was sound, the investments suitable and that the claim related to poor performance, informed by hindsight.
The O'Hares' contract with Coutts required Coutts to provide advice and recommendations in writing about the kinds of investments that would (in Coutts' view) be most appropriate. It was common ground that the contract included an implied duty (and that the law of tort imposed an identical duty) to use reasonable skill and care when recommending investments, i.e. the investments must be 'suitable'.
A key issue was whether the investments were suitable (and whether it was negligent for Coutts to recommend those investments).
Kerr J initially considered the usual Bolam test, being that a professional is required to act in accordance with a practice accepted as proper by a body of competent respected professional opinion.
However, in the context of investment advice, the Judge explained that there must be proper dialogue and communication between an adviser and a client, so as to ensure that the client understands the advice and the risks associated with a recommended investment. The Judge did not consider that the required extent of that communication could be measured against a responsible body of opinion. Instead, a different test – deriving from the Scottish medical negligence case of Montgomery3 – was considered more appropriate: that Coutts must take reasonable care to ensure that the client is aware of any material risks involved in any recommended investment, and of any reasonable alternatives. Emphasis was placed on the following points:
- A duty to provide full information in similar terms is found within the regulatory regime under the FCA's Conduct of Business Sourcebook (COB rules).
- The expert evidence indicated that there was little consensus in the financial services industry about how the treatment of risk appetite should be managed. Kerr J neatly summarised the issue by explaining that an adviser sometimes has to save a client from himself/ herself, but also that investors must take responsibility for their investment decisions, even mistaken ones. In Kerr J's words, the duty of care must "reflect a balance between those two propositions, which pull in opposite directions".
The Judge further commented that there was nothing intrinsically wrong with a private banker using persuasive techniques to induce a client to take risks which he/ she would not usually take, provided: (i) the client can afford to take such risks and shows himself/ herself willing to take them; and (ii) that the risks are not so high as to be foolhardy.
On the facts, it was decided that this was a case where responsibility for the investment decisions, even taken under the influence of Coutts' salesmanship, could be fairly taken by the claimants and that they were not objectively unsuitable.
The takeaway messages
This decision should provide comfort to advisers, especially where their clients have to exercise a degree of judgment under the relevant relationship. In such circumstances, the Court has recognised that clients need to be accountable for their investment decisions.
The critical part of this different test is whether the client is aware of any 'material' risks when investment advice is being given. In that respect, would a reasonable person in the client's position likely attach significance to the risk (or should the adviser be aware that the client would be likely to attach significance to it). This stresses the importance of financial advisers considering their clients' financial position, investment objectives and appetite for risk, before recommending a particular investment.
- Mr Les O'Hare and Mrs Janet O'Hare v Coutts & Co  EWHC 2224 (QB).
- Bolam v Friern Barnet Hospital Management Committee  1 LR 582.
- Montgomery v Lanarkshire Health Board  AC 1430.