Professional negligence within the financial sector


Financier Worldwide Magazine

April 2014 Issue

April 2014 Issue

In the context of the economic catastrophe of recent years it is hardly surprising that there has been a surge in claims for negligence against some of the brightest professionals in the British Isles. The financial sector has not escaped. Bankers, brokers, investment advisers, pension advisers and trustees, to name but a few, are all exposed to the threat of litigation for failing to act with a degree of skill and care which is reasonably expected from a member of their profession. In considering the relevant standard, one must also have regard for the relevant regulatory and statutory requirements in existence, as the failure to comply with these would be negligent. 

When referring to a professional, Lord Denning MR in the case of Greaves & Co. v Baynham Meikle & Partners [1975] 1 WLR 1095, stated “The law does not usually imply a warranty that he will achieve the desired result, but only a term that he will use reasonable care and skill. The surgeon does not warrant that he will cure the patient. Nor does the solicitor warrant that he will win the case.”One wonders if Lord Denning MR was drafting his judgment in this case in 2014 whether there would be a reference to the financial sector. I suspect there would. Perhaps he would have also stated “Nor does the financial advisor warrant that the investment will only increase in value.” 

Less than a generation ago the financial sector was an entirely different beast. The term ‘financial mis-selling’ was unheard of. In very recent times the culture of financial advice has, to an extent, changed from salesman to professional adviser. The bonus structures or commission payments which existed within the financial sector before the recession undoubtedly contributed to an ethos of ‘hard selling’ of financial products despite their relevance of suitability to an investor’s needs. Jackson and Powell on Professional Liability, Sixth Edition, state “It is submitted that in almost every case where a financial practitioner recommends an investment as suitable for an investor that recommendation carries with it implicit representations that (1) the nature of the investment has been carefully considered by the practitioner, (2) the investor’s needs have been carefully assessed by the practitioner, and (3) viewed objectively, that the investment meets those needs. If one or more of those implicit representations is false, the fact that the express representation might be one of opinion rather than of fact will be of no assistance to the maker of the representation.” 

It is clear therefore that the failure on the part of a financial adviser to assess a customer’s suitability for a particular investment and the failure to ensure that a customer has an adequate understanding of the risks associated with the investment would be deemed to be negligent. It follows that in many cases where there have been such failings that the investment would not have occurred ‘but for’ the professional’s negligence. These cases are referred to as ‘no transaction’ cases. In these cases damages are assessed by firstly determining whether the negligence caused or contributed to the investor entering into the investment or transaction. If that is affirmed then it is arguable that all losses associated with the investment or transaction are recoverable. ‘No transaction’ cases were first considered by the UK courts almost a century ago in the context of a claim for an alleged negligent valuation of a property on the basis of which the Plaintiff sought a mortgage (Baxter v FW Gapp & Co Ltd [1939] 2 All ER 752). Whilst this case relates to a valuer’s negligence, the same principles apply to a financial adviser’s negligence. Courts across the British Isles have seen an increase in the number of cases such as these in recent times as they tend to be an attractive type of claim in an economic downturn. A plaintiff may be less likely to pursue such a claim in a rising market.

There are also an increasing number of claims coming before the courts claiming fraudulent misrepresentation on the part of financial advisers. This can arise, for example, whereby a financial adviser deliberately or recklessly misrepresents an investment in order to achieve a bonus or commission or where a desire exists to benefit themselves from the investment. The advantage for the plaintiff in a claim where there is an allegation of fraudulent misrepresentation is that the Statute of Limitations only begins to run when the plaintiff became aware of or ought to have been aware of the fraud.

An employer ought to be aware that both the employee providing the financial advice and the employer may be liable in circumstances whereby negligence or fraudulent misrepresentation arises. 

Warren Buffet famously said “It’s only when the tide goes out that you learn who’s been swimming naked.” The tide has certainly gone out since the collapse of the banking sector and it was inevitable that the finger of blame would be pointed at the financial sector by those seeking to recoup their losses. As economies recover and professionals learn from mistakes made in the past, it is likely that in time we will see a reduction in the number of financial claims coming before the courts; however, for the time being, the spotlight is firmly on the financial sector.

Rachael Liston is a partner at Augustus Cullen Law Solicitors. She can be contacted by email:

© Financier Worldwide


Rachael Liston

Augustus Cullen Law Solicitors

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