The recent decision of the High Court in Worthing and Another v Lloyds Bank plc  EWHC 2836 (QB) provides helpful clarification for financial institutions as to their duties when providing regulated investment advice under the Financial Services and Markets Act 2000 (“FSMA“) and conducting subsequent reviews of that advice.
In this case, the Court held that the original investment advice given by Lloyds Bank plc (the “Bank“) was reasonable. However, even if the advice had been wrong, there was no continuing contractual duty for the Bank to correct it. Accordingly, the Claimants were not able to avoid the limitation bar to a claim based on the original advice (given in 2007) by casting the alleged omission of a later correction as a continuing breach of duty. On the facts, the Bank was required to conduct periodic reviews in accordance with its terms and conditions. In performing this obligation the Bank duly discharged its duties.
The following further key points in this case will be of interest to financial institutions:
- There is a “clear advantage” in financial institutions using standardised documentation when explaining to customers the nature of products and the associated risks.
- The Court rejected a complaint that risk-assessment used in this case ought to have involved more specific and concrete questions involving potential percentage falls in an investment portfolio.
- There is no requirement under the COBS Rules for financial institutions to carry out a fresh risk/objectives analysis at every periodic review (and it would seem there is no such duty at common law, given that discharge of the duty to exercise reasonable care and skill when providing regulated investment advice requires compliance with the applicable COBS Rules, and no additional common law duty was found by the Court in this case).
- The Court’s strong reliance on the contemporaneous file notes of the Bank when giving the investment advice highlights the importance of keeping thorough and accurate notes when giving such advice to customers.
The Claimants, being a husband and wife of high net worth, sought to recover compensation for investment losses. They claimed that the Bank, in advising them to invest in a medium-risk investment portfolio, acted negligently, in breach of contract and in breach of its statutory duties under FSMA and the Conduct of Business Rules, subsequently replaced by the Conduct of Business Sourcebook Rules (“COB” and “COBS” respectively). In essence, they claimed they only ever wanted a low-risk investment and were not properly advised as to the medium-risk nature of the portfolio.
The investment advice followed several meetings during which the Claimants discussed their expectations and objectives and filled out a number of standardised documents designed to assess their appetite, and capacity, for risk. The Claimants also signed various documents which explained the risk nature of the investment portfolio.
The Bank conducted a review meeting with the Claimants approximately one year later. At around this time the Claimants were experiencing financial pressure from an unpaid overdraft account. At the review meeting the Bank set out a number of options to assist the Claimants with the overdraft, but ultimately recommended retaining the portfolio. Later that year, the Claimants decided to sell the portfolio suffering losses of around £43,000.
At a pre-trial hearing, the Claimants had conceded that their causes of action relating to the original advice were statute-barred (the original investment being made in 2007), with the result that they relied upon claims in respect of the Bank (i) failing to correct the original advice; and (ii) providing further incorrect advice at a review meeting.
The Court dismissed the claim.
Although the claims arising from the original advice were statute-barred, the Court considered the reasonableness of that advice in deciding whether there was any duty to correct it. At all relevant times until the making of the initial investment, the giving of investment advice was subject to the COB Rules. The Court found that the Bank had complied with its duties under contract and the COB Rules, as well as its common law duty to exercise reasonable care and skill. The Court accepted the use of the standardised documentation for the purpose of explaining to its customers the nature of its products and the risks attendant on them. That entitlement is now expressly recognised by COBS 2.2.1 R. Interestingly, the Court rejected the claimants’ submission that risk-assessment ought to have involved more specific and concrete questions, such as: “Are you comfortable if the value of the investment falls by 10%? What about 20%? Or 30%?”
The Claimants’ primary submission was that, having given incorrect investment advice in January 2007, the Bank was at all times thereafter under an absolute contractual obligation to correct that advice by recommending that the Claimants either reinvest in a portfolio with low-risk profile or disinvest. This had the same effect as saying that each moment after the giving of the incorrect investment advice was a new breach by way of a failure to rectify the earlier breach. At trial, the Claimants relied upon the terms and conditions to create those continuing contractual obligations, which are set out at paragraphs 32-34 of the judgment. For example:
“3. The Service
ii. We are responsible on a continuing basis for managing the securities in your portfolio, in accordance with the investment objective and risk category that you have chosen for your portfolio.
iii. We will contact you from time to time to check whether there have been any changes in your circumstances and requirements that could affect the way in which we act on your behalf. You should inform us then or at any time if there are or have been any material changes that may affect your investment objective or attitude to risk for your portfolio, so that we can discuss with you how best to meet your future needs and objectives.”
The Claimants’ amended Particulars of Claim also relied upon an implied obligation under section 13 of the Supply of Goods and Services Act 1982 to exercise reasonable care and skill in and about giving investment advice. However, the argument based on continuing breach of contract required the Claimants to identify the particular contractual obligation that remained unperformed, i.e. the underlying contractual obligation to which the duty of care in section 13 applied. The Claimants failed to do so, and it appears from the judgment that this argument was not relied upon at trial.
The Court held that:
- The Bank was not under a continuing contractual duty with regard to the original advice; the Claimants were not able to avoid the limitation bar to a claim based on the original advice by casting the omission of a later correction as a continuing breach of duty.
- The relevant duty (to provide advice in accordance with contractual, statutory and common law duties) arose only at the point of the original advice. It was not the Claimants’ case that the Bank failed to give investment advice at all (which could theoretically give rise to a continuing duty if not satisfied), but that the advice given was incorrect.
- Once the advice was given, correct or otherwise, the duty to provide advice was satisfied. The Court did not think that the case of Midland Bank Trust Co. Ltd v Hett, Stubbs & Kemp  1 Ch. 384 provided any support to the Claimants’ argument and nothing in Maharaj and another v Johnson and others  UKPC 28 cast any doubt upon the Court’s analysis (see our blog post on Maharaj here).
The Bank satisfied its duty to conduct the review with reasonable care and skill and in accordance with the COBS Rules (which had replaced the COB Rules by the time of the review). It was not in breach of a strict obligation to correct an error in its original investment advice, because of the conclusions reached above. There was no contractual obligation to carry out a fresh risk assessment at the review, nor was there a statutory duty under the COBS Rules. The contention that the Bank nevertheless failed to advise the Claimants that the portfolio was no longer suitable failed because the claimants’ attitude to risk had not changed. The recommendation provided was suitable in the circumstances (given the Claimants’ main concern was the overdraft not the portfolio), and the future investment objectives of the claimants at that time could not properly be assessed.
This case provides welcome comfort to financial institutions that, where there is an advisory relationship with a customer, the Court will be slow to find that a bank is under a legal duty to update the original advice on a continual basis.
Although regulatory expectations of suitability assessments under MiFID II are arguably more granular, requiring valid and reliable assessment of the client’s knowledge and experience and risk, and recommendations to be suitable in the context of the client’s risk tolerance and ability to bear loss, it seems unlikely that the court would have come to a different conclusion regarding the suitability of the investment in this case.
Under MiFID II, firms providing portfolio management (such as the Bank in this case) will be required to provide periodic suitability assessments, and firms giving investment advice to disclose whether or not they will provide such assessments. Where these assessments are provided, firms will be required to issue a periodic report containing an updated statement of how the investment meets the client’s preferences, objectives and other characteristics of the retail client. However, ESMA’s Technical Advice to the European Commission on MiFID II and MiFIR suggests that periodic suitability reports would only need to cover any changes in the instruments and/or the circumstances of the client. ESMA accepts (p.106 of its final report) that this falls some way short of an obligation to provide on-going monitoring of suitability. Assuming that the Commission acts on ESMA’s advice, it therefore seems unlikely that the outcome of this case would be substantially different under MiFID II.