Being non-negligent and being seen to be non-negligentPrint publication
In the recent case of Worthing v Lloyds , the High Court considered the duties on banks and financial advisors giving investment advice to customers.
Investment advice and review
In 2007 the claimants, who had previously had experience investing in commercial property, savings accounts and Treasury Deposits, invested £700,000 in a financial product portfolio (the Portfolio) provided by, and following advice from, the defendant bank. When the claimants subsequently surrendered their investment and suffered financial losses they sued the bank, alleging breach of statutory duty, breach of contract and negligence. Whilst any claim relating to investment advice originally provided in 2007 was statute-barred following expiry of the limitation period, the bank did carry out a review of the investment with the claimants in 2008 and the claimants relied upon the review to found their action.
As part of the initial advice process in 2007, and prior to the claimants’ investment in the Portfolio, the bank sought information about the claimants’ financial situation and asked various questions designed to ascertain their attitude to risk. The bank prepared a risk and planning document, which set out its assessment that the claimants had a ‘balanced’ (meaning ‘medium’) attitude to risk and its recommendation that the claimants invest in the Portfolio accordingly. The bank used standard documents to explain the nature of the investment product and its risks to the claimants. In the 2008 review the bank ascertained that the claimant’s attitude to risk had not changed and advised that no immediate decision to be taken to sell the Portfolio. At all times the bank completed and kept documentary records.
The claimants argued that:
- As first-time investors in financial products, the bank’s standard documentation and the claimants’ own acceptance of the bank’s categorisation of their attitude to risk as ‘balanced’ was insufficient to determine the claimants’ understanding. The claimants contended that, in fact, their attitude to risk was ‘low’.
- The bank’s assessment in 2007 was therefore incorrect and its consequential investment advice was incorrect. That, in turn, led to a continuing mistake in 2008, when the bank found that the claimant’s attitude to risk had not changed. The continuing assessment at the point of the 2008 review amounted to a breach of the bank’s statutory duties (under Part 1 of Schedule 2 to the Financial Markets and Services Act 2000 and under the Conduct of Business Sourcebook Rules) and a breach a post-investment contractual obligation on the bank to correct an error.
- The claimant also contended that, in failing to carry out a fresh risk assessment, the bank had been negligent and had not carried out the 2008 review with reasonable care and skill.
Decision: for the defendant bank
The court held:
- As a result of the various enquiries and steps it had undertaken and, crucially, the contemporaneous records it had kept, the bank was able to demonstrate that it had complied with the relevant statutory rules and obligations, and that the claimants had been made aware of, and understood, the assessment of their attitude to risk and the nature of, and risks with, the Portfolio.
- The bank’s use of standardised documentation was sufficient.
- There was therefore no error for the bank to correct in 2008, and even if there had been, the bank was under no continuing duty: no such contractual duty existed and the bank’s duty of care towards the claimant was simply to conduct the review with reasonable care and skill.
- It was sufficient to discharge the duty of care for the bank to ascertain that the claimants’ attitude to risk had not changed by 2008.There was no legal obligation for the bank to conduct a fresh assessment.
- It was reasonable, in all the circumstances, for the bank to maintain the assessment of the claimants’ attitude to risk as medium and to advise, in 2008, that no immediate decision be taken to sell the Portfolio. The claimants’ claims failed on all counts.
WM Comment and practical points to note
All too often, although financial institutions and advisors may well have acted reasonably and correctly, a lack of contemporaneous note-taking, procedural errors or omissions and/or poor recording keeping can mean that they face difficulties when defending themselves, and can be forced into making settlements. That can be a very bitter pill to swallow. In this case the judge placed significant emphasis on the bank’s documentary evidence of the policies and procedures it followed, the information it sought from the claimants and the analysis and assessment it undertook. That evidence proved priceless in getting the bank the decision it deserved.
Financial institutions would be well advised to keep their policies, internal processes, standard documents and pre- and post- contract information and record-keeping under review, and to train staff as to the importance of compliance with procedures and completion of documentation. As well as minimising the scope for complaints or claims, and alongside assisting excellent customer service, the new Consumer Rights Act 2015 highlights the importance, now more than ever, of clearly and transparently getting the right information to the customer every time.
 Philip Worthing (1) and Wendy Worthing (2) v Lloyds Bank Plc  EWHC 2836 (QB)