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The duty to advise: A welcome change for financial services?

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08/11/2016

Duty to advise – standard of care?

For nearly sixty years the standard of care expected of a professional has been the Bolam test – namely, whether the adviser acted in accordance with practice accepted as proper by a responsible body of professionals [1].  In this recent case [2], Mr and Mrs O’Hare claimed that Coutts, their financial adviser, had failed to exercise reasonable skill and care when providing advice in respect of investments which subsequently lost value.  To decide whether or not Coutts had been negligent, the High Court concluded that an alternative test – that set out in the 2015 Supreme Court case of Montgomery [3] – should be applied instead.

A new and alternative approach

The Montgomery test is concerned with whether the adviser has taken reasonable care to ensure that any material risks involved in, and any alternatives to, a proposed course of action have been fully explained to and understood by the claimant.  As a corollary to that, the test for materiality of risk is whether, in the circumstances of the particular case, a reasonable person in the claimant’s position would be likely to attach significance to the risk, or whether the adviser is or should reasonably be aware that the particular claimant would be likely to attach significance to it.

The Montgomery test and the O’Hare v Coutts case are concerned with situations in which a client exercises discretion in making a decision following receipt of professional advice.  These cases acknowledge that the client is entitled to decide the risks that he or she is willing to take and will be responsible for their own mistakes.  In other words, the Montgomery test acknowledges the role of the client and does not require the professional advisor to ‘save’ the client from him- or herself.  The Montgomery test therefore shifts the focus away from a recognised body of opinion and on to whether an adviser fully explains the type and level of risk, and any alternative options, to its client.

In finding that the Montgomery test was to be preferred over Bolam, the High Court was influenced by the fact that expert evidence suggested that there was little consensus in the financial services industry as to how clients’ risk appetite should be managed by a financial adviser (and therefore the scope and extent of an adviser’s proper role); and by the Financial Conduct Authority’s Conduct of Business Sourcebook rules (COBS), which make no reference to a responsible body of opinion but which do prescribe a duty to explain which is similar to that required in Montgomery.  (The judge also acknowledged that, in this particular case, the basis of the relationship between the O’Hares and Coutts was commercial – in particular because the contract allowed Coutts to sell its own or third parties’ products to the O’Hares.)

Implications?

In terms of financial services and investment advice, this decision is hugely significant and will be welcomed by financial advisers and their insurers. It provides certainty that what is required is full disclosure and explanation of material risks and gives comfort that financial advisers and firms should no longer need to grapple with unclear and inconsistent views as to the scope and extent of an adviser’s role and responsibility.

The question arises: does this case open the door for the Montgomery test to be applied in place of Bolam test in other professional negligence scenarios?  Quite possibly. Montgomery itself was a medical negligence case and there is currently no authority which specifically restricts the types of negligence claims in which the test might apply.

It seems possible that Montgomery might be appropriate in the solicitor/client relationship where the client exercises discretion in decision-making based on legal advice.  That might, perhaps, not least be the case where the client is experienced in a particular area and/or (as is common today) where there is a blurring of the lines between legal and commercial advice.  The same might also be said in relation to the accountant/client context.

Whether or not the Montgomery test applies is also likely to turn on the nature of expertise that is in issue and the existence and quality of any expert body of opinion.  However it is too early to tell whether a paucity of expert evidence in other/non-advice professional negligence claims would merit preference of the Montgomery test over Bolam.

WM Comment

O’Hare v Coutts certainly represents an exciting progression in professional negligence law and a welcome change in the financial services context.  No doubt this case will prompt fresh attempts to reconsider the scope of a professional’s standard of care in other areas, and Walker Morris will monitor and report on developments.

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[1] Bolam v Friern Hospital Management Committee [1957] 2 All ER 118
[2] [2016] EWHC 2224 (QB)
[3] Montgomery v Lanarkshire Health Board[2015] UKSC 11

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