FCA rules may inform standard of common law duty of care owed by financial adviser to client

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17 July 2015

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Sarah Hitchins

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London

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In this case, we consider the decision of the County Court in David Anderson v Openwork Ltd [2015] EW Misc B14 (18 June 2015) in which it dismissed an appeal against an earlier decision, finding that where a financial adviser provides advice (rather than just information) to their client in circumstances where there is no statutory duty of care, the financial adviser owes their client a common law duty of care. In considering the extent of this duty, the County Court held that consideration should be given to the standards imposed by the relevant regulatory regime (in this case the rules in the FSA's Conduct of Business sourcebook (COB) in the FSA Handbook).

Background

The appellant is a network of financial advisers. One of its financial advisers advised the respondent to purchase a bond in September 2005. The respondent subsequently brought a claim against the appellant, claiming that he was advised to purchase the bond by the financial adviser when it was not in fact suitable for his needs. The respondent based his claim on a number of arguments, including that:

The appellant (through its financial adviser) had made negligent misstatements relating to the bond.

The advice given by appellant's financial adviser had breached rules in the FSA's Conduct of Business sourcebook (COB rules).
The appellant had breached its common law duty of care owed to the respondent by failing to take reasonable steps to ensure that the bond was suitable for his needs.

First instance decision

The respondent's claim was heard by DJ Parker in the County Court. As a matter of fact, he found that the appellant's financial adviser had provided advice to the respondent in respect of the bond. However, DJ Parker held that:

The respondent had not established a negligent misstatement in respect of the bond.
The COB rules did not directly apply to the bond (on the basis that the bond was a "structured deposit" as defined in the FSA Handbook and was therefore not a "designated investment" for the purposes of those rules).
In considering the extent of the duty of care that the appellant owed to the respondent, consideration should be given to the standards imposed by the COB rules, in particular the duties to:

ensure that relevant information about the bond was known to the respondent;
take reasonable steps to ensure that the bond was suitable for the respondent; and
take reasonable steps to ensure that the respondent understood the risks associated with the bond.

The District Judge concluded that the appellant:

Had satisfied its duty to ensure that the relevant information about the bond was known to the respondent.
Had not satisfied its duty to take reasonable steps to ensure that the respondent understood the risks associated with the bond.

DJ Parker did not directly deal with whether the appellant had satisfied its duty to take reasonable steps to ensure that the bond was suitable for the respondent.

The respondent was awarded damages of GBP 6,114.

Appeal

The appellant appealed DJ Parker's judgment on the following alternative grounds:

There is no need for a common law duty of care in these circumstances, given that Parliament has already devised a remedy for such cases (namely the mechanism in section 150 (now section 138D) of the Financial Services and Markets Act 2000 (FSMA), which gave private persons a cause of action for breach of certain FSA rules, including the COB rules).
If such a common law duty of care arises in these circumstances, DJ Parker applied the wrong standard. By having regard to the standards imposed by the COB rules he imposed a much higher standard by which to assess whether this duty of care was satisfied than applies at common law.
There was no evidence from which DJ Parker could find that the appellant had breached its duties to the respondent.

As is set out in further detail below, each of these three grounds of appeal were unsuccessful and the appeal failed.

First ground of appeal: does a common law duty of care arise in these circumstances?

The appellant argued that the Court of Appeal's judgment in Green and Rowley v Royal Bank of Scotland [2013] EWCA Civ 1197 is authority for the proposition that a common law duty of care cannot exist where there is a statutory duty of care that has been put in place to deal with more complicated investments (namely the COB rules). The appellant also argued that it is wrong to apply such a high standard of responsibility to advisers who are dealing with more basic investments, such as the bond in this case. The appellant further argued that at first instance the District Judge misapplied Green and Rowley in that he applied the COB rules to a "simple and straightforward investment" such as the bond.

Sitting in a different County Court, HHJ Raeside rejected the appellant's arguments, holding that DJ Parker was not wrong to find that a duty of care at common law arose in the circumstances where a financial adviser working for the appellant provided advice to the respondent relating to the bond (which was not covered by the COB rules). In particular, HHJ Raeside distinguished Green and Rowley from the facts of this case on the basis that Green and Rowley was primarily concerned with the situation where there was no pre-existing common law duty owed. In that case only information (not advice) was provided to a customer who invested in a financial product that was covered by the COB rules. HHJ Raeside contrasted this situation with the facts of the present case where, because the COB rules did not apply to the bond, no statutory duty of care applied and the appellant's financial adviser had provided advice (not just information) to the respondent relating to the bond.

As a result, the first ground of appeal was unsuccessful. HHJ Raeside emphasised that Green and Rowley is not authority for excluding a common law duty of care in relation to the circumstances of this case.

Second ground of appeal: what was the standard of the common law duty of care that arose?

The appellant objected to DJ Parker having taken into account the standards set out in the COB rules (specifically COB 5.2.5R, 5.3.5R and 5.4.3R) when determining the standard of the common law duty of care that applied in this case. The appellant argued that this approach was wrong for a number of reasons, including that it misapplied Green and Rowley, imposed a wider obligation on financial advisers than Parliament and the regulatory scheme set out in the COB rules intended, and applied standards intended for complex investments to more basic financial products such as the bond.

The County Court rejected the appellant's arguments on this point and, as a result, the second ground of appeal was also unsuccessful. The reasons given for this finding were that:

DJ Parker had not used the COB rules to define the standard of the common law duty of care that applied in this case. Rather, he "simply and understandably made reference in considering the duty to be applied". This approach was consistent with the Court of Appeal's judgment in Green and Rowley.
In any event, the concepts in Green and Rowley that DJ Parker had referred to (such as know your client, ensuring the suitability of a financial product for a client's needs, and ensuring that a client understands the risks associated with a financial product) are "no more than basic duties which common sense dictates should be applied to any financial advisory situation; they are not unusual or esoteric; indeed it would be a strange toothless duty of care if advice was given, yet these obligations excluded". HHJ Raeside approved the District Judge's observation that "[i]t is difficult to see how reasonable skill and care could be taken in giving advice about a financial product without the essence of [the COB rules] being satisfied".

Third ground of appeal: was there in fact a breach of the common law duty of care in this case?

The appellant disputed that there was any evidence to support DJ Parker's finding that it had breached its common law duty of care to the respondent by not taking reasonable care to ensure that the respondent understood the nature of the risks involved relating to the bond.

HHJ Raeside rejected the appellant's arguments on this point, holding that the appellant had not demonstrated that DJ Parker was wrong in fact or in law in the way in which he assessed whether the appellant had breached its common law duty of care to the respondent. HHJ Raeside commented that: "The District Judge was entitled to make the findings as to what constituted risk in this context, as to [the respondent's] attitude to that risk and as to the standard that could reasonably be expected of someone giving advice in those circumstances exercising reasonable skill and care. He was entitled to find as a fact that the breach caused the loss to occur".

Comment

The decision in this case appears to provide greater clarity as to the precise nature and extent of the overlap between common law principles and rules derived from statute. In particular, HHJ Raeside held that DJ Parker was not wrong to refer to various provisions of the COB rules when determining the appropriate standard of the common law duty of care owed to the respondent on the basis that the duties outlined in the COB rules were "no more than basic duties" that "should be applied to any financial advisory situation".

Although the County Court did not consider whether or not other statutes or rules derived from statute are relevant in terms of determining the standard of a common law duty of care, it did not rule out the possibility that the standard of a common law duty of care could be supplemented in this way in other situations. As a result, financial advisers and financial institutions should be aware that, even if provisions in the FCA Handbook do not apply to a particular situation or to a particular product, they may nonetheless be applied by a court to determine the appropriate standard of a common law duty of care.

Case

David Anderson v Openwork Ltd [2015] EW Misc B14 (18 June 2015) (Bailii).

This article first appeared on Practical Law and is published with the permission of the publishers.