Abandoning Bolam: a new standard for advising on investment risk

Mr and Mrs O'Hare (the claimants) alleged that their private bank, Coutts (the Bank), breached its duty to exercise reasonable skill and care in advising them on five investments they made between 2007 and 2010, causing them to suffer loss of GBP 3.3 million, plus interest.

The claimants were high net worth individuals who commenced a private banking relationship with the Bank in 2001. Acting on advice from the Bank, the claimants had invested in five structured products between 2007 and 2010.  Understandably, the risk profile of the claimants had changed over that time, and the key issue in the case was whether the investments recommended to them had been suitable in their circumstances, with particular regard to their risk appetite and their overall investment goals, or whether the Bank's salesmanship had led them to become overexposed to risk. 

Nature of the Bank's contractual duty to "develop an investment strategy"

The contractual duty of the Bank in this case was set out in the "Agreement to Provide Investment Advice", pursuant to which the Bank was obliged to "work with" the claimants "to understand [their] circumstances, objectives and requirements to enable us to develop an investment strategy for [them]", and to "provide [the claimants] with our advice and recommendations in writing at such time or times as we consider appropriate or as agreed between us". 

The court rejected the claimants' contention that this contractual duty imported an obligation on the part of the Bank to produce a 'holistic and coherent plan' for the whole of the claimants' wealth: rather, it was simply an obligation to liaise with the claimants, recommend products as and when agreed or appropriate, and implement the claimants' chosen strategy.

Standard of care when assessing the adequacy of an investment advisor's disclosure of risk

The court then turned to the question of whether the Bank had breached its duty, imposed in tort and contract, to use reasonable skill and care in recommending the five investments.  

Traditionally, the test derived from Bolam v Friern Barnet Hospital Management Committee [1957] 1 WLR 582 has been applied in resolving that question.  The adequacy of the advice is to be judged by testing "whether the defendants, in acting in the way they did, were acting in accordance with a practice of competent respected professional opinion".  In effect, this means that the relevant standard is that of a reasonably competent practitioner in the relevant sector of the profession (here, private banking).   

However, in a medical context, the Bolam test has recently been held by the Supreme Court not to govern the standard of care expected on the part of a medical professional explaining risks to a person to whom advice is given (as opposed to the standard required in carrying out any medical treatment).  In Montgomery v Lanarkshire Health Board [2015] AC 1430, the duty imposed on a medical professional explaining risk was instead "to take reasonable care to ensure that the patient is aware of any material risks involved in any recommended treatment, and of any reasonable alternative or variant treatments".   The materiality of a risk is to be assessed based on "whether, in the circumstances of the particular case, a reasonable person in the patient's position would be likely to attach significance to the risk, or the doctor is or should be aware that the particular patient would be likely to attach significance to it".

Justice Kerr extended the application of the Montgomery test to define the standard of care to be applied in the explanation of risk as part of the provision of investment advice.  In doing so, he noted that the expert evidence demonstrated that there was "little consensus in the financial services industry about how the treatment of risk appetite should be managed by an advisor", and the "extent of required communication with the client should not depend on the attitude of the individual advisor". The regulatory regime was "strong evidence" of what the common law required on the part of an investment advisor, as a duty to explain (analogous to Montgomery) was already found in the relevant Conduct of Business rules.  The content of these regulatory rules, in effect imposing an objective duty to explain on advisors, was "very difficult to square" with a conventional Bolam approach to the explanation of risk, which would set the standard solely based on a responsible body of opinion within the profession.

In the circumstances of this case, the court found that the discussions between the claimants and the Bank were "very full", and could not accept that there had been any lack of adequate communication and explanation.  The issue therefore turned on whether the investments were objectively suitable, rather than any failure to inform the claimants about the risk of the products.

Can an investment advisor properly influence the client's risk appetite?

A key issue in the case was whether the relevant Bank employee, Mr Shone, had led and persuaded the claimants to take higher risk investments than was consistent with their unconditioned risk appetite, or, whether the claimants had, showing experience and sophistication as investors, sought high risk investments. 

Justice Kerr held that there was "nothing intrinsically wrong with a private banker using persuasive techniques to induce a client to take risks the client would not take but for the banker's powers of persuasion".  He accepted that advice from a private banker "may condition the client's risk appetite, rather than the other way round".  However, the banker must be satisfied "the client can afford to take the risks and shows himself willing to take them", and subject to the proviso that the risks were not "so high as to be foolhardy".

Given that, in this case, the exchanges of information and discussions between the Bank and the claimants were very extensive and full, responsibility for the investment decision, even though taken under the influence of salesmanship, could fairly be taken by the claimants as investors. 

Voluntary absence of the key Bank witness – reduced weight given to his notes 

A separate point of interest raised in the case was the fact that the "pivotal" witness of fact for the Bank, Mr Shone (the claimants' relationship advisor who recommended the products in question) did not give testimony. The Bank's solicitors had explained to the court that Mr Shone had informed them that he was too preoccupied with other business responsibilities to devote time to the proceedings, and sought to rely on Mr Shone's contemporaneous notes made during the course of his employment. 

In circumstances where the claimants had not applied to call Mr Shone for the purpose of cross-examining him on his notes of the meetings, the hearsay notes were admissible as evidence of the truth of their content.  The issue was therefore one of the relative weight to be given to the notes, and whether they should be preferred to the Claimant's direct and otherwise uncontradicted evidence.  

Justice Kerr noted that he would have expected the Bank to call evidence from Mr Shone (as the person alleged to have given negligent advice). Mr Shone continued to work in the United Kingdom, and in the financial services industry, and was the only person present at the meetings in dispute. The fact that the Bank may have had to call Mr Shone 'blind' was not a complete answer to his absence from the witness box.  Rather, Justice Kerr inferred that the Bank's legal advisors assessed the potential benefits and risk of calling him, and concluded that the risks outweighed the benefit.  As such, the court could not accept that contemporaneous notes were to be preferred to the testimony of Mr O'Hare for the claimant. 

Comment 

The application of the revised Montgomery test in the financial services sector reflects a move over time in professional negligence cases away from essentially a self-certified standard set by the relevant professionals to an objective standard in relation to the explanation of risk.  In the case of financial services, this will mean a standard set principally on regulatory rules, although the Montgomery standard and the regulatory rules are of course not identical.  In cases where investors are exercising discretion, compliance with both will prove key in defending future negligence actions. 

It is clear that the Court will not turn a blind eye to the absence of a key witness.  Failure to produce such a witness, or at the very least, a credible direct explanation for their absence, will impact the weight to be given to former employee's contemporaneous notes.  The Court in this case was highly critical of what it saw as a tactical decision to rely on the documents, without calling the witness at least to vouch for the accuracy of the documents.  For banks, this reiterates importance insofar as possible of imposing a contractual duty of continued co-operation on employees.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Amy Edwards amy.edwards@allenovery.com, or tel +44 20 3088 3710.

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