FCA rules may inform standard of common law duty of care owed by financial adviser to client
17 July 2015
In this case, we consider the decision of the County Court in David Anderson v Openwork Ltd  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).
- 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 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.
- 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.
- 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.
First ground of appeal: does a common law duty of care arise in these circumstances?
Second ground of appeal: what was the standard of the common law duty of care that arose?
- 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 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.
David Anderson v Openwork Ltd  EW Misc B14 (18 June 2015) (Bailii).