UK: Investments – A Risky Business?

Last Updated: 6 March 2013
Article by Stuart Evans and Liane Bylett

If an investment does not pay off, and the investor is left with less than expected, can they blame their adviser? A number of factors will need to be considered – Stuart Evans and Liane Bylett from our Commercial Disputes Team take a look at these points.

Is anyone to blame?

You will need to consider a couple of questions in particular:

  • Were you properly advised by a financial adviser in compliance with their duties, in respect of a suitable investment in accordance with your risk profile and in the full knowledge and understanding of the potential risks (and rewards)?
  • And secondly, did you make an informed decision in those circumstances that you were still prepared to take the risk of the investment? 

If you can answer both questions with a "yes", then you may potentially have to take any losses "on the chin".

However, this assumes a number of things and the position may be different if you are not correctly advised by a financial adviser. Financial advisers will owe certain duties to provide you with appropriate advice, under both their contract with you and also under guidelines for financial institutions imposed and policed by the FSA (such as the Conduct of Business Rules, or COB Rules for short).

Consequences of poor advice

In January 2011 the FSA imposed a large fine of £7.7million on a major high street bank for breaches of the FSA rules. The bank failed to take reasonable steps to ensure the suitability of its investment advice to customers in respect of a particular investment fund. The FSA held that the training material, sales briefs and product updates given to the bank's staff were inadequate because they did not give clear guidance on suitability and the risks for investors. In addition, the brochures and other material given to customers were potentially misleading about the nature and level of risk involved in this particular investment. Lastly, the bank did not properly monitor investments and so it failed to identify and investigate potentially unsuitable investments.

The breaches were deemed to be all the more serious because the investment fund appealed to vulnerable and inexperienced customers (in this case, mostly individuals in or nearing retirement) who would have relied upon the bank's judgement and advice. The FSA held that the characteristics of the investment fund were sufficiently complex that customers may not have been able to understand the risks. In addition, the FSA held that the scale of the potential impact was significant because there were just over 12,000 investors in the fund, investing £692m.

If those investors had lost money on their investment as a result of the poor advice they received, in additional to being entitled to complain to the FSA, each of those investors would have a potential civil claim against the bank for breach of contract and negligence, and breach of the COB Rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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