At a glance

The following scenario should sound familiar. You are an Independent Financial Adviser ("IFA") and have taken on clients referred by outside sources. You have been assured by those third-party sources that every client referred, though classified by you as retail, has self-certified as a high net worth individual. You've seen the certificate and written statement in each case and your compliance department has diligently filed them with the clients' records. You have arranged for some of these investors, at their instigation to invest in some product or another on an execution-only basis. Your terms of business (which they have read and signed) confirm you'll facilitate this, but with no duty to advise. And just to be on the safe side, your compliance department asks them to re-certify high net worth, year on year, which they willingly all do.

Then guess what, a product that they just had to invest into of their own accord, turns out to be a turkey. They've lost their money and now they come back at you, complaining that you failed in your duty to advise them. They then try that other familiar ruse, namely that they were never actually in a position to self-certify their high net worth and can provide evidence from payslips and the like to prove this.

They complain formally and of course they trundle off to see the Financial Ombudsman Service ("FOS") as well (as is their right), even before you have the chance to consider your position.

These cases lack merit and may lack true conviction, but we all know that the FOS has been persuaded rather too often by a good sob story and ordered compensation all the same. Compensation doesn't just mean money back; no – the FOS uses its largely subjective judgment to determine that if the money had been 'properly' invested, these claimants would have had a stellar return on their cash, and you get hit for that too. Many an IFA with essentially good systems and a sound operational platform has unravelled over multiple cases such as this.

They are without merit, because investors should have no right to compensation for the consequences of their own blunders. The reason to engage an IFA is to seek and receive (and pay for) advice. The client who decides to do his own thing regardless should bear the consequences, period.

Even if the FOS has so far shown reluctance on numerous occasions to follow this frankly compelling logic, there is actually a very nice basis for fighting back.

Section 89 Financial Services Act 2012 re-enacts a provision that has been part of UK law since the original Financial Services Act of 1986 (s 47 thereof). It provides that a person who:

  • Makes a false, misleading or deceptive statement (knowingly or recklessly);
  • With a view to another entering into an investment agreement; or
  • Reckless as to whether that other might enter into such an agreement, commits a criminal offence.

In the 1986 Act the maximum punishment was 7 years, but this has since been increased to 10. It's a serious offence. It isn't often prosecuted, chiefly because it doesn't need to be (in mosey cases there are civil remedies for market abuse that can be used). And the offence can only be prosecuted by the Attorney-General or the Director of Public Prosecutions.

It doesn't take much perception to identify that this offence was legislated to address share-ramping, pump-n-dump and Ponzi schemes. But consider this. In the scenario above, the investors have all made statements to the IFA, or to a third party who has provided them to the IFA. These statements have induced the IFA to accept them as clients under its terms of business, which is an investment agreement. They have also induced the IFA to facilitate the execution-only trade in the failed investment, and that's another investment agreement. And they have been repeated and renewed each year upon request. So, if the investors now tell the IFA that the whole premise of the original high net worth representation was false, then each of those investors, like it or not, has committed a serious offence under s 89 FSA 2012. It is doubtful that the DPP will be persuaded to prosecute, but it should certainly be laid before the FOS when such an investor complains. It cannot be of any assistance to a complainant's case before the FOS that at the heart of the case brought is clear admitted evidence that the complainant has broken the criminal law.

How we can help

Any investment firms reading this piece and recognising the storyline from their own experience, and who would like to explore the possibility that this argument offers, please do not hesitate to make contact. It should always be considered that there will be differences between applicable cases and the full facts of any case need to be weighed up before concluding that this route can be pursued. It should however provide food for thought where the alternative might otherwise be to meekly submit and hope the professional indemnity insurers will cover the claim.

Originally published 30 March 2023.

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.