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Private Banker's Duty of Care

Andrew Evans
31/10/2016

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United Kingdom

The case heralds a new approach by the courts to the traditional duty of care imposed on financial advisers when advising their clients

Private Banker's Duty of Care

The case heralds a new approach by the courts to the traditional duty of care imposed on financial advisers when advising their clients (the "Bolam test") and places more responsibility on a properly informed investor to accept the consequences of the investment risks voluntarily assumed by him or her.

The Facts

Mr and Mrs O'Hare were high net worth customers of Coutts and Mr Shore (who was their relationship manager at the relevant times) recommended the O'Hares to invest in certain Coutts products. The allegation was that Mr Shore persuaded the O'Hares to take a greater risk than they might otherwise have done and Coutts were negligent in advising them to make investments on the basis that they were unsuitable.

The Bolam Test versus the Montgomery Test

Under the "Bolam test" case when considering whether a professional has breached his or her duty of care, the court looks at whether the professional acted in accordance with practices accepted as proper by a responsible body of people in that profession. The Bolam test was widely applied across all professional negligence cases for many years. However, in 2015 in Montgomery v Lanarkshire Health Board [2015] UKSC the Supreme Court departed from the Bolam test holding that the relevant duty was 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 'Montgomery test'). Whether a practitioner was obliged to advise upon a particular risk depended on whether in the circumstances of the particular case, a reasonable person in the [client]'s position would be likely to attach significance to the risk, or the [adviser] is or should reasonably be aware that the particular [client] would be likely to attach significance to it.

The O'Hare Decision

Mr Justice Kerr held that in determining the overall suitability of the investments, the Bolam test applied, but when considering the required level of communication about the risks of an investment, that it was inappropriate to determine this by reference to industry standards, preferring the Montgomery test. Kerr J. concluded that the Montgomery test was to be preferred over the Bolam test, because:

  • There is a lack of clear consensus in the financial services industry about how the treatment of risk appetite should be managed by an adviser;

  • The relevant COBS rules in the FCA Handbook make no reference to the Bolam concept of a responsible body of professional opinion, but instead make reference to obligations that more closely resembled those in Montgomery.

Kerr J found that, on the facts, Coutts had communicated adequately with Mr and Mrs O'Hare about their investments which objectively suited them. This was therefore a case where the responsibility for the investment decision lay with the O'Hares. Interestingly he also found that financial advisers could properly use persuasive techniques to influence an investor and this would not result in them breaching their duties. He said "there is 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, provided the client can afford to take the risks and shows himself willing to take them, and provided the risks are not – avoiding the temptation to use hindsight – so high as to be foolhardy."

Conclusion

The O'Hare decision does not represent a complete rejection of the Bolam test in professional negligence cases, but it does suggest that as long as professionals have provided suitable recommendations, the extent of the communication to their client should not solely be decided in accordance with a practice accepted as proper by a number of professionals within that industry. Instead, the responsibility will lie with the reasonably informed client. In a nutshell, if there is a significant divergence of opinion amongst members of the industry on what a reasonable member of that profession should do in the circumstances, a judge may now decide that the Montgomery test should apply rather than the Bolam test.

 

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