Breaching the regulator’s Conduct of Business rules does not give rise to a compensation claim if the investment is suitable, a Judge reminded a court in a judgement passed earlier this year.
In a judgement passed in February of this year, Lord Justice Rix said advisers may not be liable to pay compensation to customers who have a suitable investment even if they breached the Cobs rules in delivering their advice and carrying out a transaction.
According to Lord Justice Rix, a precedent exists which he says demonstrates that “even where there has been a breach without which no transaction would have taken place at all, it does not follow that the defendant in breach is liable for all the losses suffered by the claimant in consequence of entering into the transaction.
“In the present case I am doubtful that an investor would be entitled to be compensated in full for an otherwise suitable investment just because there has been some breach, of whatever kind, of Cob 7.9.3.”
Conversely, an investor cannot successfully lay claim to compensation from the adviser unless the investment was unsuitable at the time of sale, even where the adviser may have breached Cobs.
Robert Morris, partner at law firm Reynolds Porter Chamberlain, said the tactic of pointing out procedural breaches by advisers is one commonly used by CMCs. Instead of simply pulling out their chequebook however, advisers should consider if they could use this defense instead where they can demonstrate that the underlying advice was suitable.
Robert Morfee, consultant at Clarke Wilmott, said the notion of causation - determining the exact events that led to a client’s loss - is “not widely understood by the public”.
He said: “The law is... that the wrong done by the defendant must have directly caused a loss to the claimant, and it is only that particular loss which is to be put right by compensation.
“This is another case where a very rich person has failed to get damages for breaches of rules really designed for the ordinary investor.”
Alan Parkinson, IFA at CPD Independent Financial Advisers, said the judgement means claims management firms will no longer be able to take a scattergun approach.
He said: “Now [a CMC has] got to do its job, it’s got to say the investment was unsuitable because X.”
He added that by putting the focus on advice the dispute falls more under an advisers’ expertise than that of the CMC.
“There is no response if he turns around and says ‘have you got a fully completed fact find?’, but there is an argument as to whether the advice is suitable.”
He added: “[It is] a wonderful logical outcome for the industry I think network and an excellent CMC legal defence.”
Another financial services solicitor who wished not to be named said CMCs are ignorant of this part of the law and often focus on technical breaches of process instead of whether or not the investment was suitable.
He added that even in extreme examples where the adviser is unauthorised but still gives advice, if the investment is found to be suitable the adviser will not necessarily be liable to pay compensation.
Last week, adviser Alan Lakey of Highclere Financial Services successfully forced a CMC to pay his hourly rate for dealing with an unfounded claim.
