Warning of legal risks in serving insistent clients

Warning of legal risks in serving insistent clients

Wealth managers have been warned they may need to seek legal advice if a vulnerable client falls victim to an investment scam.

According to Svetlana Rhodes, head of financial crime compliance at Close Brothers Asset Management, wealth managers could be breaching duty of care rules even if they specifically advised a client not to invest in a suspicious-looking scheme, if they allow the client to withdraw funds to invest in the scheme. 

The warning was sounded at a financial crime conference hosted by the Personal Investment Management & Financial Advice Association in London today (February 4), where Ms Rhodes said advisers faced "reputational and litigation" risk if they failed to convince clients not to invest in scams.

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Ms Rhodes said: "I have seen some unbelievably convincing investment scams with a web of fake websites showing false investment firms and LinkedIn pages. 

"A client may consider themselves quite financially savvy, however if they were presented with a fraudulent investment opportunity such as this they would struggle to assess or recognise the risk - and this is where their vulnerability lies in this particular situation." 

Ms Rhodes gave the example of a client requesting a £100,000 transfer into what they deem to be a good investment opportunity, but which a wealth manager can identify as a scam.

She said: "Sometimes it takes a couple of hours' research at a computer and it becomes clear to a professional in the financial services industry that the opportunity is a scam. 

"In this case you need to document all your findings, such as online or on the FCA register, and evidence why you believe the investment to be fraudulent and why the client should not go ahead with this transaction.

"Also document the communication between you and the client, where your role is to strongly discourage them from proceeding with this transaction - you have to convince them this is a fraud."

Wealth managers and advisers should also report these cases externally to Action Fraud and the FCA, Ms Rhodes said.

She added: "At this stage the best case scenario is that you have managed to convince the client not to invest with the fraudulent company.

"However, complications arise when a client insists on proceeding with the transaction. On one side the client owns the funds and can do what they want with the money.

"However, you could be breaching your duty of care if you process this transaction and allow your client to proceed with something which is detrimental to them."

It is at this point, Ms Rhodes said, wealth managers should be seeking legal advice.

She warned: "If you give in realising the client is vulnerable, I can see a risk of litigation. Even from potential future beneficiaries who go on to accuse the manager of knowing the investment was fraudulent. 

"It depends on your risk appetite and the legal advice you receive, but I can see potentially some firms may decide to withhold the payment and the client will take them to court and the court will decide whether they should receive the funds."