The recent English High Court decision in O’Hare and another v Coutts & Co [2016] EWHC 2224 (QB) marks a departure by the courts from the traditional standard of care imposed upon a financial adviser when advising their client, and places greater emphasis on the responsibility of a properly informed investor to bear the consequences of the investment risks they have voluntarily assumed.

The facts

Mr and Mrs O’Hare suffered substantial losses as a result of investments made with Coutts between 2007 and 2010. The O’Hares claimed that Coutts were negligent in advising them to make the investments on the basis that they were unsuitable.  

The Bolam test and recent developments

The traditional test in professional negligence cases was established in the case of Bolam v Friern Barnet Hospital Management Committee [1957] 2 All ER 118. Under the 'Bolam test’, when considering whether a professional has breached his or her duty of care, the court looks at whether the professional acted in accordance with practice accepted as proper by a responsible body of people in that profession.

The Bolam test was widely applied across all professional negligence cases for a number of years. However, last year in Montgomery v Lanarkshire Health Board [2015] UKSC 11 the Supreme Court departed from this approach. Montgomery was a medical negligence case in which the Supreme Court said that medical practitioners were under a duty to take reasonable care that patients were aware of any material risks involved in their treatment, and any reasonable alternative treatments. Whether the practitioner was obliged to advise upon a particular risk depended on whether, in the circumstances of that case, a reasonable person in the patient’s position would be likely to attach significance to the risk, or the doctor was or should have been aware that the patient in question would be likely to attach significance to it.

This movement away from the Bolam test might be thought to place a greater onus on the individual, in a medical context, to take responsibility for their own decision-making when fully informed of the risks involved in their various treatment options.  

The court’s decision in O’Hare v Coutts & Co

In O’Hare, Kerr J considered that whilst the Bolam test did apply to the process of a financial adviser recommending suitable investments to his or her client, the Montgomery test applied to the extent of communication required between them relating to the risks involved in those investments. 

The Judge stated that the Montgomery test was more appropriate than the Bolam test in these circumstances for two reasons. First, because he found there to be a lack of a clear consensus within the financial services industry about how the treatment of risk appetite should be managed by an adviser; and second, because he thought the relevant COBS rules in the FCA Handbook did not make any reference to the Bolam concept of a responsible body of professional opinion but instead more closely resembled the obligations in Montgomery.

The Judge found that, on the facts, Coutts had communicated adequately with Mr and Mrs O’Hare and that the investments were objectively suitable for them. Therefore, this was a case where responsibility for the investment decision lay with the O'Hares. 

Persuasive techniques used by financial advisers

Interestingly, Kerr J also felt that financial advisers could properly use persuasive techniques to influence an investor. 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...so high as to be foolhardy. Kerr J did, however, caution that there is a balance to be struck and that full information must be given to the investor and any conflicts of interest must be managed properly. 

Commentary

The obligation on financial advisers to provide their client with advice as to the risks involved in an investment is nothing new. However, the decision in O’Hare is a departure from a long-accepted approach towards assessing the standard of care owed by an adviser that might be welcomed by financial advisers as making clear that properly informed investors have to take responsibility for their own decisions – provided that the investments recommended to them are suitable.

With the growth in automated advice and increase in internet-only relationships between client and adviser, clients’ expectations of what their adviser will do are changing. It will be interesting to see how the caselaw in this area develops to deal with concepts of suitability and appropriateness in this context.

More broadly, now that the traditional Bolam test has been departed from in cases involving medical professionals and financial advisers, it may only be a matter of time before this approach will be followed in cases involving other professionals.