Worthington V Lloyds [2015] – A clarification on giving investment advice

In the recent case of Worthington and Another v Lloyds Bank plc [2015] EWHC 2836 (QB), the High Court provides a helpful clarification for investment firms providing, and subsequently reviewing, investment advice to clients under the Financial Services and Markets Act 2000 (“FSMA”). The case would be of particular interest to such firms as it touches upon the key issue of devaluing assets and firms’ liability in regards to providing advice on such assets.

Case summary:

The Claimants received investment advice from Lloyds Bank plc (the “Bank”) for investment advice in regards to their assets. After having consulted with them, the Bank, using standardised documentation, offered a medium-risk portfolio in which they subsequently invested their assets. The Claimants had signed various documents explaining the risk of the portfolio chosen. Approximately one year later, the Claimants were experiencing financial pressure from an unpaid overdraft account and in a review meeting with the Bank, in order to assist with this problem, the Bank recommended them retaining their portfolio, as opposed to disinvesting it or investing it in a lower-risk portfolio. The Claimants’ retention of the portfolio eventually resulted in a £43,000 loss.

The Claimants sought to recover compensation for their investment losses and claimed that the Bank, in advising them to invest in a medium-risk investment portfolio, acted negligently, in breach of contract and in breach of its statutory duties under FSMA and the Conduct of Business Rules, which were subsequently replaced by the Conduct of Business Sourcebook Rules (“COB” and “COBS” respectively). One of the Claimants’ main arguments was that they only ever wanted a low-risk investment and were not properly advised as to the medium-risk nature of the portfolio. The Claimants sought to claim that the Bank should have asked risk specific questions as part of their risk-assessment, such as ’Are you comfortable if the value of the investment falls by 10%? What about 20%? Or 30%?’ Moreover, the Claimants sought to argue that the Bank had a duty to correct the original investment advice which they have failed to satisfy. The court’s reasoning and particulars of the claim are summarised below:

  • The original advice. The claims arising out of original advice were barred by statute, however the court still considered the reasonableness of the original advice provided in order to conclude whether there was a duty to subsequently correct it. It was held that the Bank was in compliance with its contractual duties, its duties under COB Rules (giving investment advice is subject to COB Rules) and its duties under common law (to exercise reasonable care and skill). Moreover, the court outlined the fact that the Bank had used standardised documentation for the purpose of explaining the nature of its products and the risks attached to them and indicated the use of such standardised documentation weighs in favour of firms (currently embodied in COBS 2.2.1 R).
  • Continuing duty to correct the advice given. The prime submission of the Claimants was that after having given investment advice, the Bank was at all times under an absolute contractual obligation to correct that advice by recommending that the Claimants either reinvest in a lower risk portfolio or disinvest their assets. Effectively, this meant that a new breach was committed for each moment after incorrect advice had been given by failure to rectify it.

The overall holdings of the High Court were:

  • there was no continuing contractual duty following the original advice;
  • the relevant duty arose only at the point the original advice was given;
  • once the advice has been given the duty has been satisfied, this is regardless of whether the advice is correct or otherwise and liability can only arise in regards to the original advice; and
  • the original recommendation provided to the Claimants was suitable in the circumstances as the future investment objectives of the claimant at that time could not be properly assessed.

Take away points:

  • there is a “clear advantage” in financial institutions using standardised documentation when explaining to customers the nature of products and the associated risks;
  • the High Court indicated that there is no need for risk assessment to involve asking clients specific and concrete questions which involve potential percentage falls in an investment portfolio;
  • COBS Rules do not require financial institutions to carry out a fresh risk/objectives analysis at every periodic review, neither is there any such contractual or common law duty; and
  • the Court’s strong reliance on the contemporaneous file notes of the Bank when giving the investment advice highlights the importance of keeping thorough and accurate notes when giving such advice to customers.

Should you require any further advice or information on the above, Cleveland & Co, your external in-house counsel, are here to help.

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