Claims against IFAs – a litigator’s view on how to avoid them

With recent changes to FOS requirements and the impact to professional indemnity insurance providers, the CII provided a timely event in Leeds this week to address the complaint concerns from the side of a solicitor firm handling the disputes. The meeting was held by Mills & Reeve LLP, who are professional indemnity insurance and commercial disputes litigators.

It was clear to them (and anyone in financial services), that the IFAs are now more accountable as pension freedom, client’s access to DIY research, greater capital reserves and a client’s desire to make money work harder, has created a greater interest for investments. With the knowledge that consumers have the free protection of FOS and the Claims Management Companies (CMCs) supporting a no win no fee culture, the advisers are facing a ‘perfect storm’ on the advice they give.

Undoubtedly, the effects of this storm may not yet be seen – Warren Buffet famously said “only when the tide goes out do you discover who’s been swimming naked” and therefore the opportunity to look for potential poor advice will come into focus when the next market fall occurs.

The focus of the remaining part of the meeting was to highlight the concern of a litigator when they are dealing with claims.  They stated that the reports they see have 2 elements that FOS will look upon, the suitability of the advice, and the suitability of the product.

 ‘You should never have advised the client to …’

They stated that the claims for suitability of advice would fall foul when the lack of alternative options was not discussed or evidenced. They found that the lack of benefits to say why the transfer or switch was in the client’s best interest was also a common theme.

‘You failed to warn the client of the risky nature of …’

The complaints were upheld when a failure to assess the client’s attitude to risk was completed correctly, and/or a lack of sufficient experience was established. In some cases, reports lacked detailed risk warnings to validate the recommendation.

Access to FOS

The explanation on how they feel FOS approach disputes was a topic that grabbed the attention of the room.

They stated that FOS has ‘wide discretion’ and will generally take customer-focused fairness towards its outcomes. Although FOS must adhere to the rules and regulations, they are not bound by the law when they feel the outcome is fair and reasonable for the client. Therefore, this will undoubtedly create some inconsistent decisions.

One of the rules that Mills & Reeve commented on was the 6-year time limit for complaints – they stated that this was something that was not a fixed rule and they often saw cases that exceed this term.

Insistent clients

The complaint involving insistent clients was one of the topics that were often seen on the litigator’s desk. This was mainly due to the process of (or lack of) a good understanding of the insistent client rules. They commented that it was not enough to simply rely on a standard insistent client form for the client to accept responsibility, as this was not sufficient to evidence that the client understood the consequences.

They commented on the FCA requirements to have a hand-written client letter or taped discussion (with agreement), to confirm the client’s understanding of the firm’s original recommendation not to proceed and their own statement confirming their understanding of the recommendation and their acceptance of consequences when rejecting the advice. They feel that this was often the best way to avoid any poor outcome.

Mills & Reeve summarised their top tips to help avoid potential complaints being escalated:

  • Ensure your meeting notes are documented clearly (this is also a MiFID requirement).
  • Don’t advise on areas that you are not familiar with.
  • Don’t be complaisant with long-standing clients or become too close.
  • Review files with peers for second checks.
  • Keep up to date with new developments (check COBS rules).

Ensure you have adequate PI cover

The recent PI changes, following FOS updates on the 1st April, has made many firms look at their own PI cover. Mills & Reeve stated that it is important to know what is, and what is not, covered by your PI insurance.

The current market conditions have led to a price-conscious approach to PI but it is important to know now what you fully protected for, in the event of a claim. It is important to know what exclusions are in your PI cover and if this will impact on your firm’s investment proposition.

In conclusion, if you operate a ‘whiter than white’ approach to everything stated above then you can sleep easy in your beds tonight, for those who may have some grey areas in their standards, it is a good time to review your processes and tighten up on areas that may leave you potentially exposed to future complaints. For those who live in the dark side, hold on for a bumpy ride!

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