Putting your adviser in the dock
The financial crisis has brought wealth destruction on an historic scale. For those who have seen fortunes disappear, a burning question is whether they have grounds to sue their adviser.
Wealth managers that encouraged clients to invest in an enhanced money market fund managed by collapsed insurer AIG are being threatened with legal action by clients and other cases are likely to surface in coming months.
In the case of the AIG product, thousands of Britain’s wealthiest investors were advised to buy the “low-risk” money market funds as a safe and liquid alternative to bank deposits. Investments by the fund in asset-backed securities, which slumped in value last year, mean investors currently face losing as much as one quarter of their investment.
An action group, AIG Victims, has been established and the disgruntled members have written an open letter alleging banks mis-sold them the AIG Premier Access Bond Enhanced Fund. The letter calls on the private banks to underwrite their clients’ losses and threatens to launch a £1bn class-action lawsuit if they do not.
Unfortunately, a recent legal judgment suggests their prospects of success may be slim. The case of JP Morgan Bank (formerly Chase Manhattan Bank) v Springwell Navigation Corp (2008) considered in some detail the important issue of the scope
JP Morgan v Springwell is a case that provides guidance of a bank’s duty to advise on the appropriateness of investments.
In this case, the facts turned on a series of claims brought by Springwell against Chase in respect of losses on emerging market investments following events in 1998. In essence, all the claims related to how dependent Springwell was on the advice of Chase.
The case was a resounding victory for Chase. The court determined that Springwell was a highly sophisticated investor and therefore should not have been dependent on Chase. Of course, a court may decide diff erently if it determined that the investors in AIG were not sophisticated and were highly dependent on their private bank’s advice. But it is diffi cult to see how the court would impose a liability on the adviser.
The relationship between a client and their adviser is contractual. If a client wants to sue his adviser for a loss, the terms of engagement should specify this.
In the Springwell case, not only was there no initial mandate to advise but subsequent contractual documents contained disclaimers to the eff ect that Springwell would not rely on Chase’s advice for investments.
Clients may assume there is a legal duty for a bank to act in their best interests, what is often referred to as a “fi duciary duty” which is the higher duty of care owed by trustees to their beneficiaries.
But commercial relationships do not give rise to a fi duciary relationship and, in the absence of any contractual agreement for a bank to provide a fi duciary investment advice service or any common law acceptance of an obligation to do so, it is difficult to see how this could give rise to fiduciary obligations.
The regulatory backdrop in the UK has changed considerably since the events in question as the Russian financial crisis occurred before the Financial Services Act 2000. The UK’s Financial Services Authority is acutely aware of the vulnerability of non-sophisticated investors and has sought to regulate the banks that take advantage of them.
Clearly, if a bank or investment adviser is in breach of the regulations, they will be appropriately punished by the FSA. But in the absence of such a breach it seems unlikely advisers will be held liable for clients’ losses. Clients who want redress should proceed to litigation with caution. Just because losses were made does not necessarily mean that the bank was either reckless or negligent.
Rather than litigation, clients may like to consider a more subtle approach, such as threatening to move their assets from an adviser. It may well be a less satisfying way to begin recovering losses but it is likely to be more successful.
Caroline Garnham is a partner and Harriet Turnbull a solicitor in the tax and private capital department of LG Lawyers.
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