H.H. Judge Keyser Q.C. :
- In January 2007 the claimants, Mr and Mrs Worthing, invested £700,000 in an investment portfolio ("the Portfolio") provided by Lloyds TSB Private Banking Limited (which is now Lloyds Bank Plc, the defendant; I shall refer simply to "the defendant" without distinction) through its Mayfair Asset Management Service. In July 2008 the claimants surrendered their investment in the Portfolio and received back only £657,388.21. They say that the losses they suffered on the investment were due to bad advice given to them by the defendant, initially in January 2007 to invest in the Portfolio and subsequently in a review meeting on 13 March 2008 to retain the investment. In a nutshell, they say that they ought to have been advised at the outset that the Portfolio, as a medium-risk investment, was inappropriate for them as investors wanting only low risk, and that subsequently the defendant ought to have corrected its initial mistake and advised them to disinvest from the Portfolio. In these proceedings, which were commenced on 16 March 2013, they seek to recover compensation for their losses on the basis that, in giving them that advice, the defendant acted negligently, in breach of contract, and in breach of its statutory duties under the Financial Services and Markets Act 2000 (FSMA) and the Conduct of Business Sourcebook Rules (the COBS Rules).
- At a hearing on 13 August 2014 the claimants conceded that their causes of action were statute-barred in so far as they related to alleged breaches of duty that occurred before 16 March 2007. Accordingly the claim that is pursued relates not directly to the original advice to invest but to a failure to correct that advice and to subsequent advice to retain the investment. The facts concerning the original advice and events before 16 March 2007 are however relevant as providing both the context for the later advice and the foundation of part of the claimants' case regarding the defendant's continuing contractual obligations; this judgment will deal with them in some detail.
- At trial, evidence of fact was given by the claimants and by Mr Aidan Doyle, the defendant's employee who conducted the review in March 2008.
- I also received expert evidence as to the standard of advice given by the defendant from Mr Charles Levett-Scrivener and Ms Louise Claro as expert witnesses. Parts of the expert evidence were of some assistance; if I do not make extensive reference to it, however, it is because for the most part I did not think that it added much to a consideration of the pleaded issues that arose on the facts and were pursued at trial.
- In what follows, I shall set out most of the material facts, referring extensively to the contemporaneous documentation. Then I shall summarise the relevant law. Finally I shall explain and discuss the various complaints made by the claimants and state my conclusions with respect to them. My conclusions are summarised very shortly at the end of the judgment.
- I am grateful to Mr Mantle and Mr McMeel for their helpful written and oral submissions.
The relevant facts
- In January 2007 Mr Worthing was 54 years old and Mrs Worthing was 51 years old. After a long career as a golf professional, in 1997 he had become the sales director of a recruitment company. She meanwhile had been a housewife and had also had some employment in clerical roles. In 1999 Mr Worthing's employment was terminated and the claimants put £20,000 into setting up a business of their own called Abacus Recruitment and Training ("Abacus"). By 2006 Abacus was generating annual profits of about £1 million. In September that year the claimants sold the business for about £5 million. Mr Worthing retained a part-time role with Abacus, for which he was to receive an annual salary of about £80,000. The claimants also jointly received an income of about £100,000 p.a. from a property portfolio.
- The claimants had been customers of the defendant bank since about 2000. After the sale of the business, their bank manager arranged an introduction to the defendant's Mayfair Banking Service, which was the division providing private banking services to "ultra-high-net-worth" individuals (that is, those with assets available for investment in excess of £1 million), for the purpose of receiving advice regarding the investment of part of the proceeds of sale.
- The initial meeting took place on 29 September 2006 at the claimants' business premises in Pontypool. Those present were Mr Worthing, Mr Richard Boanas, Mr Aidan Doyle and Mr Nigel Kilborn; Mrs Worthing was not present. Mr Boanas was the Relationship Manager with whom the claimants dealt at their local branch of the defendant bank. Mr Doyle was employed by the defendant as a Private Banking Manager in the Mayfair Banking Service. Mr Kilborn was an independent financial adviser working out of the defendant's Private Banking offices in Cardiff. The defendant's internal rules did not permit Mr Doyle to provide initial investment advice, though he was permitted to conduct subsequent reviews. Accordingly, at all stages up to and including the making of the initial investment, the lead in the discussions and in completing the necessary paperwork was taken by Mr Kilborn. As an independent financial adviser, he was not limited to recommending the defendant's financial products, though in fact the advice he gave did relate to such products.
- This first meeting took place nine years ago. Even the review meeting, to which I shall turn later in this judgment, took place seven-and-a-half years ago. It is inevitable that the recollections of those present will have faded badly over this time; they are also liable to have become overlain with later thoughts and interpretations. There exists, however, a file note in respect of each meeting; I am satisfied that these were dictated by Mr Doyle very shortly after the meetings to which they respectively relate. Although I shall consider the oral evidence regarding the meetings, the file notes, in conjunction with other contemporaneous documentation, seem to me to be the best starting-point when considering what happened at them, and I shall accordingly refer to them at some length.
- The file note for the first meeting shows that the purpose of the meeting was to explain to the claimants the services that the defendant's Private Banking division, and in particular the Mayfair Banking Service, could provide. Mr Worthing's personal and financial circumstances were then summarised; these were documented in a "Personal Fact Find", and there was also what I shall call a "Risk and Planning" document that assessed the customer's appetite and capacity for investment risk. I shall say more about those documents below. The key point recorded in the file note was that Mr Worthing had "approximately £3.9m in cash sitting on a fixed term deposit which is due to mature shortly". The file note concluded:
"Planned expenditure is £650,000 in relation to his boat, and other issues, approximate[ly] £1.5m on property, £400,000 for Capital Gains Tax.
We have identified that there is approximately £1m of surplus income [this should read 'capital'] and having explained our services to him, he is happy for us to present a report to him for a £1m IPS [Investment Portfolio Service] portfolio. We will look at a range of options for Philip as he does come out [that is, on the risk assessment] as progressive but he has indicated he wants relatively low risk, but I think we need to present him with the various options as he is fairly shrewd and will be looking for real returns.
…
Nigel Kilburn (sic) is now preparing a report and will liaise with me regarding a second meeting."
- The services being offered by the defendant may, so far as relevant to this case, be indicated by reference to its brochure, "Asset Management Service[:] a guide to our Investment Portfolio Service and Portfolio Administration Service". It contained the following passages:
"The Asset Management Service helps you conserve and build your wealth by offering a managed investment portfolio together with a facility for holding equities and other investments that you prefer to look after yourself."
"Your investment strategy is built around you. It aims to match your circumstances and investment objectives, plus attitude to risk—creating a portfolio of investments designed to meet your needs. ...
We will identify your investment objectives and assess your attitude to risk. Do you want minimum risk or maximum growth? A balance between the two perhaps? What about overseas investment? Or a combination of bond, equity and property funds in a single portfolio? ...
It all depends on your situation and how long you intend to invest for. Bear in mind though that the portfolios created by the Investment Portfolio Service are intended to perform over at least five years, and ideally longer."
"Our Investment Portfolio Service is a discretionary managed portfolio service, meaning we make the day to day decisions. It consists of different combinations of collective funds investing in bonds, equities and property."
Pages 12 and 13 of the Guide dealt with the choice of investment Profile, indicating the level of risk appropriate to the particular customer. The introductory section stated:
"Deciding on the Profile that best suits you will depend on what you see as the most acceptable trade-off between risk and reward. As a general rule, the greater the proportion of equities, the stronger the potential for growth, but the higher the possible risks."
Four categories of Profile were identified, in ascending order of risk:
"CAUTIOUS – For those who are prepared to take only modest risks, we offer Profiles with asset allocations that give precedence to bond funds over, or instead of, property and equity funds. Bond funds suit cautious investors because they are generally less susceptible to market volatility, although also less likely to provide such pronounced growth potential.
BALANCED – Balanced Profiles attempt to distribute your money more evenly between lower risk asset classes such as bonds and property and higher risk asset classes such as equities. Balanced Profiles carry greater growth potential while aiming to moderate risk. These types of Profiles suit investors who, while keen to enjoy the advantages offered by equity market investment, don't want to expose their capital too much.
PROGRESSIVE – Progressive category Profiles often put the majority of your money into equity funds yet maintain an element of lower risk asses for risk moderation. As such, they are well suited to investors who are prepared to expose their money to relatively significant risk in return for better growth potential, but want some reassurance in the event of stockmarket volatility.
ADVENTUROUS – Profiles that consist of funds investing mainly or wholly in equities are structured for optimum growth potential. Some include funds investing in overseas assets which, although susceptible to volatility and currency risk, can, in certain conditions, provide greater potential for growth than the domestic market. Such Profiles are designed for those who are willing to accept extra risk in return for higher growth potential."
- During the first meeting, on 29 September 2006, Mr Kilborn completed a "Personal Fact Find" document, which recorded the information given by the claimants as to their financial position and intentions. It was recorded that the claimants had approximately £3.75 million in secure investments, nearly all of it in a Treasury Deposit, and that they had no other investments in financial products. They jointly owned a property portfolio valued at £3 million and the matrimonial home, and Mr Worthing owned a motor-boat valued at about £500,000. (The document also records "50% ownership of Share Links Healthcare Ltd ... £210,000", described as a psychiatric business, although the claimants' evidence was that they had never owned such a shareholding and knew nothing about that company.) Section 5 of the document dealt with anticipated expenditure: the claimants had a liability of £400,000 in respect of Capital Gains Tax; and Mr Worthing intended to increase the value of the property portfolio to £6 million, with investment of £1.5 million and borrowing from the bank of a similar amount; he also intended to buy a new boat for £250,000. Section 6 was the "Summary of needs & objectives". It identified "investments" as the area of need, and the objective as follows:
"Appoint a single independent advisor/company to manage surplus capital with a view of outperforming cash-based deposits after charges & costs. Objective to provide diversification via both a no. of different companies & funds to ensure no reliance on any one asset class. All admin and paperwork to be looked after & the facility for an annual face-to-face review to monitor both performance & personal objectives considered important."
- A second version of the "Personal Fact Find" document is signed by the claimants. It is the same as the first version, save that some additional information has been added in manuscript, regarding in particular sufficiency of income. The claimants' signatures are both dated 29 September 2006, though it may be that either the signatures or the additional information or both were placed on the document after that date. A third version of the document was signed by the claimants on 18 January 2007; it is materially identical to the second version, save that a final page confirms acceptance of the defendant's investment recommendations.
- Mr Kilborn also completed an initial version of the "Risk and Planning" document, which at that stage was limited to Mr Worthing. A later version, dealing with both claimants, was signed by them on 18 January 2007; I shall say more about the document in the context of the final meeting.
- Following the meeting on 29 September 2006, Mr Kilborn prepared an initial Financial Planning Report for the claimants. A final version of the Financial Planning Report was prepared and sent to the claimants in January 2007, and I shall describe the document fully with respect to that final version. At this stage it suffices to note that it recommended investment in a medium-risk portfolio ("Balanced Profile").
- On 7 November 2006 Mr Doyle and Mr Kilborn met again with Mr Worthing. Mr Doyle's file note, which was probably dictated on the following day, reads in part:
"The purpose of the meeting was to deliver the Mayfair Investment Portfolio Service report and recommendations.
We have gone through the report and recommendations in detail with Philip Worthing and he seemed generally happy with the proposals we were putting to him. However he does want to discuss the matter in detail with his wife and has therefore asked that we give him 10 days to resolve this issue at this time[.] Nigel Kilbourne (sic) will get back to him to arrange a hopefully final meeting to complete the paperwork."
- A third meeting took place on 9 January 2007. At the last minute Mrs Worthing became unavailable to attend, and therefore it could not be the final meeting as had been envisaged; a further meeting was arranged for completion of the paperwork. Mr Worthing confirmed that he wanted to proceed with the investment but only at a reduced figure of £600,000. At the end of his file note, Mr Doyle added a memo for his assistant:
"Can you ... do two fresh [Financial Planning] reports and email these to Nigel Kilhorn (sic) for £600k for balanced profile option 2 and the progressive profile option 2 for the £600k.
On second thoughts you can't do that as it has to be option 1 when it is less than £700,000. Can I therefore suggest that you do profiles one for £600,000 for balance of progressive and do a report for £700,000 for balance on progressive option 2."
In his oral evidence, Mr Doyle explained that he wanted to provide the claimants with alternative reports in order to illustrate the difference between the two levels of risk: "balanced" being a medium-risk and "progressive" being a higher-risk investment profile. He said that the reason for illustrating an investment of £700,000 rather than only £600,000 was that the higher figure was the threshold for investment directly in equities rather than in a managed fund. He denied that either he or the bank had been trying to push the claimants into a higher-risk investment.
- A further meeting took place on 18 January 2007. On this occasion, both claimants were present, as were Mr Doyle and Mr Kilborne. This is the meeting at which the initial investment advice was confirmed and accepted. Three documents are relevant to considering that advice: first, the final version of the Risk and Planning document; second, the Financial Planning Report; third, the revised Personal Fact Find document.
- The Risk and Planning document was primarily designed to enable the defendant to assess both its customers' appetite for risk and their capacity for risk. For the claimants it exists in an original version and a revised version. The original version dealt mainly with Mr Worthing; there were some limited entries for Mrs Worthing. The revised version added further information regarding Mrs Worthing and made some alterations regarding Mr Worthing. The following matters are relevant.
20.1 Section 2.4 identified the funds for which advice was sought as £1.12 million currently held in secure investments. The notes indicated the intention: "Utilise surplus cash reserves to provide potential for a better return than existing cash deposits."
20.2 Section 2.6, headed "Likely patterns of activity", stated: "Capital likely to be invested for growth + no withdrawals anticipated for next 5 years +".
20.3 Section 3.2 was in two parts. The first part was headed, "Understanding your capacity for risk". The second part was headed, "Understanding your appetite for risk". The basic distinction is clear: capacity relates to objective ability to bear risk, whereas appetite relates to subjective willingness to take risk. In each part, there were a number of multiple-choice questions, and a score was given for each answer. The total score would indicate the defendant's assessment, with reference to different levels of risk: Secure, Cautious, Balanced, Progressive, Adventurous, and Specialist. Next to the defendant's assessment was a space for the customers to indicate whether or not they agreed with the assessment. The ascending scale of risk is fairly obvious; it suffices to set out the description of the three central ones:
"Cautious – These investments are expected to have a relatively modest risk to the capital value and/or income. They have the potential for relatively modest capital growth and/or income over the medium to long term. Some products may offer some guarantee of capital protection while some will not.
Balanced – These investments carry a risk of loss to capital value but have the potential for capital growth and/or income over the medium to long term. Typically they do not have any guarantees and will fluctuate in capital value.
Progressive – These investments are expected to have relatively significant risk of loss to capital value but with the potential of relatively more capital growth over the medium to long term. They do not offer any guarantees and will fluctuate in capital value."
Mr Doyle's evidence, which I accept, was that, if a customer's capacity for risk and appetite for risk differed, the defendant's recommendation would be based on the lower-risk assessment, although the option for a higher-risk investment might be presented for consideration. This is consistent with the terms of the Risk and Planning document itself.
20.4 The four questions used for the assessment of capacity for risk were as to the timeframe for the investment, the age of the investor, whether the investor was a first-time investor, and the proportion of investable assets that would be accounted for by the investment. On the basis of the answers given to these questions, the defendant assessed Mr Worthing's capacity for risk as Progressive and Mrs Worthing's as Balanced; she agreed with her assessment, but he disagreed with his. In fact, it is hard to follow the reasoning behind the assessments. Mrs Worthing was assessed as having a lower capacity for risk, because no answer was attributed to her in respect of the final question (proportion of assets); as the relevant assets were jointly owned, the claimants should have been treated in the same way. On the other hand, it might be noted that the assessment proceeded on the basis that the proposed investment would account for 61-85% of the actual investable assets. That was correct only on the basis that an investment of £1.12 million comprised more than 61% of net investable assets remaining after the use of £1.5 million to increase the property portfolio. By the time of the revised version of the Risk and Planning Document, the investment was only £700,000, which was only 47% of the net investable assets. This indicates that the final assessment of capacity for risk was performed conservatively.
20.5 The assessment of appetite for risk was based on the responses given to ten propositions. For each proposition there were four possible responses: strongly agree; tend to agree; tend to disagree; strongly disagree. The exercise was designed to test willingness to take risk by putting broadly similar propositions in different words. The most striking similarity is between proposition no. 1 ("The stability of my capital is more important to me than the return that I may obtain") and proposition no. 9 ("Maintaining the money I have is more important to me than making it grow"). Interestingly, when Mr Worthing first gave his responses in September 2006 he gave diametrically opposed responses to those propositions: he strongly agreed with no. 1 and strongly disagreed with no. 9. In January 2007 he altered his response to no. 1 to "tend to agree" but maintained his response to no. 9. (Mrs Worthing's responses in January 2007 were identical to Mr Worthing's revised responses.)
20.6 Further, the document gave an opportunity to the customer to express agreement or disagreement with the bank's assessment. On the basis of their responses, both claimants were assessed as having a Progressive appetite for risk. However, they both expressed disagreement with that assessment.
20.7 The summary of the overall risk-level assessment on the revised document showed that the maximum overall joint risk level was Balanced. A tick showed that the claimants expressed agreement with that joint assessment, though Mr Worthing had expressed disagreement with his own personal assessment as Progressive risk.
20.8 On the original version of the document, which did not contain a fully completed risk assessment, the Notes read: "Customer [i.e. Mr Worthing] wishes to consider either the Balanced or Progressive IPS profiles." However, on the fully completed revised version, the Notes read:
"After reference to the Profile Summary, Philip + Liz have selected the Balanced profile as they believe this will offer the right blend between equities for potential growth but fairly high risk and bonds to provide relative security and lower risk."
- The Financial Planning Report went through a number of revisions; I shall refer only to the final version, dated 15 January 2007, which formed the basis of the investment made by the claimants. Under the heading "Your objectives and needs", the report included the following observations:
"• [Y]ou now seek ongoing investment advice for a capital sum of £700,000 to provide potential for capital growth over the medium to long term. …
• You wish to provide maximum flexibility for your capital, including the opportunity to change your investment strategy in response to your changing needs and circumstances. …
• As you regard this investment as a medium to long term commitment you do not anticipate needing access to the invested capital during the minimum investment term of 5 years.
• You have not stated any investment preferences or objections to any future investments.
• As you have been retained by the company and already enjoy a substantial income from your property portfolio, you do not require an income from your investment for the time being.
• You recognise that inflation will potentially erode your capital and you therefore recognise the need to provide the opportunity for real capital growth, to help provide financial security into your retirement.
• With this in mind you are prepared to accept a risk to your capital.
• Having completed the Risk and Reward Scorecard you have agreed that Balanced investments are most appropriate and you are prepared to accept the risks associated within this category. Having reviewed the investment profiles you have selected the Balanced Equity profile as the most appropriate choice. ...
• You also wish to set aside £2,150,000 to meet the following commitments:
1. Purchase of additional buy-to-let & Commercial Properties £1,500,000 ...
2. Capital gains tax liability £400,000
3. £250,000 towards the purchase of a new motor boat. ...
• We have discussed the benefits of investing via National Savings[;] however you have declined to consider these asset classes as you do not believe there is sufficient potential for capital growth."
- The recommendation in the Report was that the claimants invest £700,000 into the Investment Portfolio Service ("IPS") described in the Report. The aims and objectives of the IPS were stated as follows:
"Seeks to provide a positive total return with a medium risk of capital loss in the short to medium term. This will be achieved through broadly balanced proportions of low risk investments, including UK Government fixed interest bonds (gilts), other Sterling-denominated bonds and overseas bonds, and medium risk investments. These will include UK equities and possibly some property funds. There may also be a small exposure to higher risk overseas equity markets to improve diversification. There may also be investment in Funds of Hedge Funds when it is considered to be appropriate. Investments in the profile will be through either collective investment schemes or direct investment."
- The Recommendation section of the Report contained a warning in bold print:
"Please note that adopting the IPS profile below will significantly increase the overall risk profile of your total investible assets. We agreed that the reason why it is appropriate to undertake this change was because you seek to provide a better return than conventional bank or building society accounts."
Below, the section showed that the Balanced Profile involved a portfolio comprising 45% bonds, 40% UK equities, 5% overseas equities, 5% hedge funds, and 5% commercial property. The following text appeared underneath:
"Risk factors you need to know about
…
• Investing in equities generally has the potential for higher capital growth over the longer term than investing in, for example, fixed income securities. However, there might be considerable fluctuations in equity prices and there is a greater risk that you might not get all your money back.
• Exchange rate changes might cause the value of any overseas investments held by the portfolio to go up or down."
- I have already described the various versions of the Personal Fact Find document; see paragraphs 13 and 14 above. The difference from the earlier versions was the inclusion of a page dealing with the recommendations that had been accepted. This recorded that the claimants had accepted a recommendation for an investment of £700,000 in the Investment Portfolio Service provided by the defendant: "balanced profile[,] option 2". Underneath that entry was written: "Customers have amended their decision to invest from £1,120,000 to above [i.e. to £700,000] by phone. As they have decided to reduce the inv[estment] they have decided against National Savings." Below, Mr Kilborn had signed on 17 January 2007. At the foot of the page the claimants signed on 18 January 2007. Immediately above the claimants' signature was a declaration:
"You confirm that you understand the advice which will be provided by the above named Adviser is based on the information included in this document, any Supplementary Planning Questionnaires, any written report and the Key Features Documentation provided in support of the recommendation. Where recommendations have been made and not accepted by you, you understand that this is your decision and that Lloyds TSB Independent Financial Advisers Limited or its Adviser will not be held liable for this. You confirm that you have been given the opportunity to read these documents in full before signing."
- Mr Doyle's file note of the meeting on 18 January 2007 contains the following relevant passages.
"Following our previous meeting Philip [Worthing] had scaled down the initial sum he was looking at from £1m to £600k but I have explained to him that I have done a report also for £700k so as to give him flexibility if he so wished to have direct gilts and corporate bonds as opposed to collectives. I explained the differences between the two approaches.
We have gone through the report in detail[,] describing each asset class and the benefits of multi manager approach to UK and International equities, the benefits of commercial property trusts, they are very familiar with commercial property owning a number of commercial properties themselves[,] and also the hedge funds explaining how these work.
I discussed in detail costs and terms and conditions and they have been provided with full details of the guide to charges and terms and conditions. ...
They have declared themselves happy with the report and have opted to go from the £700k on the balanced profile option 2 and the necessary paperwork was completed and signed. ...
I have also explained to them in detail what happens regarding the opening of their portfolio and they fully understand this. Nigel Kilbourne (sic) will be dealing with the papers and passing these to their location."
- The claimants signed an application form for the Investment Portfolio Service and the following month they invested £700,000 in the Portfolio with a Balanced profile. At trial, Mr McMeel expressly and correctly accepted that the investment fell within the industry standard for a medium-risk investment and was properly described as such. The claimants' case as to the initial investment is, in summary, that the defendant was in breach of duty in recommending a medium-risk investment in a portfolio with a Balanced profile; it ought to have recommended a low-risk investment in a portfolio with a Cautious profile. I shall consider this case later. At this stage it is convenient to set out some of the witness evidence that has a bearing on it.
- In his witness statement, Mr Worthing said that he and his wife had no investments in financial products or equities. He had never liked shares, because one had no control over the investment and because his father had lost money by investing in shares. Accordingly he kept his money in "bricks and mortar" and in deposit accounts. He said that he had told Mr Doyle and Mr Kilborn that he had no understanding of equities or of investment risk.
"Mr Doyle and Mr Kilborn were well aware that I was not comfortable with anything higher than low risk. ... There was some discussion regarding our risk tolerance and I recall answering some questions regarding this. I told them that I wanted a low risk. Mr Doyle and Mr Kilborn explained that to make a better return than a deposit account a certain amount of risk had to be taken but reassured me that the risk was low and calculated.
"I made it explicitly clear to Mr Doyle and Mr Kilborn that I was only prepared to accept a low risk. ... We were not looking to make big returns, just a modest amount of interest. To me low risk meant that we could not lose a lot of money and also that we would not make huge gains. Had I known that there was even a small risk of substantial losses, I would not have agreed to invest. ...
"I understand that Mr Doyle/Mr Kilborn recommended what was termed a 'balanced' risk portfolio. I honestly do not remember 'balanced' being mentioned, although I do concede that this is in the defendant's documents. In my mind it was clear that I had told them low risk and that is what I thought we had been recommended."
- Mrs Worthing's statement (which can be seen to be partly textually dependent on that of her husband) was to similar effect. She stated:
"I do not recall the defendant assessing my attitude to investment risk at any time. If they had done so, they would have ascertained that I had no interest in taking any risks. ... I do not remember either Mr Kilborn or Mr Doyle ever going through my attitude to risk with me. I truly did not think they had scored me. I do not remember ever being presented with a description of what the different categories were. I do not remember agreeing to 'balanced' or it ever being explained to me what this meant. We were always cautious and believed that we had selected the lowest risk option available."
- In cross-examination Mr Worthing candidly accepted a number of important matters. His objective had been to achieve a medium-term investment giving capital growth that outdid inflation, and he had not been overly concerned about short-term fluctuations in the stock market. He had been given a proper opportunity to read the Risk and Planning document (cf. paragraph 20 above) and had understood the importance of providing accurate responses. His responses "strongly agree" to proposition no. 8 ("My first priority is to maximise the return on my investments, so I am prepared to accept the risk of the value of my investment falling") and "strongly disagree" to proposition no. 9 ("Maintaining the money I have is more important to me than making it grow") indicated that he was prepared to accept the risk of capital loss in the interests of achieving growth; he said, however, that it was difficult to give accurate answers when presented with repeated questions and that his responses had been inconsistent. On 7 November 2006 Mr Doyle had given him the Financial Planning Report (paragraphs 16 and 17 above) and had taken him through it. The Report was substantially similar to the final version, though it was prepared in respect of a proposed investment of £1,120,000 rather than the eventual figure of £700,000; in particular, it was for a Balanced profile. By the time of the meeting on 18 January 2007 the claimants had been in possession of the Report for more than two months, but they did not question the use of a Balanced profile; they only decided to reduce the amount of the investment. The Notes on the final version of the Risk and Planning document (paragraph 20.8 above) correctly indicated that the Balanced profile was the claimants' own choice. It was put to Mr Worthing that he chose a Balanced profile because he was happy with it, and he accepted that that was correct. He did, however, say that to him a Balanced profile meant a "relatively low risk".
- In cross-examination, Mrs Worthing confirmed that, although her husband took the lead in the discussions with the defendant, he always "brought [her] up to speed" after meetings and the decision to invest was made jointly. She accepted that Mr Doyle and Mr Kilborn had performed the risk-assessment exercise with her, but she said that she had done so in a very casual way, with no apparent concern that she should understand the process. At first she said that she had not understood the Financial Planning Report. However, when it was put to her, with reference to Mr Doyle's file note of the meeting on 18 January 2007, that she and her husband had declared themselves happy with the Report, she replied: "Yes, I suppose we were." She accepted that they could not have been happy with the report if they had indeed specified "low risk", though she said that the understanding they took away from the meeting was that the investment was low risk. She said: "I thought 'Balanced' meant safe." However, she also confirmed Mr Worthing's evidence that, after making the investment, they largely "forgot about" the money. When asked about this, she accepted that the reason for this was that they both knew that in the short to medium term the value of the investment might fall.
- Mr Doyle's evidence was, naturally enough, largely reliant on his contemporaneous file notes. Mr Worthing had described Mr Doyle as an impressive man; he was also an impressive witness, giving answers thoughtfully and intelligently and with conviction. The impression of scrupulous honesty he conveyed tends to be confirmed by testing his evidence against the documentation. Mr Doyle strongly disagreed with the suggestion that there was a casual approach to the defendant's dealings with the claimants. (The specific evidence was given with direct reference to the later meeting in March 2008, but the terms in which it was given indicated its general application.) He said that the risk-assessment had been completed by Mr Kilborn, though in his presence. That a customer gave apparently inconsistent answers in respect of "appetite for risk" was not a matter of concern; the process involved discussion and probing and the answers had to be viewed in combination. Based on the claimants' risk-assessments, he (Mr Doyle) would not have accepted them for a higher-risk profile than Balanced, unless they had insisted on the Progressive profile and that had been sanctioned by the defendant's compliance department.
- The terms of the contract formed between the claimants and the defendant after the meeting on 18 January 2007 were contained in the "Asset Management Service—Investment Portfolio Service and Portfolio Administration Service—Terms and Conditions". The following provisions are potentially relevant to a consideration of the subsequent relations between the parties:
"1. Your Rights
a. We undertake to use all reasonable care and skill in the performance of this agreement. We are authorised and regulated by the Financial Services Authority. ... We are therefore bound by the rules which it has made for your protection.
...
c. We will treat you as a private customer for the purposes of the applicable regulations ..."
"2. Your Portfolio
a. The investment range for the securities in your portfolio under the Investment Portfolio Service (IPS) (see paragraph 3.a) will comprise collective investment schemes of which the provider is normally a Lloyds TSB group company. ..."
"3. The Service
3a. Investment Portfolio Service (IPS)
i. Under this form of the service (IPS), we will provide management and administration of securities in your portfolio on a fully discretionary footing within your investment objective.
ii. We are responsible on a continuing basis for managing the securities in your portfolio, in accordance with the investment objective and risk category that you have chosen for your portfolio.
iii. We will contact you from time to time to check whether there have been any changes in your circumstances and requirements that could affect the way in which we act on your behalf. You should inform us then or at any time if there are or have been any material changes that may affect your investment objective or attitude to risk for your portfolio, so that we can discuss with you how best to meet your future needs and objectives."
"5. Custody
a. We will provide custody of the securities in your portfolio and our service will include safekeeping of documents of title (if any) and registration of the securities concerned ...
"11. Fees and Expenses
a. You agree to pay the fees, charges and interest payable under this agreement ... Where holdings in a collective investment scheme are held in your portfolio, you should be aware that in addition to the fees and charges mentioned above, the fund managers controlling those investments will impose further charges which affect the price of those holdings. These include initial charges made on the purchase, annual charges for investment management and certain other charges that may be charged to the fund in which the investment is made."
"13. Limits of Responsibility
a. No warranty is given as to the performance or profitability of any securities or moneys held or acquired for the account of your portfolio nor can responsibility be accepted for any decrease in, or loss of opportunity to increase, its value except in cases of our wilful default or our negligence. Liability will be accepted for errors of fact or judgement or lawful acts or omissions only in cases of such wilful default or negligence. This paragraph will not exclude or restrict any duty or liability which we may have or owe to you under the applicable regulations."
- Appendix A to the Terms and Conditions was headed "Risk Warnings"; it commenced:
"Past performance of investments should not be seen as an indication of future performance. The value of investments and the income from them may fall as well as rise and you may not get back the amount you invested."
- The fees and charges payable in accordance with paragraph 11 of the Terms and Conditions were summarised in a separate document. There was an initial charge of 1.5% of the amount of any capital investment. There was an annual service charge of 1% of the value of the Portfolio, subject to a minimum charge of £1000 p.a. after the first year, for the management and administration of the securities in the Portfolio. In addition, there were ongoing fund management charges in respect of particular funds within the portfolio. Dealing fees were chargeable on sales of equities, gilts and bonds within the portfolio for the purpose of reinvestment within the Portfolio; these did not arise in the claimants' case.
- The defendant's internal documentation shows that it diarised 26 January 2008 as the "Ongoing KYC [Know Your Client] Due Date", that is, the date for an annual review of the claimants' needs and requirements. On 15 January 2008 Mr Doyle wrote to the claimants. The letter read as follows:
"As you know, the way we manage your investments reflects your personal circumstances and requirements, based on the most recent information you provided to us. It's important that we give you the opportunity to update us if there have been any changes that may affect the way we act on your behalf. These changes could include:
• Your income needs
...
• Your attitude to investment risk
• Significant changes to your overall asset position
Regarding your attitude to investment risk, last time we assessed the approach you required for this portfolio we agreed that you wanted a balanced approach (see attached for full description).
Based on the information you provided at the time, we recommended that you invest in the Balanced portfolio. ... This profile seeks to provide a positive total return with a medium risk of capital loss in the short to medium term. ...
If your circumstances or requirements have not changed significantly, and your attitude to risk and description of your current portfolio still meets your requirements[,] you don't need to respond to this letter or take any action. We will continue to manage your portfolio as we do now.
If your circumstances and requirements have changed significantly—or are likely to in the near future—please complete the Notification of Changes Form attached and post it back to me. ..."
Enclosed with the letter were a Notification of Changes Form and a document summarising the different investment Profiles.
- The claimants did not return the Notification of Changes Form. Despite this, a review meeting was arranged; it could not be held in January, as the claimants were out of the country, and was instead arranged for 13 March. The contemporaneous documents (Mr Doyle's agenda for the meeting and his file note of the meeting, and the defendant's internal communications) and the witness evidence show that the position at the date of the meeting was as follows:
- The £400,000 that the claimants had earmarked for the discharge of their capital gains tax liability had instead been used to make family gifts.
- The tax of £437,407 had instead been paid by means of an overdraft facility on the claimants' High Interest Cheque Account with the defendant. At the date of the meeting the overdrawn balance was £356,716. The overdraft facility of £360,000 was due for review on 1 April 2008. The applicable rate of interest was 1.5% over the defendant's base lending rate. The claimants told Mr Doyle that they were "uncomfortable" with the level of debt and wanted to explore means of reducing it.
- When the overdraft was arranged in January 2008, the claimants intended to clear it by the end of March out of the proceeds of sale of business premises. The expected sale price was £1.9 million. However, by 13 March the properties had not been sold. An offer had been received for £1.6 million but Mr Worthing had been advised that he ought to expect to achieve a price of around £1.9 million. It was believed that there was at least some prospect of achieving a sale at a price around that figure before 6 April, when the tax consequences of the sale would alter. As Mr Worthing confirmed in cross-examination, as at 13 March 2008 the preferred plan remained to clear the overdraft from the proceeds of sale, with alternative sources of repayment being considered if the properties could not be sold for an acceptable price.
- The value of the portfolio had dropped to £675,712. This was a reduction of 3.5% from the value of the initial investment. In the same period the FTSE 100 index had dropped by 10.5%.
- The annual rental income received by the claimants from their property portfolio had fallen from £100,000 to £20,000.
- There is some issue, though relatively small, as to what was said at the meeting regarding the Portfolio. Mr Doyle went through the claimants' financial affairs with them in a similar fashion to the fact-finding exercise in the earlier meetings. In the file note that he dictated on the same day or the following day Mr Doyle recorded the following:
"The options regarding reducing or managing the [overdraft] debt are as follows:
1. If the commercial properties sell in the near term, this will take care of the position.
2. Strip out some of the fixed interest holdings in the portfolio to reduce the debt.
3. Speak to their accountant about switching the debt against the commercial and domestic let property to at least get tax relief on the interest payments. I am not sure if this is possible but they will speak to their accountant about that. That idea certainly appealed to Phil Worthing."
We had a lengthy discussion about the portfolio performance and the state of the market. I confirmed my views that the current market is certainly volatile. I could not give them comfort in that we may not see a lower market from where we are now but are (sic) expectations are of a recovery towards the end of this year. I explained my views were that this was not a market to be selling equity funds or commercial property funds. I further confirmed that the fixed interest out of the portfolio had clearly offered a significant buffer against market volatility in recent months. They appear to have accepted my recommendations to stick with the portfolio at this stage and will give some thought as to what they want to do about reducing the debt.
...
We may need to explore as a short term measure increasing the facility on the account to £400,000. There is no way that Philip Worthing will countenance arrangement fees to revisit that and they would not want to pay more than 1.5% over base. It has to be accepted that the portfolio is at risk due to performance.
If they do decide to reduce the fixed interest holdings I have agreed with them that we would not be looking to rebalance to increase the fixed interest holdings at the expense of selling equities in a depressed equity market. They believe that is a sensible approach."
- After the meeting, an extension of the overdraft was arranged until 30 June 2008; at the claimants' request the facility was limited to £370,000.
- Eventually the anticipated sale of the commercial properties fell through. The overdraft remained in place. On 18 July 2008 Mr Worthing spoke by telephone to Mr Doyle and also to Mr Tony Hollingbery, a Private Banking Manager with the defendant, and instructed them to sell the Portfolio. He confirmed the instruction in writing on the same day. There are two contemporaneous records of the oral instruction on the defendant's file. In an internal memo, Mr Hollingbery wrote:
"The client has been considering his position for some time and due to an overdraft facility with us of £360k he wishes to distance himself from stock market investments."
A file note made by Mr Doyle records:
"Phil and Wendy have an overdraft with us, which currently stands at £364,000.
They have been struggling to accept this position, as they were hoping some external funds would arrive to clear the debt. This is no longer happening and they have had to make a difficult decision about the portfolio.
Phil has requested the portfolio be sold in full and the proceeds paid to his bank account. ...
I talked through the option of selling the Fixed Interest worth £300k and holding the equity to allow some longer term recovery but Phil would prefer to have the remaining cash in his bank account.
...
Phil is disappointed to sell but circumstances with the borrowing have controlled this situation."
- The Portfolio was duly sold. The proceeds received by the claimants were £657,388. If the Portfolio had been sold immediately after the meeting on 13 March 2008, the claimants would have received £676,153; that is £18,765 more than they received four months later.
- It is, again, convenient to summarise the witness evidence relating to the annual review, the meeting on 13 March 2008 and the eventual decision to sell the Portfolio.
- In his witness statement, Mr Worthing stated that he and his wife had told Mr Doyle that, as their money was tied up in investments, they had little available money; this was why they had such a large overdraft, and they were uncomfortable with that level of debt. "We were trying to sell the 4 properties but we were struggling to find an offer that was acceptable." They told Mr Doyle that they were disappointed and surprised at the performance of the Portfolio: they told him that they understood that "the stock market goes up and down, but at the moment it appears to just be going down"; they could see the entire investment disappearing in front of their eyes and "could not afford to risk losing any more money." He stated:
"We told Mr Doyle that we were strongly considering pulling out of the Portfolio to prevent any more loss. In particular we felt that it may be better to pay off the overdraft with the money received from the investment. ... Mr Doyle advised us that the cause of the loss was down to the almost unprecedented global financial crisis ... and that, although he could not guarantee it would not fall further, he was sure that there would be a recovery soon. ... Mr Doyle was adamant in his advice that we should remain invested and not pull out of the Portfolio. Mr Doyle alleviated my concerns about the Portfolio. We were uneasy about his recommendation to stay invested but we thought that as he was the expert we should follow his advice."
"At no time in this meeting did Mr Doyle attempt to undertake our attitude to investment risk."
- When he was cross-examined, Mr Worthing accepted that he had not responded to the defendant's letter of 15 January 2008, which was sent with a further explanation of the various risk profiles, by saying that a Balanced profile and a medium risk were wrong for him; he had not returned the Notification of Changes form, and he had not queried the risk profile with Mr Doyle. About a week before the review meeting, he had spoken to Mr Doyle by telephone to complain about the withdrawal of fees from the claimants' account, but he had not said anything about the risk profile. He was asked whether it could therefore be taken that he was happy with medium risk and a Balanced profile, and he responded that it could. Mr Worthing accepted that in early 2008 he was looking to the sale proceeds of the commercial properties to repay the overdraft. At the date of the meeting with Mr Doyle, he remained optimistic of achieving a sale of the properties at an acceptable price within a reasonable time, and there was some prospect of achieving a sale before 5 April. Mr Worthing accepted that his preference remained to pay off the overdraft from the proceeds of sale and to look to another source of funds only if a sale were not achieved. The decision to sell the Portfolio was taken after the sale of the properties fell through. However, the defendant's file note was incorrect in recording that the claimants took the decision to sell reluctantly. The claimants felt that they had lost too much money already and that, if they left their investment in the Portfolio, they would only lose more.
- Mrs Worthing's statement was to similar effect to that of her husband. She stated: "I recall Mr Doyle stating that we should definitely remain invested in the Portfolio, in equities and property, as this was not the time to disinvest. I recall that he was very bullish about this. ... I did not feel as though Mr Doyle was interested in seeing if the original investment was suitable or not."
- When she was cross-examined, Mrs Worthing said that the attitude of herself and her husband to risk had not changed between January 2007 and March 2008. She denied that the reason she had not challenged the Balanced profile after receipt of the letter of 15 January 2008 was that she was happy with medium risk; "I thought Balanced meant safe." However, Mrs Worthing accepted that she had known that the value of the Portfolio might fall in the short to medium term; it was because they knew that this might happen that they were not too concerned when they saw the quarterly reports for the Portfolio. Regarding the meeting on 13 March 2008, she said that she had not wanted to keep the Portfolio, and she felt it pointless to have both an overdraft and an investment that was losing money, but she felt embarrassed to say so; Mr Doyle was "desperate" that they keep it, and the fact that he was meeting them in their own home made it more awkward to insist. In the end, she felt that they should perhaps "give it another month".
- Mr Doyle's evidence was, again, based largely on his file note and his usual practice, though he did have some recollection of the meeting on 13 March 2008. His witness statement said that there had been a lengthy discussion about the performance of the Portfolio. The claimants "were clearly contemplating liquidating the investment". He believed that he would have told them that he did not think it was a good idea to do so at that time. The Portfolio was intended as a medium- to long-term commitment of at least five years; to sell after only fourteen months would have been a mistake. He told the claimants that, on the basis of his experience, he would expect markets to improve. He stated:
"Mr Worthing has, I understand, raised the issue of why I did not undertake an assessment of the claimants' attitude towards risk at our meeting. The fact was that this was unnecessary as it had previously been undertaken and agreed with the claimants in October/November 2007 [scil. 2006] when the IPS was first recommended[,] and on 15 January 2008 (less than 3 months previously) I had written to the claimants to enquire as to whether their attitude towards investment risk remained as balanced. Accordingly a further assessment was unnecessary as at March 2008."
- In cross-examination, Mr Doyle said that, although the claimants had shown natural concern at the fall in the value of the Portfolio, they had not been greatly concerned about it. He was challenged about this and was asked about a memo that he sent to a member of the Credit & Risk Team on the day after the meeting, which said: "The client is not happy with portfolio performance and is considering closing." His reply was that the claimants were indeed thinking of selling the Portfolio; that, however, was not because of major concerns about risk but because they wanted to address the overdraft. The memo was intended to add weight to his request to the Credit & Risk Team to extend the overdraft in order to give time for the commercial properties to be sold. Mr Doyle confirmed that he did not think it sensible to make strategic alterations to a medium- to long-term investment strategy after less than 18 months or to sell equities in a depressed market. If resort were to be had to the Portfolio to pay off a debt, it was better to sell the bonds within the Portfolio than to crystallise existing short-term losses by selling equities.
The law
- In view of the large measure of agreement as to the applicable regulatory framework, it is only necessary for the purposes of this judgment to set out the main points.
- In connection with the initial investment in early 2007, the defendant was giving investment advice, which was a regulated activity under Part 1 of Schedule 2 to FSMA. At all relevant times until the making of the initial investment, the giving of investment advice was subject to the Financial Service Authority's Conduct of Business Rules ("COB"), which were made by the FSA under the rule-making power conferred by section 138 of FSMA. The provisions of COB comprised Rules and Guidance. At the time, section 150 of FSMA conferred a right of action for breach of a Rule; the relevant provisions are now in section 138D. Section 150(1) provided:
"(1) A contravention by an authorised person of a rule is actionable at the suit of private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty."
It is common ground that, for the purposes of section 150(1) the defendant was an authorised person, the claimants were private persons, and the COB Rules were rules within the meaning of the subsection.
- As I have already made clear, on account of a limitation defence the claimants cannot advance any claim in respect of the initial investment. Nevertheless, because of the reliance placed by Mr McMeel, in developing his argument that the defendant was in breach of duty in 2008, on what is said to have been the bank's breach of duty in connection with the initial investment, it is relevant to refer to some of the COB Rules applicable at that earlier time; it is unnecessary for my purposes to refer expressly to the applicable Guidance.
"COB 2.1.3 R
When a firm communicates information to a customer, the firm must take reasonable steps to communicate in a way which is clear, fair and not misleading."
"COB 5.2.5 R
Before a firm gives a personal recommendation concerning a designated investment to a private customer ... it must take reasonable steps to ensure that it is in possession of sufficient personal and financial information about that customer relevant to the services that the firm has agreed to provide."
"COB 5.3.5 R
(1) A firm must take reasonable steps to ensure that, if in the course of a designated investment business ... it makes any personal recommendation to a private customer to ... buy ... a designated investment ... the advice on investments ... is suitable for the client."
"COB 5.4.3 R
"A firm must not (1) make a personal recommendation of a transaction ... with, to or for a private customer unless it has taken reasonable steps to ensure that the private customer understands the nature of the risks involved."
- It is also common ground that the defendant owed to the claimants a duty of care at common law to exercise reasonable care and skill in and about advising them in relation to the initial investment, and that discharge of that duty required compliance with the applicable COB Rules.
- On 1 November 2007 the COB Rules were replaced by the Conduct of Business Sourcebook ("COBS"), which implemented the requirements of European Directive 2004/39/EC, the Markets in Financial Instruments Directive ("MiFID"). The structure of COBS is similar to that of COB, with a distinction between mandatory Rules and advisory Guidance. In 2008 section 150 of FSMA continued to apply so as to give to a private person a right of action for breach of a COBS Rule. In respect of the advice given to them by Mr Doyle in March 2008, the following COBS Rules are either specifically relied on by the claimants or otherwise relevant to consideration of the issues:
"COBS 2.1.1 R
(1) A firm must act honestly, fairly and professionally in accordance with the best interests of its client (the client's best interests rule)."
"COBS 2.2.1 R
(1) A firm must provide appropriate information in a comprehensible form to a client about ... (b) designated investments and proposed investment strategies; including appropriate guidance on and warnings of the risks associated with investments in those designated investments or in respect of particular investment strategies; ... so that the client is reasonably able to understand the nature and risks of the service and of the specific type of designated investment that is being offered and, consequently, to take investment decisions on an informed basis.
(2) That information maybe provided in a standardised format."
"COBS 9.2.1 R
(1) A firm must take reasonable steps to ensure that a personal recommendation, or a decision to trade, is suitable for its client.
(2) When making the personal recommendation or managing his investments, the firm must obtain the necessary information regarding the client's:
(a) knowledge and experience in the investment field relevant to the specific type of designated investment or service;
(b) financial situation; and
(c) investment objectives;
so as to enable the firm to make the recommendation, or take the decision, which is suitable for him."
"COBS 9.2.2 R
(1) A firm must obtain from the client such information as is necessary for the firm to understand the essential facts about him and have a reasonable basis for believing, giving due consideration to the nature and extent of the service provided, that the specific transaction to be recommended, or entered into in the course of managing:
(a) meets his investment objectives;
(b) is such that he is able financially to bear any related investment risks consistent with his investment objectives; and
(c) is such that he has the necessary experience and knowledge in order to understand the risks involved in the transaction or in the management of his portfolio.
(2) The information regarding the investment objectives of a client must include, where relevant, information on the length of time for which he wishes to hold the investment, his preferences regarding risk taking, his risk profile, and the purposes of the investment.
(3) The information regarding the financial situation of a client must include, where relevant, information on the source and extent of his regular income, his assets, including liquid assets, investments and real property, and his regular financial commitments."
"COBS 9.2.3 R
The information regarding a client's knowledge and experience in the investment field includes, to the extent appropriate to the nature of the client, the nature and extent of the service to be provided and the type of product or transaction envisaged, including their complexity and the risks involved, information on:
(1) the types of service, transaction and designated investment with which the client is familiar;
(2) the nature, volume, frequency of the client's transactions in designated investments and the period over which they have been carried out;
(3) the level of education, profession or relevant former profession of the client."
"COBS 9.2.6 R
If a firm does not obtain the necessary information to assess suitability, it must not make a personal recommendation to the client or take a decision to trade for him."
- It is common ground that the defendant owed to the claimants a duty of care at common law to exercise reasonable care and skill in and about advising them regarding the retention or disposal of the Portfolio in 2008, and that discharge of that duty required compliance with the applicable COBS Rules.
- I have set out passages from the Terms and Conditions applicable to the ongoing relationship between the claimants and the defendant (paragraphs 32-34 above). I shall deal later in this judgment with Mr McMeel's submissions concerning the scope of the defendant's continuing contractual obligations.
Summary of the claimants' case
- The case advanced by Mr McMeel on behalf of the claimants at trial was based on breach of statutory duty, breach of contract and negligence. His careful argument may be summarised as follows.
55.1 At the time of the original investment advice in 2006 and early 2007, the defendant failed to ensure that the claimants genuinely understood the nature and risks of the investment they were making. The claimants were first-time investors in financial products; their investment history was confined to commercial property, money in the bank, and Treasury Deposits. Although the claimants expressed agreement with a Balanced profile, this is not determinative of the adequacy of their understanding. The standard documentation used by the defendant was insufficient to bring home the realities to inexperienced investors. Mr Worthing's "authentic voice" is heard in his desire for an investment with "relatively low risk" (see the file note of the meeting on 29 September 2006: paragraph 11 above) and in his very cautious response to the first proposition in the "appetite for risk" section of the Risk and Planning document (paragraph 20.5 above). Mrs Worthing's evidence was that she believed that "balanced" meant "safe"; clearly she lacked proper appreciation of the risks involved in exposure to the market.
55.2 This initial failure on the part of the defendant constituted breaches of COB 2.1.3 R, COB 5.3.5 R, and COB 5.4.3 R (paragraph 50 above). More importantly for present purposes, it resulted in the claimants' investment profile being identified as Balanced (i.e. medium risk), whereas it should have been identified as Cautious (i.e. low risk).
55.3 At all times after the initial investment and until the Portfolio was sold in July 2008, the defendant was under a continuing contractual duty to correct its initial default by either advising that the investment be transferred into a Cautious profile or advising that it be sold.
55.4 Further, when Mr Doyle on behalf of the defendant carried out the yearly review in March 2008, he failed either (i) to correct the original incorrect risk assessment or (ii) to ascertain that the original assessment, whether or not incorrect when it was made, was no longer appropriate for the claimants. He ought to have done the former, because the defendant was obliged to do so by COBS 9.2.1(1) R and by its continuing contractual obligations. He ought to have done the latter, because the information available to him indicated both that the claimants' investment objectives had changed and that their reaction to the drop in value of the Portfolio was inconsistent with a Balanced profile.
55.5 If the defendant had complied with its continuing duties: (a) it would have advised the claimants to disinvest, or to convert the investment into one with a Cautious profile, and they would have done so; the ongoing nature of this duty means that there was a breach as at 16 March 2007, which is the earliest date on which any cause of action that is not statute-barred can have accrued, and the claimants are entitled to recover the damages equal to the difference between the value of the Portfolio at that date and the value upon eventual sale; alternatively, (b) it would have advised them at the annual review in March 2008 that they should disinvest, and they would have done so; accordingly the claimants are entitled to recover damages equal to the difference between the value of the Portfolio on 13 March 2008 and its value upon eventual sale. (In connection with this second way of putting the case, a half-hearted attempt was made to suggest that the review ought to have taken place before 13 March 2008. However, in my judgment no adequate basis has been shown for holding that the defendant was in breach of any duty by reason of the fact that the review meeting was held on 13 March and I reject this attempt to push the relevant date back in time.)
- Consideration of the case summarised above requires some further observations and findings on the facts and evidence set out above.
Discussion
- At the heart of the claimants' case is the contention that the defendant acted in breach of duty in 2007 in recommending a Balanced profile for the claimants' investment. I reject that contention.
The initial investment
- It is clear and I find that the claimants expressed a desire to invest in a portfolio with a Balanced profile, rather than a Cautious or a Progressive profile. It is accepted that they had the capacity to invest with a Balanced profile; the contention is that the defendant failed to take adequate steps to explain to them the meaning and implications of such a profile or to ascertain that their appetite for risk was properly to be understood as cautious. The evidence set out above is against these contentions and I reject them.
- It is wrong to suppose that the beginning and end of the enquiry is provided by Mr Worthing's mention on 29 September 2006 of wanting "relatively low risk" (paragraph 11 above) and his very cautious response to the first proposition in the "appetite for risk" section of the Risk and Planning document (paragraph 20.5 above). As for the former, the relevant question for exploration was what "relatively low risk" meant, having regard to the implications of different investment strategies for capital security and capital growth. Mr Doyle expressed the view that a Balanced profile was properly to be considered as relatively low risk. At all events, the need was to tease out the meaning and implications of such expressions of desire, and to test the wishes and aspirations of the clients, by a process of risk assessment. That is what the defendant did; it is no more to be criticised for doing so than it would have been if a client had expressed a wish to "go for growth" and it had nevertheless declined to recommend a Progressive profile before it had carried out a risk assessment.
- As for the assessment of appetite for risk, Mr McMeel suggested that the inconsistencies of the responses given by the claimants to propositions nos. 1 and 9 and to other propositions indicated that the exercise provided an unreliable basis for an assessment of appetite to risk. He submitted that the response to proposition no. 1 showed clearly that the claimants were cautious investors; that should have been the end of the matter. I disagree. As Mr Doyle and Ms Claro explained, the exercise is designed to avoid reliance on single, unreflective responses; rather it probes the customer's attitudes and provokes thought and discussion. Focus on one particular response, be it to proposition no. 1 or to propositions nos. 8 and 9 or to any other proposition is itself unreliable, because it risks attribution of attitudes that are not genuinely those of the customer and evades the process of reflection that is integral to the assessment.
- Mr McMeel accepted that on one level the claimants understood that they were investing with a Balanced profile and what that meant. But he submitted that the steps taken by the defendant and the "stock phrases" used in its standardised documentation were inadequate to bring home to the claimants, first-time investors with no experience of the world of equities or bonds, what the risks of investment were in practical terms. The defendant ought to have been more concrete and direct in its approach; it should have asked questions to the effect: "Are you comfortable if the value of the investment falls by 10%? What about 20%? Or 30%?"
- It is right to bear in mind that the claimants had not previously invested in financial products, other than the practically risk-free kind such as deposit accounts and Treasury Deposits. But it will not do to paint them as naïve, unsophisticated or timid. Both of them are obviously intelligent. Mr Worthing has been a remarkably successful businessman. They are clearly a close couple, who had joint finances and made their investment decisions on a genuinely joint basis. They were not ignorant about the implications of exposure to the financial markets, at least in general terms; Mr Worthing's evidence concerning his father's unhappy experience confirms that point, if it were not otherwise likely. Their approach to life was not one of putting money safely on deposit. They had a substantial property portfolio and were intending to expand it significantly with the use of a high level of borrowing; it is not credible to suppose that they believed investment in commercial property to be risk-free, though they clearly believed that it provided the opportunity for substantial capital growth. They had spent a very large amount of money on the purchase of a motorboat; though it might properly be said that that was for pleasure rather than investment, the purchase casts some light on their attitude to retention of money. The very cautious nature of the investment of the surplus of the proceeds of sale of the business before the investment in the Portfolio does not demonstrate a propensity to caution; it was by way of a short-term arrangement, while decisions were made as to what to do with the money in the longer term, and a reason for seeking the defendant's advice on investment was to achieve greater returns in the mid- to long-term.
- The defendant was entitled to use standardised documentation for the purpose of explaining to its customers the nature of its products and the risks attendant on them; that entitlement is now expressly recognised by COBS 2.2.1 R. There is a clear advantage in using such documentation, because it avoids the vagaries of inconsistent and perhaps unclear explanations and information and provides a clear reference for assessment and approval by the regulatory authorities. The documentation used by the defendant with respect to the claimants was clear and straightforward in its explanations of the risks involved in a Balanced, as distinct from a Cautious, profile. Indeed, Mr McMeel did not identify any respect in which it could be said to be unfair, unclear or misleading (cf. COB 2.1.3 R). Moreover, although the investment strategy was ultimately a choice for the customer, that choice came after a process of assessment that was designed to probe the customer's understanding and attitudes. Once it is accepted that no individual response, whether to proposition no. 1 or otherwise, can properly be accepted as determinative and that the claimants' responses taken as a whole indicate a Balanced profile, the remaining complaint is that the risk-assessment ought to have involved more specific and concrete questions (cf. paragraph 61 above). I reject that complaint. The risk-assessment was a robust method of probing and assessing attitude to risk and was properly applied. (I reject Mrs Worthing's evidence that the defendant's approach to the meetings on 18 January 2007 and 13 March 2008 was casual, and I accept Mr Doyle's contrary evidence, which is consistent with the contemporaneous documentation, with Mr Worthing's view that Mr Kilborn and Mr Doyle were impressive and with my impression of Mr Doyle's professionalism.) The risk-assessment was not an exercise in prediction of possible gains, possible losses or the relationship between the two. Questions such as those proposed by Mr McMeel involve artificiality and abstraction, the more so the more potentially meaningful they become ("Would you accept a w% risk of a x% loss in return for a y% chance of a z% gain?", and so on) and I see no reason to suppose that they would provide a better understanding of a customer's attitude to risk, far less that they should be mandatory for first-time investors. Mr Doyle said simply: "It is neither possible nor helpful to put this in terms of percentages. Markets go up and down." I agree. It might also be observed that the contention that the defendant ought to have asked different questions was not pleaded in either the original or the amended particulars of claim and was not supported by expert evidence.
- Further, and more importantly, the evidence shows clearly that the claimants understood what they were getting and got what they wanted. This is demonstrated by the documentation and the witness evidence summarised above. The claimants' full involvement in the process is shown in particular by their only qualified agreement with the results of the risk-assessment and by their decision to reduce the amount of their investment from £1,120,000 to £700,000. Their desire for a medium-risk investment with a Balanced profile is shown in particular by their stated investment objectives, their responses on the risk-assessment, their decision in the light of the reduced investment to eliminate the component of low-risk National Savings (paragraph 24 above), their instructions to proceed as recorded by Mr Doyle and on the Risk and Planning document (paragraph 20.8 above), and their contentedness to "forget about" the investment after it had been made because fluctuations were to be expected. It is also shown by what happened in 2008. Even if, contrary to my view, the defendant ought to have asked different questions for the purpose of ascertaining the claimants' attitude to and understanding of risk, the evidence does not support the conclusion that such different questions would have resulted in a different investment strategy.
- I shall mention briefly one aspect of the case that was raised in the amended particulars of claim and discussed in Mr Levett-Scrivener's evidence. The complaint was made that, in view of the claimants' existing commercial property portfolio, it was inappropriate and unsuitable to recommend that the claimants invest in a Portfolio containing a 5% component of commercial property (paragraph 23 above). This complaint does not advance the case. First, it was ultimately not pursued as a substantive allegation. Second, it is unpersuasive as an allegation of unsuitability. The Balanced Portfolio was, so to speak, an "off-the-peg" investment package. The element of commercial property contained in it was very small as a proportion of the Portfolio and negligible as a proportion of the claimants' total investments and cannot in my view justify treating the Portfolio as unsuitable. In fairness, Mr Levett-Scrivener viewed the 5% component and the existing commercial property portfolio together; he considered that the defendant ought to have advised the claimants that they already had an imbalanced portfolio. That, however, is not the pleaded case; the pleaded case is that the 5% component represented lack of diversification. Third, Mr Levett-Scrivener made clear that the 5% component was material to diversification, not to risk. Fourth, there is no evidence that removal of the 5% component would have improved the claimants' ultimate financial position.
The continuing contractual obligation
- The discussion and conclusions in paragraphs 57 to 64 above are sufficient to dispose of all aspects of the claimants' claim, except their allegation that Mr Doyle gave them incorrect advice in March 2008. However, I shall consider the case that was advanced in respect of continuing contractual obligations; see paragraph 55.3 and alternative (i) in paragraph 55.4 above.
- There are at least three different ways in which it might be open to the claimants to contend that the defendant was under continuing contractual obligations in respect of the initial investment advice.
1) The original investment advice was given under a contract, but the advice, being incorrectly given, did not discharge the defendant's duty under the contract and the defendant remained contractually bound to perform that duty; such performance required the defendant to correct its original advice.
2) After the initial investment advice was given, a new contract came into existence, under which the defendant was under an absolute obligation to correct any incorrect advice it had originally given.
3) Whether under the contract pursuant to which the initial investment advice was given or under a new contract that came into existence thereafter, the defendant was required to conduct periodic reviews; and in conducting those reviews the defendant was required to exercise reasonable care and skill and to comply with the COBS Rules.
I shall refer to these as Alternative 1, Alternative 2 and Alternative 3 respectively. In his submissions, Mr McMeel did not distinguish between Alternative 1 and Alternative 2, because he treated everything done by the defendant as having been done under a single contract. His primary submission, accordingly, was that, having given incorrect investment advice in January 2007, the defendant was at all times thereafter under an absolute contractual obligation to correct that advice by recommending that the claimants either reinvest in a portfolio with a Cautious profile or disinvest; this has the same effect as saying that at each moment after the giving of the incorrect investment advice there is a new breach by way of a failure to rectify the earlier breach. His secondary submission, if there was no such obligation, was that Alternative 3 obtained.
- The earlier parts of this judgment dispose of Alternative 1 and Alternative 2 on the facts and also of Alternative 3 insofar as it relates to the correction of earlier advice. However, and in any event, in my judgment:
1) Alternative 1 cannot apply, because (a) the original investment advice was not given under any, or alternatively any pleaded, contract and (b) if there were such a contract it would not generate any relevant continuing obligations;
2) Alternative 2 cannot apply, because the contract that came into existence after the original investment advice was given did not impose any relevant obligation (that is, any obligation such that, for each moment when the defendant had not corrected its earlier advice, there was a continuing breach consisting of the failure to correct it);
3) Alternative 3 does apply, because a new contract came into existence after the original investment advice. However, the obligations under it did not impose an absolute duty to correct any earlier error in the original investment advice; they required the defendant to conduct reviews with reasonable care and skill and in accordance with the COBS Rules. I shall discuss Alternative 3 below under the heading "The 2008 Review".
- The particular contractual terms that Mr McMeel relied on in argument at trial as creating continuing contractual obligations were those in the Terms and Conditions: see paragraphs 32 to 34 above. There was little attention at trial to questions of contract formation. In my judgment, the documentation indicates that the Terms and Conditions governed the parties' relationship only after the meeting on 18 January 2007. It was as a result of the investment decision taken at that meeting that the claimants made an application for the Investment Portfolio Service and Portfolio Administration Service. Their application form was signed by the claimants on 18 January 2007 and in acceptance on behalf of the defendant on 26 January 2007. It is clear that the Terms and Conditions governed the relationship between the parties from the date of acceptance. However, there is no evidence that the Terms and Conditions formed part of any contract between the parties before that date, and as the claimants did not sign up to the Asset Management Service before they applied to do so on 18 January 2007 it would be for them to discharge the burden of showing how the Terms and Conditions could have applied at that date.
- In the amended particulars of claim, paragraph 5, it is alleged that the defendant's retainer to give investment advice to the claimants came into existence in or about September 2006. Various documents are said in paragraph 6 to evidence the retainer; these include the Terms and Conditions and the application form dated 18 January 2007, although I do not see that either of those documents evidences a contract made several months earlier. The amended defence, paragraphs 7 and 8, expressly denied that there was a retainer for the giving of investment advice. The defendant did not resile from that denial at trial, though Mr Mantle did not devote much attention to contractual issues in submissions that were primarily directed to the facts. I should note that no case was pleaded or advanced that the initial investment advice was provided under some general contract of banker and customer made before September 2006.
- None of this has any bearing on the application of the COB Rules or the existence of a common-law duty of care in the giving of investment advice between September 2006 and January 2007. However, it does have relevance to Mr McMeel's argument that the original investment advice was given in purported performance of a contractual obligation but that the giving of the advice did not discharge that obligation, which accordingly subsisted and continued to bind the defendant at each moment thereafter. In the absence of proof that there was such a contractual obligation at the outset, the argument falls at the first hurdle.
- Even if this last conclusion were wrong, the case advanced at trial regarding a continuing contractual obligation would remain untenable. The amended particulars of claim, at paragraph 9.1, relied on only one contractual obligation, namely the implied obligation under section 13 of the Supply of Goods and Services Act 1982 to exercise reasonable care and skill in and about giving investment advice. If indeed the original investment advice was given pursuant to a contract, the implied obligation under section 13 did apply. But that would support nothing more than a contention that incorrect investment advice had been given in breach of contract. Because of the limitation bar to a claim based directly on the original advice, the claimants' argument based on continuing breach of contract requires them to identify the particular contractual obligation that remains unperformed. This in turn requires that they identify the underlying contractual obligation to which the duty of care in section 13 applies. The mere fact (if it be such) that advice is given without the exercise of reasonable care and skill cannot suffice to establish that there is a continuing breach of duty.
- Mr McMeel relied on a line of authorities beginning with Midland Bank Trust Co. Ltd v Hett, Stubbs & Kemp [1979] 1 Ch. 384. In view of my findings on the facts concerning the original investment advice, I shall not try to deal with them comprehensively; consideration of the main points will suffice. In Hett, Stubbs & Kemp, the defendant solicitors failed to register an option as an estate contract under the Land Charges Act 1925. The land to which the option related was sold, and the unregistered option did not bind the purchaser. Approximately five years after the sale of the land and eleven years after the defendants had been instructed to register the option, the plaintiff brought a claim for damages for professional negligence in respect of the losses caused by the failure to register the option. Oliver J held that neither in contract nor in tort was the claim statute-barred. His preliminary remarks regarding the contractual claim are important both generally and for the claimants' arguments in this case:
"It is perhaps a truism to say that what those facts are [that is, the facts necessary to be proved for the claim to succeed] can be ascertained only by reference to the right asserted, or, to put it another way, in the case of an action for breach of contract, by reference to the particular contractual duty the breach of which is asserted as the ground for the claim."
In a long passage commencing at 434, Oliver J said that the complaint in the case before him was not that the option had not been registered within a reasonable time but that it had not been registered at all before the land was sold. At 435 he said:
"It is, I think, important in the instant case to note that it is not a case of the giving of wrong and negligent advice—where the breach of contract necessarily occurs at a fixed point of time—but of simple non-feasance. ... [The solicitor] has, no doubt, exhibited a failure to show the normal competence and care for his client's affairs by carelessly allowing a period to elapse during which a third party might have, but has not in fact, acquired an interest. But such a failure cannot, I should have thought, affect, much less discharge, the primary obligation to effect registration timeously, which continues until it is performed or becomes impossible of performance or until the client elects to treat the continued non-performance as a repudiation of the contract."
Oliver J considered that previous authorities did not dictate a contrary view. At 438 he observed that the defendant solicitors had "never treated themselves as functi officio in relation to the option" and he held that "the obligation to register which they assumed when they were first consulted continued to bind them."
- Hett, Stubbs & Kemp was distinguished by the Court of Appeal in Bell v Peter Browne & Co. [1990] 2 QB 495. The claimant reached an agreement with his estranged wife: he would transfer to her his interest in the matrimonial home in return for a mortgage or declaration of trust to secure payment to him of a proportion of the proceeds of any future sale. The defendant solicitors acted for the claimant in the transaction; they effected the transfer but failed to procure the mortgage or declaration of trust or to lodge a caution against dealings. Eight years later the wife sold the house and spent the proceeds. The Court of Appeal held that the claim in contract was statute-barred; there was no continuing duty; the breach of contract had occurred more than six years before the commencement of proceedings. Nicholls and Mustill LJJ considered that the breach was committed when the transfer was effected (or, in the case of failure to lodge the caution, as soon thereafter as reasonably practicable); this remained the case even though the breach was remediable for several years thereafter. "Failure thereafter to make good the omission did not constitute a further breach. ... A remediable breach is just as much a breach of contract when it occurs as an irremediable breach, although the practical consequences are likely to be less serious if the breach comes to light in time to take remedial action": per Nicholls LJ at 500-1. Nicholls LJ emphasised that the case was different if the contractual obligation, on its true construction, was a continuing obligation, such as the common form of leasehold repairing covenant. He said that Hett, Stubbs & Kemp "may be distinguishable" on the basis that the defendants in that case had never treated themselves as functus officio in relation to the option but had continued to have dealings with their client in respect of it. Beldam LJ's reasoning was essentially the same as that of Nicholls LJ, though he was unpersuaded by the proposed ground of distinction between the cases and implied strongly that Oliver J's decision was simply wrong: see 508. Mustill LJ, who expressed agreement with both Nicholls LJ and Beldam LJ, found it impossible, on the facts of the case before him, to imply "such a strange obligation" as one to exercise continuing vigilance to discover any mistake which [the defendants], themselves, might have made, and then to busy themselves in putting it right": 511-2.
- The matter of continuing contractual duties has recently been considered by the Judicial Board of the Privy Council in Maharaj and another v Johnson and others [2015] UKPC 28. In 1986 the defendants acted for the claimants in their purchase of some land; the purchase was completed and the defendants, having been paid for their services, closed their file. In 2008 the claimants discovered that their title to the land was questionable, because the conveyance had been made by an attorney lacking authority to act for the vendor. They sued the defendants, and one of the claims that they proposed to advance was that the defendants were in breach of contract. In order to defeat a limitation defence, they needed to show "that every day until after 26 February 2008 the defendants continued to be under a contractual duty to secure for them the legal interest in the land and that, on each of those days ... they breached it and so generated a fresh cause of action." The question for the Board was whether it was arguable that the claim in contract was not statute-barred. Lord Clarke, dissenting, thought that it was indeed arguable that the claim in contract was not statute-barred. His judgment considered the reasoning in Hett, Stubbs & Kemp and in Bell; it may fairly be said to indicate a preference for that of Oliver J, but the critical point was that even in Bell the Court of Appeal had accepted that it was possible for parties by agreement to create continuing contractual obligations, and Lord Clarke thought it arguable that Maharaj was such a case: see [58-60]. However, the majority of the Board considered that the claim in contract was not arguable. At [34] Lord Wilson explained why:
"The claim is that for 22 years ... the defendants were under a continuing contractual duty to procure execution of a Deed of Rectification. But their fees had been promptly paid. Their file had been closed. There is no evidence of any communications between the claimant and the first defendant (or any of the other defendants) [until] February 2008. The Midland Bank case was, as Oliver J stressed, one of non-feasance: the contract obliged the solicitors to register the option and the obligation remained outstanding for six years. The Board recognises that the Bell case could be subject to a similar analysis, namely that the contract obliged the solicitors to register the caution and that the obligation remained outstanding for eight years. Beldam LJ may have been correct to accept that, in relation to the continuing duty, the two cases were indistinguishable. Mr Casey [counsel for the claimants/appellants] argues forcefully that, on this point, it was the Bell case, rather than the Midland Bank case, which was wrongly decided. In any event, however, the present case is different. the complaint is not that the defendants failed to take action pursuant to their contract with the claimants; it is that, in proceeding on the basis that [the vendor's purported attorney] had validly executed the Deed of Conveyance on behalf of [the vendor], the action by which they purportedly performed their contract was negligently wrong. At the point when they paid the purchase price, the claimants did not receive the marketable title which they had contracted to receive. There was no reference in the contract, express or implied, to an obligation to procure execution of a deed of rectification and, unlike the facility of solicitors to secure registration of an option or a caution, the defendants could not have procured execution of a deed of rectification without the participation of a third party, namely [the vendor]. The proposed claim in contract is, in a word, factitious."
- I do not think that Hett, Stubbs & Kemp provides any support to Mr McMeel's argument. The claimants' case is not that the defendant, being contractually obliged to give them investment advice, failed to do so. It is that the defendant gave wrong and negligent advice in January 2007. As Oliver J made clear, in such a case the cause of action accrues when the advice is given; there is no question of a continuing unperformed obligation. Nothing in Maharaj casts doubt on that point.
- It is of course the case that, in the present case, there was a contractual relationship between the parties at all times after 15 March 2007 (the relevant date for limitation) and the parties had ongoing relevant communications. But that is because the claimants had signed up to the Asset Management Service and, perhaps, because they were customers of the defendant bank under some other contract (this latter point was not explored at trial). It is not because of any contract, pleaded and proved, under which the investment advice was given. More importantly, none of this has anything to do with a contractual obligation that ought to have been performed by the defendant in January 2007 but was not performed and thus remained a subsisting unperformed obligation. No relevant contractual provision has been identified, nor does the claimants' case as to breach of contract fall within the scope of the decision in Hett, Stubbs & Kemp: see the two citations from Oliver J's judgment in paragraph 73 above.
- A different point remains, namely that at all times after 15 March 2007 the bank was contractually bound by the provisions of the Terms and Conditions of the Asset Management Service. Section 13 of the 1982 Act applied to any functions that it performed under the Asset Management Service. But more than that is required to establish that the defendant was under a continuing duty at all times since the original investment advice, in the sense of a duty that had not been discharged by the giving of incorrect advice in January 2007 and that remained open for performance only by the correction of that initial advice. I have already explained why the Terms and Conditions cannot provide that something more. Even if they could in principle do so, none of the Terms and Conditions are pleaded in the amended particulars of claim.
- Regardless of any pleading point, the Terms and Conditions relied on by Mr McMeel (paragraphs 32-34 above) do not assist in establishing the case that at all times after 15 March 2007 until the sale of the Portfolio the defendant was in breach of contract by reason of the existence of a continuing contractual obligation such that, for each moment when the defendant had not corrected its earlier advice, there was a continuing breach consisting of the failure to correct it. (It is a different question whether the Terms and Conditions assist in establishing a case that the defendant was in breach of contract by reason of the advice it gave in March 2008; I turn to that question below.) Mr McMeel submitted that the Terms and Conditions gave rise to continuing contractual obligations on the part of the defendant. That is correct, but it is necessary to be clear what one means. The terms set out the contractual obligations that the defendant owed to the claimants at all material times from March 2007 until the Portfolio was sold. They did not, however, purport to do anything that had the effect of making each moment when any incorrect investment advice originally given was not corrected the occasion of a new breach under a continuing obligation; there was nothing in them to impose on the defendant strict liability for the continued subsistence of a state of affairs whereby the claimants' money remained invested in a Portfolio with an unsuitable risk profile (if it were in such an investment). Clause 1 was an express term to the same effect as the implied term in section 13 of the 1982 Act. Clause 3(i) and 3(ii) related to management and administration of the Portfolio in accordance with its terms and risk profile; no complaint is made regarding management and administration. Clause 3(iii) related to periodic reviews and changed circumstances; it is relevant to the 2008 advice but does not purport to impose an obligation at each succeeding moment after the initial investment to rectify any error in the original investment advice. Clause 5 related to custody and safeguarding of securities; that indicates a continuing relationship but is not a matter of complaint. None of these provisions or any of the other provisions of the Terms and Conditions have anything to do with the primary obligation alleged by Mr McMeel, namely a strict obligation, continuing from moment to moment, to correct any initial mistake in the original investment advice. Such an obligation is supported neither by the law nor by the evidence.
The 2008 review
- The defendant had an obligation to conduct periodic reviews of the claimants' circumstances and requirements in accordance with clause 3(iii) of the Terms and Conditions. In performing that obligation, it was required to exercise reasonable care and skill in accordance with clause 1(a) and section 13 of the 1982 Act and to comply with the requirements of the COBS Rules.
- Mr McMeel's first main complaint in respect of the March 2008 meeting is that Mr Doyle failed to carry out an assessment of the claimants' risk profile and to correct the original incorrect risk assessment. I reject that complaint.
81.1 The original risk assessment was not incorrect: see above.
81.2 There was no contractual obligation to carry out a new risk assessment in the sense of going over the ground covered at the time of the original investment. The obligation under clauses 1(a) and 3(a)(iii) of the Terms and Conditions was to carry out a periodic review and to exercise reasonable care and skill in identifying and responding to changed circumstances or investment objectives. Mr McMeel's argument sought to impose on the defendant an obligation to repeat the process undergone at the time of the original investment; the purpose of this argument was to make of the original breach of duty a repeated breach of duty within the limitation period. There is no justification for that. Mr Doyle was correct to say that the risk assessment had been carried out at the time of the original investment; his task was to find out what if anything had changed and to give any appropriate advice.
81.3 There was no obligation under the COBS Rules to carry out a fresh risk assessment in the sense already explained. Mr McMeel submitted that there was, and he relied on COBS 9.2.1 R. That Rule did apply, because advice on the merits of selling a designated investment is a personal recommendation for the purposes of Chapter 9 of COBS (though see further below). However, the defendant had examined suitability at the time of the original investment. All that was required in March 2008 was to see whether the claimants' objective circumstances or subjective objectives or the material facts regarding the Portfolio had altered in any way that made the investment no longer suitable for them. Neither the wording of COBS 9.2.1 R nor any good reason requires that the original exercise be repeated de novo.
81.4 Mr Doyle did what was appropriate in the circumstances. See below.
81.5 There is no evidence and it was not submitted that the claimants' capacity for risk now made the retention of the Portfolio unsuitable for them, and it is their own evidence that their appetite for risk had not altered. See below.
- Mr McMeel's second main complaint is that Mr Doyle ought to have ascertained that the original assessment, whether or not incorrect when it was made, was no longer appropriate for the claimants and that he ought to have advised them to disinvest from the Portfolio as being unsuitable for their present circumstances. He ought to have done this because the information available to him indicated both that the claimants' investment objectives had changed and that their reaction to the drop in value of the Portfolio was inconsistent with a Balanced profile. I reject this complaint.
82.1 Mr McMeel submitted that the fact that the claimants were thinking about selling the Portfolio indicated that their investment objectives had changed and their attitude to risk was not now (if it had ever been) reflected by a Balanced profile—either the original assessment was wrong, or the risk profile had changed. So far was Mr Doyle from taking this on board that he actually suggested stripping out the low-risk investments (bonds) and leaving in place the high-risk investments (equities).
82.2 The element of truth in this last-mentioned observation, concerning Mr Doyle's suggestion that bonds be sold and equities retained, only serves to highlight the problem with the underlying premiss of the submission. The suggestion had nothing to do with allaying concerns about risk; it was directed to the question how best to proceed if the claimants decided to have recourse to the Portfolio to discharge the overdraft. Mr McMeel says that this is because Mr Doyle "was not listening". I do not accept that. It was because the issue raised at the meeting did not concern the claimants' attitude to risk.
82.3 The position, as I find, was relatively simple. The claimants' immediate concern was about their overdraft; they had expected to clear it from the proceeds of the property sale, but this had not yet been achieved. Their primary intention was still to pay it with the proceeds of sale, as Mr Worthing acknowledged. But they were unwilling to allow the overdraft to remain in place for much longer—they felt "uncomfortable" with it—and they needed to consider alternatives. They were as unhappy as anyone would be at a fall of nearly £25,000 in the value of the Portfolio. They also knew that there was a global financial crisis. But they had always known that the investment was a medium-risk investment and that falls in its value were liable to occur. There had been no change in their attitude to risk, as they both acknowledged. The question was whether, if they could not sell the commercial properties quickly, they should sell the Portfolio and use the money to clear their debt. Mr Doyle's suggestion that it was an option to sell the bonds and retain the equities, so far from "talking past" the claimants (as Mr McMeel would have it) was directly in point. If recourse were to be had to the Portfolio, the better course would be to use what I may term the cash equivalent for that purpose and to retain the equities; otherwise losses would be crystallised on a low market and the opportunity of future recovery would be foreclosed.
82.4 Accordingly I do not agree with Mr Levett-Scrivener's belief that "Mr and Mrs Worthing's concern about this performance [of the Portfolio since January 2007] was indicative of their lack of understanding of investments and a further indication of their unwillingness to accept investment risk." In those circumstances I disagree with his conclusion that a competent financial adviser would therefore have re-categorised the claimants as either Secure or Cautious.
82.5 Mr Doyle did what was appropriate for the purposes of Chapter 9 of COBS. He discussed the claimants' circumstances with them in detail; it has not been suggested or demonstrated that he failed to ascertain relevant matters. And he discussed with the claimants the performance of the Portfolio, the reasons for the fall in its value and the reasonable hopes of recovery over the longer term.
82.6 For the defendant, Mr Mantle submitted that at the meeting Mr Doyle did not make any personal recommendation and could not properly have made any personal recommendation because he lacked the necessary information to assess its suitability. I partially agree with this submission. Mr Doyle did two relevant things. First, he advised against any immediate sale of the Portfolio. Second, he suggested that, if any recourse were to be had to the Portfolio, it would better be to the bonds than to the equities; but he did not recommend such recourse. The advice not to sell immediately was, in my judgment, a personal recommendation, because it was advice as to the merits of sale of a designated investment. However, it was limited advice as to its scope, because the position was as yet uncertain regarding both the sale of the commercial properties and the tax position mentioned in the file note of the meeting. Given the position that obtained, it seems to me that Mr Doyle was perfectly entitled to advise against immediate liquidation of the investment; the only possible alternatives were to advise immediate sale or to sit on the fence. The suggestion concerning rebalancing of the Portfolio was not a recommendation, because no decisions were being made or counselled; as the file note correctly states, it was an option to be considered if recourse were had to the Portfolio.
82.7 In agreement with the submissions of Mr Mantle and the evidence of Ms Claro, I consider that it would have been inappropriate for Mr Doyle to make a personal recommendation for the sale of all or part of the Portfolio. Chapter 9 of COBS and, in particular, COBS 9.2.6 R are directly in point. The critical question was whether the claimants' investment objectives made the Portfolio an unsuitable investment for them. That question could not be answered until the parties knew the position regarding the sale of the commercial properties and the tax issues raised at the meeting. As Mr Mantle submitted, those affairs were in something of a state of flux in mid March. In particular, it was not known whether the properties, which remained the preferred source of funds for repayment of the overdraft, could be sold for an acceptable price within a reasonable time. Therefore it was not possible to know what the investment objectives with regard to the Portfolio were to be in the future. In those circumstances, Mr Levett-Scrivener accepted in his oral evidence that the approach of "wait and see" with regard to the sale of the properties before reviewing the position was one that a reasonably competent financial adviser could have adopted, provided that steps were taken to ensure that immediate repayment of the overdraft were not suddenly demanded. That accords with Mr Doyle's approach in the present case, namely to advise against immediate sale of the Portfolio and to take steps to ensure that the overdraft facility remained in place.
82.8 Mr McMeel submitted that Mr Doyle was nevertheless open to criticism for failing to revert to the claimants after the meeting in March 2008. There was a need to review the position and decide whether the Portfolio remained suitable for the claimants; "the ball was in Mr Doyle's court"; while the Portfolio and the overdraft both remained in place, time was of the essence and Mr Doyle ought to have pressed for a quick review rather than leave matters in the air until the claimants gave the instruction to sell some four months later. Mr McMeel described this line of argument as a "sideshow" to the main point of the incorrect risk profile; that may explain why it is not reflected in the amended particulars of claim. At all events, I reject the submission. Ms Claro's opinion was that, where a review of the investment objective of this relatively long-term investment was dependent on the outcome of the proposed commercial property transaction, it was reasonable to wait for up to six months before advising the claimants that they should review their position rather than waiting indefinitely for the properties to sell. I accept that opinion; it is the best available evidence of what falls within the range of conduct to be expected of a competent financial adviser and, having regard to the facts of this case, it appears to me to be a reasonable opinion.
82.9 The ultimate decision to sell the Portfolio was that of the claimants. Mr Doyle's file note, set out above, correctly records: "Phil is disappointed to sell but circumstances with the borrowing have controlled this situation." I reject Mr Worthing's oral evidence that the decision was not made reluctantly and was simply because the claimants did not want to lose any more money. It may be noted that in his first witness statement (where a witness's first statement has been superseded by a later version, I have generally referred only to the latest version) Mr Worthing stated: "If it had not been for the overdraft problem we would have retained the Portfolio as advised by the defendant." That was correct. The claimants did not want to sell and did not do so because they thought the Portfolio unsuitable for them; they sold because they reluctantly needed to have access to the money to pay off an overdraft that had neither existed nor been envisaged when the original investment was made. Mr Worthing's departure from his original statement on this point is, I think, illustrative of the process of interpretation undergone by the claimants' evidence by reason of a combination of the lapse of time and the work on their minds of their disappointments and the benefit of hindsight.
Summary and Conclusion
- The Balanced Portfolio was a suitable investment for the claimants when they took it out in early 2007. They understood that it was a medium-risk investment, they knew what that meant and they knew what they were getting. There was accordingly no error for the defendant to correct in the period until the review that took place in March 2008. Even if the original advice had been wrong, the defendant was not under a continuing duty with regard to the original advice; the claimants are not able to avoid the limitation bar to a claim based on the original advice by casting the omission of a later correction as a continuing breach of duty. The defendant was under a duty to conduct the review in March 2008 with reasonable care and skill and in accordance with the COBS Rules. It did so. The contention that it was in breach of a strict obligation to correct the error in its original investment advice fails because the original advice was not given in error and because there was no such strict contractual obligation. The contention that it nevertheless failed to advise the claimants that the Portfolio was not now suitable for them fails because their attitude to risk had not changed, because it was reasonable to give advice that no immediate decision should be taken to sell the Portfolio, and because the future investment objectives of the claimants with regard to the Portfolio could not at the time be properly assessed.
- Accordingly the claim fails and will be dismissed.
- This judgment is being handed down in the absence of the parties. As they have not been able to reach agreement on consequential matters, including costs, I shall adjourn consideration of those matters to a later hearing.
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