Solicitor Michael Cotter explains how advisers can avoid client claims and in this first part talks about the start of a client relationship.

    Over the last few years as a solicitor I have been legally advising individuals on financial services sector matters, assisting investors to secure in total millions of pounds either through the Financial Ombudsman Service or High Court and also defended advice firms from unmeritorious claims and assists in ensuring regulated firms are compliant in understanding the ever increasing requirements of the Financial Conduct Authority.

    I have helped investors and advisers in respect of investments including Arch Cru, Keydata, Arck LLP and various unregulated collective schemes.

    Through my experience, I’ve noticed the most common mistake made by advisers is their lack of paper-trail and often a reverse engineering of an investment to suit a particular client. However, I have also seen some fantastic financial planning and recognise the value quality advice in this market can provide.

    So I am writing to provide my view from the other side and confirm as a lawyer what I see and how advisers can avoid client claims. What better place to begin than the start of a client relationship?

    Now, you are no doubt a good financial services professional and/or somebody who hopefully receives sound financial advice, however the nature of my practice is that I see plenty of below-par financial advice and yes, I thoroughly accept that this is not exclusive to financial services, do not worry, I bring proceedings against legal professionals as well!

    So, let us imagine a scenario where financial services firm meets would-be client and would-be client seems keen on working with said financial service firm. I cannot stress how important it is to ensure the basics are dealt with correctly, the amount of times, I request a client file and in turn further to a subject access request (it is easier if you send me the file…) receive the business file and it is missing the following:

    1. Terms of Business
    2. Initial client review
    3. Profiling documentation
    4. Suitability letter

    Now, before you all stop reading, I assure you, this happens far too frequently. We can all hold-hands and rally against the FCA and their over-demanding big brother behaviour at times, however those 4 items are proper, back to school, no-brainers, are they not?

    And let me tell you why they are important, your business file on any client is your sword and shield. If you have Terms of Business on file, it will (and if it does not, it should) define exactly what you have agreed to do for your client and ultimately and perhaps most importantly, what you will not do for your client. If you have said you do not offer a certain element of advice, carve it out, make it clear and stick it in your Terms of Business. Furthermore, if you do not already, make sure you have a back sheet which the client signs and has to send back to you (invest in Stamped Addressed Envelopes) confirming that they have read your terms. Far harder for a client to have memory loss about any and all advice ever received if you have evidence.

    Now, that word 'evidence' is what the law is all about, obvious I know, but often over-looked. I will sit with clients and opponents for hours and hours whilst they wax lyrical about their case, for it to fall apart when you ask the crucial question, “how are you/we going to prove this?” - only for another hour long debate to start all of which ends up sometimes with the realisation that it sounds a little bit like “he said-she said” because no-one can either find and/or they failed to document, what is now very important.

    Whilst I empathise that the business of providing 'advice' is what financial services professionals wish to do, getting your ducks in a row from the outset and ensuring that you have reviewed what the client needs, told them what they definitely do not need and documenting it from the outset is the difference between a referral to your insurer (are you sure they will honour your claim?) and worse the beginning of a road that may lead to the firm falling away and the FSCS.

    The FSCS and the ever-increasing levy is I am afraid to say, is hear to stay, the only way to ensure it decreases is if you spread the gospel of ensuring you have the evidence to combat any claim that may arise, because if and when things do go wrong, the client will always look to find somebody else to blame (the alternative is endless head-shaking around the dinner table from their partner). I accept this is all to simplistic, however it is perhaps not too controversial to say that not too many 'good' firms fall by the way side, insurance and network collapses/disasters put to one-side.

    Turning the tables somewhat, my ideal client, if it comes to prosecuting a claim (I also do defence work before you shout ambulance chaser! They oft only arrive because there has been an accident...), is one who arrives with a nicely organised file full of e-mails. We are all perhaps guilty of it, as in this day and age it is the only real form of communication, however rarely will scores of e-mails replace the core documents of which you are required to produce and of which will act as your 'shield' to protect you if someone knocks on your door.

    Due-diligence is meant to be undertaken everyday in financial services, whether it be on product, platform or the regulator, it is important however, nigh on essential, to 'health-check' certain activities and the rush to advise, sometimes requires one to step back and think about the future, as whilst we would all love every client to be with us for evermore, acting as if every new client could be a future problem, perhaps is not the worst attitude, as it will instil a cautious approach to how you create and manage a client's initial expectation.

    Finally, if you assess a client as 2/10 or 20/100 and put in black-and-white terms that they are “cautious” and then advise them to invest their entire final salary pension into the South American Oil Property Land Locked No.67 Fund (note there were not 66 successful funds before), you probably deserve everything you get.

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