FINANCIAL MIS-SELLING IN IRELAND
Introduction
One of the consequences of the Celtic Tiger in Ireland was a significant increase in the
mis-selling of investment products to consumers. Financial mis-selling may be loosely
described as the sale of an investment or other financial product to a customer by a Bank,
lending institution, pension, life or Investment Company on the basis of false
information, unsuitable or mis-leading advice. It can apply to multiple products within
the Irish Financial Services Industry which may have been mis-sold. These products
include mortgages, loans, credit cards, hire purchase agreements, payment protection
insurance, mortgage payment protection, income protection, investments, pensions and
life assurance. Financial mis-selling typically includes the following:
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Failing to clearly explain the product being sold;
Failing to clearly explain its terms;
Selling a product that was not suitable for the consumers needs;
Making misleading statements about the product being sold;
Failing to explain relevant charges and penalties for early termination;
Failing to clearly explain the cooling off period and right to cancel;
The FSA in the UK in advising industry on the definition of “mis-selling has stated as
follows;
“It is the suitability of the recommendation for the consumer, not the investment
performance of the product that matters. As long as suitability was established at
the time of sale, and the required explanation of risk made, then consumer
dissatisfaction about investment returns achieved gives no basis for an allegation
of mis-selling. Investment performance may be relevant in assessing redress due
where mis-selling is shown to have occurred. Consumers rightly expect those
who advise and sell financial services products to behave with honesty and
integrity and to apply their skills, experience and judgement to give them
appropriate advice and sell them a suitable product. In short, they expect
financial firms to give them a fair deal”
A further consequence of mis-selling has been a major loss of trust and confidence by
consumers with the entire financial services industry. The Irish Central Bank has said one
in five payment protection policies (PPI) it has reviewed so far were in breach of the
bank’s consumer protection code. It further said that so far about €25m has been
identified for refund to those customers whose files have been reviewed (Irish Financial
Review October 2013). In the UK most of the main banks have suffered enormous
reputational damage for the widespread mis-selling of investment products to
inexperienced investors. While there is considerable protection available in Ireland for
consumers of financial services from investment firms in cases of financial mis-selling
under consumer protection legislation, contract law and the law of negligence, it is
arguable that more could be done by the Irish Financial Regulator to stamp this out.
In an article published in Banking Ireland in the spring of 2007, Bill Hannon, Group
Head of Compliance at Irish Life and Permanent, wrote:“Financial services firms now have defined responsibilities in relation to looking
after the interests of customers, with the result that the relationship between
financial services firms and their customers is now more akin to that between
professional advisors (such as doctors, accountants or solicitors) and their
clients, rather than the traditional relationship inherent in the principal of caveat
emptor”.
However many bankers would still argue with this statement. A key difference between
the traditional relationship based on caveat emptor and the relationship between an
individual and a professional advisor is that the advisor owes a duty of care to the
individual and where such a duty does exist the law of negligence may apply. Special
rules apply to cases of professional negligence and the courts hold professionals to a
higher standard than non-professionals when determining whether a breach of duty of
care has occurred. It remains to be seen however whether the courts will treat investment
managers, bankers and advisors as a profession for negligence purposes in Ireland. The
tort of negligence insofar as it applies to an investment firms is dealt with below.
The aim of this paper is to focus on the protection and redress available to clients of
investment firms and consumers of financial services and products who have been missold a financial product or service.
Investment Firms
The Central Bank authorises two types of Investment Firms;
IIA (Investment Intermediaries Act, 1995) Non – Retail Firms;
(IIA firms can only provide a limited range of services and cannot passport their services
to other EEA jurisdictions)
MiFID (Markets in Financial Instruments Directive) - Firms.
Consumer Protection Legislation
The relevant consumer protection legislation is as follows:
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The Central Bank Acts 1942 – 1998;
The Sale of Goods and Supply of Services Act 1980;
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The Investment Intermediaries Act 1995;
The Consumer Credit Act 1995;
The Stock Exchange Act 1995;
The Insurance Acts 1909 – 2000;
The Investor Compensation Act 1998;
The Central Bank and Financial Services Authority Acts 2003 – 2004;
The Consumer Protection Act 2007;
Markets in Financial Instruments and Miscellaneous Provisions Act 2007;
The Consumer Protection Code 2012;
Relevant Statutory Instruments.
MiFID Regulations
The MiFID Regulations came into effect in Ireland on the 1st of November 2007 and are
intended to harmonise investment rules across the EU. They apply to Investment Firms
who provide the following: Investment advice;
 Conduct discretionary portfolio management; or
 Execute client orders;
in relation to “financial instruments” and are required to be authorised by the Financial
Regulator pursuant to the MiFid Regulations. Financial instruments include shares in
companies, bonds, units in collective investment undertakings and a wide variety of
derivatives.
The Financial Regulator may attach conditions to the Investment Firm’s MiFID
authorisation, or impose conditions relating to the ongoing operation of the Firm.
The MiFID Regulations divide clients of MiFID firms into three categories:
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Retail;
Professional;
Eligible counterparty.
Each of the above categories is afforded differing degrees of protection, the highest
protection being available to retail clients. All clients must be notified of their above
categorization.
The Conduct of Business rules includes the following;
 Best execution and client order handling: firms must take all reasonable steps to
obtain the best possible result for their clients, taking into account factors such as
price, costs, likelihood of execution and settlement, when executing orders and
must establish an execution policy;
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Assessment of suitability and appropriateness: when providing advice or portfolio
management services, a firm must obtain certain information from clients so as to
enable the firm to recommend services and products that are suitable. When
providing other services firms must determine the service or product is
appropriate;
Provision of information to clients: information provided must be clear and in
such a form that clients are reasonably able to understand the risks of the service
or product offered;
Inducements: the MiFID Regulations contain criteria in relation to the acceptance
of fees, commissions and non-monetary benefits;
Conflicts of interest: firms must monitor conflicts of interest and establish a
conflicts of interest policy.
Investment managers who breach their conditions of authorisation imposed by the
Financial Regulator, or whose conduct contravenes the MiFID Conduct of Business
Rules, maybe made subject to the Financial Regulator’s Administrative Sanctions
Procedure. This gives the Financial Regulator the power to hold an enquiry into the
alleged conduct of the investment manager and to determine whether a “prescribed
contravention” (including a breach of the MiFID Regulations) has occurred. Upon the
finding of a prescribed contravention, the Financial Regulator may impose a wide variety
of sanctions on the investment manager and its directors and managers.
Consumer Protection
The Central Bank of Ireland has a crucial role in relation to the protection of consumers
of financial services. The Central Bank of Ireland imposes conduct of business rules
through codes of conduct such as the Consumer Protection Code, the Code of Conduct on
Mortgage Arrears, the Code of Conduct for Licensed Money Lenders and the Minimum
Competency Requirements. These Codes are intended to ensure that financial services
firms provide clear information and suitable and appropriate products to consumers.
Investment firms must be in a position to show that they comply with the Central Bank’s
requirements.
The Consumer Protection Code
The Consumer Protection Code, which came fully into effect on the 1st of July 2007, is
the foundation of the Central Bank of Ireland’s work in protecting consumers who deal
with regulated financial service providers. A review of the Code took place in 2010 and
2011resulting in the Consumer Protection Code 2012 which came into effect on 1st
January 2012. The Code is a set of general principles combined with more detailed
requirements in certain areas. It now distinguishes between different classes of
consumers such as a personal consumer defined as “a natural person acting outside his
or her business, trade or profession”, incorporated bodies with a turnover of €3 million
or less in the previous financial year, partnerships, clubs, charities and trusts and
“vulnerable consumers”. It requires firms to act in the best interests of their customers by
selling them products that are suitable, explaining why the products offered are suitable,
provide them with appropriate information and treating customers fairly if things go
wrong. The Code does not apply to regulated entities providing MiFID services.
The Code marks an important modification of the principal of caveat emptor (let the
buyer beware) by the express requirement that financial services firms act “in the best
interest of customers”.
The Consumer Protection Code offers very broad protection to a consumer and it was
issued by and in the name of the Irish Financial Services Regulatory Authority
(“Financial Regulator”) and applies to entities regulated by the Financial Regulator,
pursuant to powers under the legislation mentioned above. A regulated entity is
defined as;
 Credit Institutions (Banks and Building Societies);
 Insurance Undertakings;
 Investment Business firms, other than when conducting MiFID services;
 Insurance Intermediaries;
 Mortgage Intermediaries and
 Credit Unions, when providing financial services which require to be
regulated by the Financial Regulator.
Consumer Protection Code – General Principles
A regulated entity must ensure that in all its dealings with customers (any person to
whom a regulated entity provides or offers to provide a service) that it:
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Acts honestly, fairly and professionally in the best interests of its customers and
the integrity of the market;
Acts with due skill, care and diligence in the best interests of its customers;
Does not recklessly, negligently or deliberately mislead a customer as to the real
or perceived advantages or disadvantages of any product or service;
Has and employs effectively the resources and procedures, systems and control
checks that are necessary for compliance with the Code;
Seeks from its customers information relevant to the product or service requested;
Makes full disclosure of all relevant material information, including all charges, in
a way that speaks to inform the customer;
Seeks to avoid conflicts of interest;
Corrects errors and handles complaints speedily, efficiently and fairly;
Does not exert undue pressure or undue influence on a customer;
Common Rules for Regulated Entities under the Consumer Protection Code
Regulated entities must ensure that:
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The name of a product or service it provides is not misleading;
All instructions from or on behalf of a consumer are processed properly and
promptly;
It must keep a record of any instruction from a consumer that is subject to any
conditions;
Must ensure that all warnings required by the Code are prominent and must
provide a consumer with its Terms of Business;
Must ensure that all information it provides to a consumer is clear and
comprehensible;
Must ensure that where it intends to record a telephone conversation with a
consumer, it informs the consumer, at the outset of the conversation, that it is
being recorded;
Must provide each consumer with the terms and conditions attaching to a product
or service, before the consumer enters into a contract for that product or service,
or before the cooling period (if any) expires;
Must ensure that all printed information it provides to consumers is of a print size
that is clearly legible.
Knowing the Consumer
Before providing a product or service to a consumer, a regulated entity must gather and
record sufficient information from the consumer to enable it to provide a
recommendation or a product or service appropriate to that consumer. The level of
information gathered should be appropriate to the nature and complexity of the product or
service being sought by the consumer, but must be to a level that allows a regulated entity
to provide a professional service. The 2012 Code introduces new requirements on
regulated entities to identify “Vulnerable Consumers” such as aged or mentally
incapable.
Suitability
A regulated entity must ensure that:
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Any product or service offered to a consumer is suitable to that consumer;
Where it offers a selection of product options to the consumer, the product options
contained in the selection represent the most suitable from the range available to
the regulated entity;
Where it recommends a product to a consumer, the recommended product is the
most suitable product for that consumer.
Charges
A regulated entity must:
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Provide the consumer with details of all charges;
Advise consumers of increases in charges;
Provide a statement of all charges applied to a consumer;
Provide a breakdown of charges.
Handling Complaints
A regulated entity must have in place a written procedure for the proper handling of
complaints. At a minimum the following procedures must be in place:
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A complaint must be acknowledged in writing within 5 business days of the
complaint being received;
Appoint an individual within the regulated entity to deal with the complaint;
Provide the complainant with a regular written update on the progress of the
investigation of the complaint with intervals of not greater than 20 business days;
Attempt to investigate and resolve a complaint within 40 business days of having
received the complaint;
Inform the consumer of its right to refer the matter to the Financial Services
Ombudsman;
Inform the complainant in writing within 5 business days of the completion of the
investigation of the complaint and the outcome of the investigation and, where
applicable, explain the terms of any offer or settlement being made.
Consumer Records
A regulated entity must maintain a list of all customers who are consumers and are
subject to the Code.
Conflicts of Interest
Where conflicts of interest arise and cannot be reasonably avoided, a regulated entity may
undertake business with or on behalf of a consumer with whom it has directly or
indirectly a conflicting interest, only where that consumer has acknowledged, in writing,
that he/she is aware of the conflict of interest and that he/she still wants to proceed.
Additional Requirements of the Consumer Protection Code
The Code also contains important guidelines on the following:
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Loans;
Insurance products and services;
Investment products;
Advertising;
Arrears Handling (how regulated firms must deal with and treat consumers who
are in arrears on a range of loans including credit cards 2012 Code e.g. unsolicited
contacts limited to 3 per month)
Most of the above requirements were already contained within the Investment
Intermediaries Act 1995 and SEA 1995 / SE Rules, although the scope of services to
which they applied was considerably narrower.
Sanction by the Financial Regulator
There have been a number of recent announcements by the Financial Regulator of
settlements reached with regulated financial service providers for breaches of the
Consumer Protection Code and various sections of the Investment Intermediaries Act
1995. These breaches have related to the sale of unsuitable investment products. The
firms generally have been held to have failed to properly inform customers about the
investment risks and guarantee limitations associated with investment products a failure
to record customer’s information, failure to provide a customer with the firm’s terms of
business and failure to issue statements of suitability to certain customers as required by
the Code.
Remedies available to a consumer against financial mis-selling – Complaint to FSO
The Financial Services Ombudsman was established pursuant to the Central Bank and
Financial Services Authority of Ireland Act 2004. The FSO offers an informal alternative
to the Courts while also operating within the rule of law. There is no requirement to have
legal representation and the FSO has no power to award costs, however legal advisors are
frequently retained to assist complainants.
A complaint by a consumer against a “regulated service provider” may be brought to the
FSO. This includes investment managers regulated by the Financial Regulator. Claims
may also be made by a company with a turnover of less than €3 million.
In order to make a complaint, the conduct complained of must have occurred during the
previous 6 years (even if the date of discovery occurred later) and it cannot have been the
subject of legal proceedings in the Courts. The complainant must also have exhausted the
internal procedures of the service provider in question.
Prior to making a formal complaint to the FSO it is very much worth considering making
an Access Request to the financial service provider under the Data Protection Acts.
Pursuant to this request the financial service provider must provide the consumer with all
personal data in relation to his or her investment within a period of 40 working days.
Following a complaint, the FSO will request the submission of all relevant
correspondence and documentation, together with a completed Complaint Form. This
will be forwarded to the service provider who then has 25 working days to issue a “final
response letter”. If the complainant is not satisfied with the explanation or response
made by the service provider the complainant must submit the final response letter to his
office within 15 working days of the service provider issuing it.
The FSO will assess the complaint and the option of mediation will be offered to both
parties. If it is not availed of or if it is unsuccessful then a formal investigation of the
complaint by the FSO will take place.
The service provider will be required to answer a series of questions posed by the FSO
and to submit any material and make any submissions which the service provider sees as
being desirable to put before the FSO or which the FSO requires to see. This must be
done within 20 working days.
Responses and documents will be copied to the complainant who will be given 10
working days to submit any observations. Any observations from the complainant will
be copied to the service provider who will be given 5 working days to submit any further
observations.
In the course of reviewing the evidence, the FSO will consider whether an oral hearing is
necessary. If an oral hearing is held oral evidence is given under oath at that hearing
which will be reviewed together with the documentary evidence and a Finding will then
be issued to both parties.
The Finding of the FSO is legally binding on both parties subject only to an appeal by
either party to the High Court. Either party has 21 calendar days from the date of the
FSO’s Finding in which to appeal to the High Court.
The FSO has a number of remedies against a service provider to choose from. These
include;
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directing the service provider to rectify the conduct complained of;
directing that it provide reasons or explanations for the conduct complained of;
change the conduct;
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directing it to pay compensation up to a maximum of €250,000; or
to take any other lawful action.
The FSO’s office is currently overburdened with complaints which have jumped by 27%
in the first half of 2013. Banks have been singled-out for performing worse with
approximately 10% more complaints upheld against banks than their peers in the
insurance and investment sectors. More than 4,600 complaints have been made according
to the FSO’s bi-annual review, up from 3668 in the same period in 2012. Of these, 21%
were settled between the consumers and financial institutions, without the need for a full
determination by the FSO. Three quarters of complaints that were investigated by the
FSO were not upheld, with 16% partly upheld, and just 8% fully upheld, down from 9%
in the same period last year. Less than 1% of all complaints made however were
described as “frivolous” in nature. Many of the complaints relate to mis-selling of
investment products. The FSO is frequently critical about the lack of effort on the part of
financial service providers to resolve complaints at an early stage, although this appears
to be improving. He has also been most critical about the lack of power to “name and
shame” service providers against whom he has upheld a complaint. This has now been
addressed under Section 72 of the Central Bank (Supervision and Enforcement) Act 2013
which permits him to publish in his annual report, the name of a regulated financial
service provider against whom at least three complaints have been upheld either in whole
or partially in the past financial year.
FSO Case Studies
An examination of some of the FSO’s Findings gives an insight to his attitude on
financial mis-selling:
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A Bank was directed to pay back the full amount (€345,000) paid by an elderly
couple who invested in a managed fund on the basis that the Bank had not
exercised appropriate care and caution in dealing with the complainants, given
their age, investment inexperience, previous investment profile and the health of
the husband. The complainants were also found not to have understood the issue
of risk and the nature of the investment recommended by the Bank.
A financial service provider that recommended an investment product with a term
of 6 years as well as hefty penalties for early encashment to an elderly couple of
85 and 84 years was held to be in dereliction of its duty of care to the couple. The
FSO directed that the financial provider should buy back the bond for the original
investment of €300,000 less any income received by the couple from the bond and
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he also directed the service provider to pay a sum of €5,000 compensation for the
mis-sale.
A Bank was directed to pay €90,000 compensation to a couple who invested in a
geared property fund upon the basis that the implication of gearing to this
investment was not explained at all”. In this case there was an apportionment of
blame (40%) upon the basis that the couple admitted that they had not fully read a
brochure which contained a warning of the risk associated with their investment.
A customer who complained he was pressurised by his Bank into investing
€100,000 in an investment bond which failed complained that he had not been
given a copy of the terms and conditions of the investment, was not informed of
any cooling off period and that the Bank had taken the initiative in introducing the
bond to him. The FSO however after considering the evidence concluded that the
Bank had given the complainant a copy of the terms and conditions of the
investment, including the cooling off period and had not pressurised him into
making the investment rejected the complaint.
The FSO directed an investment intermediary to refund €100,000 to a credit union
following its loss of nearly all that amount in a bond that was not in compliance
with the Trustee (Authorised Investments) Order 1998. The FSO considered that
the investment intermediary had a duty to advise whether or not the bond was an
authorised investment.
A Credit Union’s complaint against a Financial Services Provider that lost all of
its €1million investment in an ISTC Bond was upheld on the basis that;
the service Provider failed to discharge the standard of care that is to be expected
from a reasonably competent financial advisor;
the ISTC bond was unsuitable as an investment product for the Credit Union,
given inter alia, the risk of permanent and total loss of a large amount of capital,
and the fact that the debt was effectively the subordinated debt of a single entity;
failed to advise the Credit Union of the risks associated with the Bond;
failed to carry out proper research as to whether the Bond was suitable for the
needs of the Credit Union;
wrongly led the Credit Union to believe that the Bond was an altogether safer
form of investment than in fact was the case.
However on the basis that the FSO found that the Credit Union had failed to read
over the application form before investing in the Bond the FSO determined that
the Credit Union should bear a proportion of the loss and assessed that 50% of the
loss i.e. €500,000 should be refunded to the Credit Union. This Finding was
appealed by both parties to the High Court which upheld the FSO’s finding.
[Naomh Brendain Credit Union Limited v The Financial Services Ombudsman
and McLoughlin and Staunton Limited 2008].
Right of Appeal against FSO Finding
In the case of Ulster Bank v Financial Services Ombudsman & Ors [2006] IEHC 323
Finnegan P laid down the test for an Appeal pursuant to Section 57CL of the Central
Bank Act 1942, as inserted by the Central Bank and Financial Services Authority of
Ireland Act 2004;
“To succeed on this Appeal the Plaintiff must establish as a matter of probability that,
taking the adjudicative process as a whole, the decision reached was vitiated by a serious
and significant error or series of errors. In applying the test the court will have regard to
the degree of expertise and specialist knowledge of the Defendant”.
It is important to note therefore that an Appeal against the FSO’s Finding is not a de novo
appeal where the court looks at all the material from scratch and makes up its own mind
what it would do in the case and is therefore more similar to a judicial review process.
Enfield Credit Union v Davy Stockbrokers [2008].
On the advice of Davy the Credit Union invested €500,000 in perpetual bonds. The
Credit Union lost almost €77,000 of its members’ money. It alleged that Davy failed to
make adequate disclosure of relevant material information relating to the bonds and in
particular the fact that they were perpetual and subordinated. The Credit Union also
alleged that the investment in perpetual bonds was unsuitable given its attitude to
investment risk and given the Credit Union’s investment policy which was firmly based
on capital guarantees and fixed maturity dates. The FSO made a Finding that Davy failed
to advise the Credit Union of the risk of the possibility of total loss of capital, failed to
point out that the bonds were outside the ordinary type of investment typically made by
the Credit Union and that Davy should have known that the Credit Union Investment
Committee were not financial investment experts and placed their upmost faith in Davy
as their advisor.
Davy appealed the FSO’s Finding to the High Court and requested a review of his
decision, challenged his authority and also lodged a Judicial Review to impugn the FSO’s
decision on the grounds that he had misconstrued his powers under the statute and had
acted unconstitutionally. The High Court quashed the FSO’s decision and directed the
FSO to conduct a fresh investigation into the complaint in line with procedures outlined
by the Judge. These included inter alia the following:
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The FSO should invite the parties to consider Mediation as a first step;
Ensuring that all relevant documentation is put before the FSO and that each side
is given an opportunity to reply to it;
The holding of an oral hearing where there is an issue of fact which cannot be
fairly resolved without hearing the parties.
The FSO has amended some of his procedures and appeals under these grounds are now
less frequent. However recent case law shows that a litigant seeking to challenge a
decision of the FSO faces a difficult task. The “serious and significant error” is now
firmly embedded in the case law of the High Court and has been applied in a range of
circumstances.
Bringing a claim to Court for Financial Mis-selling
Larger cases involving mis-selling against an investment advisor or providers of financial
products tend to follow the more traditional route and go to the courts and more
frequently to the High Court, (fast track) Commercial Court. Typically there is a claim
for negligence/breach of duty, breach of contract, misrepresentation and breach of
fiduciary duty as well as breach of statutory duty.
There are 3 key elements which must be present to constitute the tort of negligence as it
would relate to an investment advisor:
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The existence of a duty of care;
A failure by the advisor to conform to a required standard;
Actual loss or damage caused as a foreseeable result of the failure by the advisor
to conform to a required standard.
While the Courts have not traditionally favoured professional investors they are
becoming more sympathetic to retail investors particularly given the complex financial
products which are now sold in the market place which are often accompanied by
aggressive selling by Banks and financial service providers.
An investor, will seek to establish the existence of a duty of care when he received
investment advice from an investment advisor. Where that duty of care exists, the
investment advisor must observe the applicable standard of care. While an investment
advisor will usually point out for example the value of investments may rise and fall he
nevertheless, has a duty to use reasonable care and competence when carrying out his
activities. If he fails to reach this standard his client has a potential basis for a claim of
negligence against him. The test will be whether the investment advisor provided his
service with the proficiency of an ordinary skilled person in that sector. The Plaintiff
would be required to produce his own independent expert evidence that the investment
advisor failed to reach the applicable standard of care.
Breach of fiduciary duty
A claim for breach of duty of care may also include the more serious claim of breach of
fiduciary duty which is likely to arise where an investment advisor recklessly puts
himself in a position of conflict of interest or earned a secret commission. A finding by a
court of a breach of fiduciary duty could have regulatory implications for an investment
advisor, if proven.
The duties which a fiduciary owes to his client are as follows:
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A fiduciary should not put himself in a position where his own interests and those
of his client conflict;
A fiduciary should not profit from his role at the expense of his client;
A fiduciary should not allow the duties he owes to one client conflict with duties
owed to another;
A fiduciary owes a duty of confidentiality concerning information acquired in a
fiduciary capacity.
Breach of fiduciary duty can give rise to an investor claiming substantial damages,
rescission, and an account for profits by the investment advisor, and or an injunction.
Breach of Contract
The relationship of an investment advisor and an investor is normally based on contract.
Most investor firms now have standard terms and conditions and clients will be asked to
sign an Advisory Agreement which should be carefully studied. The Agreement will inter
alia set out the clients’ investment policy and importantly categorise the client under
MiFID. Frequently the Agreement will seek to limit any liability on the part of the
Advisor. In addition to these expressed terms under contract there are implied terms at
common law and/or under statute.
The Sale of Goods and Supply of Services Act 1980 provides that a person supplying
services must do so with “due skill, care and diligence”. The Courts will also imply
terms into contracts such as the Consumer Code referred to above.
Misrepresentation
Most investment products are promoted through promotional material distributed to
investors. An investment advisor may face a damages claim from a consumer if he is
found by a Court to have misrepresented information contained in an offering
memorandum, prospectus or marketing literature. In order to prove a misrepresentation a
Plaintiff must show “that there was a representation of a fact, that the representation
was untrue and that the Plaintiff was induced to enter into the contract by reason of the
representation”.
Recent Cases
Kilmartin v Bank of Ireland [Circuit Court].
In this case Mr. and Mrs. Kilmartin claimed negligent mis-selling of an endowment
mortgage upon the basis that the Bank never fully disclosed to them in 1991 when the
mortgage was set up, the potential risks that they may face and, in fact, had implied that
there would be no risk at all. The Plaintiff’s claimed that they suffered loss of over
€22,000 as a result of the Bank’s negligent advice that this type of mortgage would
provide them with superior security and return, when compared with a traditional annuity
mortgage. The Bank argued that the endowment mortgage had cost the Plaintiffs
approximately €5,000 less than annuity mortgage, and therefore they had not been ill
advised. The Bank Manager also claimed that he had warned one of the Plaintiffs
verbally of the potential risks before they entered the mortgage. Mr. Justice Deery, found
in favour of the Plaintiffs and awarded them €16,000 in damages on the basis of the
Bank’s negligent misrepresentation.
The Solicitors Mutual Defence Fund Limited v Bloxham [2009].
This case came before the Commercial Court in the early part of 2011 and was settled last
year. The SMDF invested a sum of €8.4 million in 2005 in what it believed was a
Dresdner Bank Bond. The bond was in fact issued by Saturns Investment Europe plc and
secured by a Dresdner Dollar Bond 2031. Morgan Stanley set up Saturns to purchase the
Dollar Dresdner Bond. As a result of the global financial crisis the rating of the bond was
down-graded, which constituted an “early redemption event” in the bond. This resulted
in Morgan Stanley redeeming the bond at relatively little cost and a 97% loss in the value
of the bond to the SMDF.
SMDF claimed in its proceedings that Bloxham misrepresented the bond as a Dresdner
Bank Bond whereas it was issued by Saturns, failed to explain the true nature of the bond
and recommended the investment without properly understanding its nature and
associated risks and without being in possession of the prospectus for the bond which
contained very strong investor risk warnings. Bloxham on the other hand blamed
Morgan Stanley who were joined to the proceedings as a third party for the SMDF losses
and alleged that Morgan Stanley did not give sufficient warning to them in relation to the
possibility of early termination of the bonds.
McHaughey v Irish Bank ResolutionCorporation Limited & Anor Supreme Court 2013
In this case Mr McCaughey claimed that as a customer of the private banking arm of the
former Anglo Irish Bank he was solicited along with other customers of the bank to
invest in a New York hotel fund. He also claimed that as a private client of the bank it
agreed to mind him so he could get on with his own business affairs and that it failed to
disclose serious material information concerning the investment that would have resulted
in him not proceeding with the investment had he been made aware of same. However
prior to making the investment the bank got him to sign a Commitment Agreement in
terms which Hardiman J described as “breathtakingly broad” and requested him to
confirm that “he has all the material that he wants, that he is not relying on any
representations and that he has made his decision on the basis of his own appraisal, and
that he recognises that he may not have been given complete information but wishes to
proceed all the same and the object of which was “to exempt the bank from liability for
anything except direct lies and actual fraud or fraudulent concealment”. As Mr
McCaughey was not able to establish fraud his case did not succeed. However the case
did not explore the nature of the relationship between the parties as client and private
banker and made it clear that in circumstances where a bank is attempting to rely on such
a total exclusion of liability clause it had a duty to draw the clients attention to same in
absolutely express terms owing to its enormous scope.
Gallagher v ACC Bank plc Supreme Court 2013
This is an important case as it clarified the rules (under the Statute of Limitations)
governing the time within which claimants must institute negligence proceedings in
respect of financial loss. Broadly speaking proceedings must be issued within 6 years of
the date on which the alleged loss occurred. The Supreme Court held that there was “an
immediate loss” upon Mr Gallagher entering the particular investment which was
allegedly unsuitable from the outset and consequently time began to run from that point.
However the court acknowledged that this would not necessarily be the case in respect of
different types of investment products where for instance mismanagement or deviation
from investment strategies is alleged.
What Steps should an Investment Advisor take to avoid a Mis-Selling Claim?
While the principle remains that consumers should take responsibility for their own
decisions the above will show that there is a range of consumer protection legislation,
codes of conduct and common law duties which an investment advisor must observe and
comply with. If he fails to put the necessary business systems and controls in place he
may clearly face a claim against him for mis-selling and/or the risk of regulatory action
after the event.
In investigating a complaint the FSO, Court or Financial Regulator will enquire into the
following and seek to establish whether the investment advisor :
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Acted with due skill, care and diligence, in the best interests of its clients and the
integrity of the market;
Assessed the client – the client’s financial situation, investment knowledge,
experience and investment objectives (MiFID Firms);
Knew the consumer – gathered and recorded sufficient information from the
consumer (Factfind) (Consumer Protection Code non MiFID Firms)
Assessed the suitability and appropriateness of the investment for each client;
Satisfied itself that the client understood the nature and risks of the products;
Maintained effective and transparent procedures for the reasonable and prompt
handling of complaints received from retail clients (MiFID Firms)
Consumer complaints – was an attempt made to resolve the complaint within 40
business days (Non MiFID Firms)
The investment advisor should also take the following steps to reduce the risk of misselling claims:
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Review the firm’s internal rules, manuals and procedures for compliance with
requirements for selling products to consumers;
Ensure client is furnished with its Terms and Conditions of Business;
Ensure client is correctly categorised;
Ensure that staff explain the nature and risks of the product they are selling
despite obtaining apparent confirmation that clients had read and understood the
relevant investment memorandum;
Know the consumer – before providing a service, gather and record sufficient
information from the consumer (Factfind);
Ensure the product or service offered to the consumer is suitable and in
accordance with the consumer’s financial objectives;
Fully document the assessment of suitability and appropriateness of product or
service for each client;
Ensure staff are familiar with the Consumer Code and MiFID conduct of business
rules;
Review Complaint Procedures;
Ensure Complaint Procedures are adequate;
Ensure complaints are dealt with in a timely manner;
Appoint a specific individual to handle complaints;
Review Professional Indemnity Insurance;
Review risk management procedures;
Train staff and ensure they are familiar with FSO type complaints;
Avoid damage to reputation;
Take legal advice.
Suggested solutions to prevent mis-selling
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A prohibition on financial advisors receiving commission-instead having to
charge customer directly;
A requirement for better qualification of financial advisors;
More transparency of financial products;
More consumer orientation;
Professional training;
Enhanced monitoring of sales force;
Enhanced checks of product literature;
Strengthening of control functions;
Review incentive structures.
Conclusion
It is likely that in the current financial climate the number of financial mis-selling claims
made to the FSO and to the courts will continue to increase. For firms offering
investment advice this should cause them to review their internal procedures and controls
and risk management policies. For consumers they should be aware that there is
significant protection available to them and while in many instances it may still be
appropriate to bring their claim to the higher courts or the Commercial Court there is also
an alternative option of making a complaint to the FSO. While the latter need not involve
any costs to the complainant by reason of many of the legal and procedural issues
involved there are undoubtedly benefits when bringing a claim to the FSO in engaging
professional legal representation.
Kirby Tarrant
O’Gradys
October 2013