Professional negligence: overturning a Financial Ombudsman decision

17 January, 2017
by: Cripps Pemberton Greenish

In a recent professional negligence case the High Court has – unusually – overturned a decision by the Financial Ombudsman (FO).

The claim in Lenderkink-Woods v Zurich Assurance Ltd and Others [2016] EWHC 3287 (Ch) arises from tax advice given by a financial planning consultant representing Allied Dunbar (Allied Dunbar was later acquired by Zurich).

In 2001 the claimant, who had a complex domicile situation (she was born in the UK, acquired a domicile of dependency in the Netherlands and later moved to Costa Rica, where she still lives), was introduced to a financial advisor by one of her daughters. She wanted someone to “watch over” her investment portfolio, as she lived abroad, and was concerned about the potential inheritance tax liability (around £130,300) the portfolio (then worth £567,700) would incur.

Two key points arise regarding the financial advice given:

  1. Tax planning is affected by an individual’s domicile status and, accordingly, it is crucial that any financial advisor take into account their client’s domicile; and
  2. As a “tied” advisor, he could only recommend Allied Dunbar schemes. If nothing was suitable he was bound by his regulator to make no recommendation and introduce his client to an independent financial advisor.

On his recommendation, the portfolio was invested in three Allied Dunbar investments.

The claimant suffered a mild stroke in 2009. Her daughters became more involved with her finances and concerns grew about the investment portfolio.  In 2012 a complaint was made to Zurich, who agreed to £459,567 in compensation.  However, the offer was later withdrawn on the basis that the investments were suitable. 

A complaint to the FO followed. In 2014 the FO agreed with Zurich, stating that there was no proof any financial loss or other detriment had actually been incurred.

The claimant commenced proceedings in 2014. Importantly, she was able to overcome assertions by the defendants that her claim had been brought out of time.

The High Court ruled in favour of the claimant. It held that the advisor had been negligent and that “every tax-based reason that [the advisor] gave for his advice was wrong”.  The investment products were not suitable for someone not domiciled in the UK.  The advisor failed to reach the standard of a reasonably competent advisor who would know that domicile is a critical issue in tax planning and should either know, or seek advice as to, the rules.  In addition, the charging structure was unnecessarily burdensome. 

The claimant was awarded £223,000 in damages based on the unnecessary charges levied, which had cancelled out all investment growth.

The case is a helpful reminder that – although decisions reached by the FO are often regarded as final – courts are able to review and, where appropriate, overturn the FO’s decision in a matter.

Zurich said that it had not offered financial advice for more than a decade but accepted the ruling. Unsurprisingly, the FO has said that it will review the decision carefully.

For more information please contact Pradeep Oliver on pradeep.oliver@crippspg.co.uk or +44(0)1892 765 453.