Feature

posted 4 Apr 2006 in Volume 11 Issue 3

Protecting the investor

Some investments are more risky than others, where the possibility of losing money is the inevitable downside of a hoped-for cash windfall. The law does have provisions, however, for protecting investors, including trustee investors, in some circumstances. Barrister MOHAMMED ASIF reports.

Most people in this day and age will have investments of one form or another. These can range from the everyday (residential home, pensions and savings), through to the exotic (fine wines and cigars), with a great deal in between.

Each investment will carry risk ranging from extremely low (savings) through to extremely high (investment in small businesses). The investment may be driven by a tax-mitigation motive (ISAs being a case in point) or by other more emotional factors (investment in football clubs, for example).

What is clear is that ‘what goes up may come down’. While, in many cases, investments fall in value through no attributable fault, there are occasions where the law fixes responsibilities on individuals and/or companies. This article concerns itself with those situations, and concentrates on the action that an investor can take in these circumstances.

Non court action: The Financial Ombudsman Service

For many investors, this represents a cheap alternative to litigating through the courts¹. Individuals can simply write into the Financial Ombudsman Service (FOS) and register their complaint². There are a number of disadvantages, however.

Under section 226 of the Financial Services and Markets Act 2000 the Ombudsman has oversight over complaints falling into two categories: the ‘compulsory jurisdiction’, which covers the regulated and potentially regulated activities of authorised firms, and the ‘voluntary jurisdiction’, which is in principle open to unauthorised firms.

In order to take advantage of the service the investor must show that either:

His complaint relates to an activity in relation to which the compulsory jurisdiction rules were in force and the respondent was an authorised person at the time of the act or omission complained of;
The respondent was participating in the voluntary jurisdiction of the scheme and the voluntary jurisdiction rules were in force at the time of the act or omission complained of, and the respondent was participating in the scheme, and the complaint cannot be dealt with under the compulsory jurisdiction.

If these conditions are satisfied, the complaint itself may not necessarily be eligible as the Ombudsman’s scheme is open only to private individuals and to certain small businesses (excluding Lloyds Members).

Although the service is meant to be informal it is highly likely, given the complexity of the rules concerned, that an individual will require professional assistance in formulating a complaint to the Ombudsman. This has the affect of increasing costs, which are unrecoverable from the respondent even if the Ombudsman finds in favour of the complainant³.

Furthermore, the experience of the Parliamentary and Health Services Ombudsman is that there are far more complaints than the service can investigate. Delays occur as a direct result⁴.

Taking action in the courts In some circumstances the only option remaining for the investor is to bring proceedings before the courts.

Limitation

The first consideration should be whether there is any limitation period imposed by law that is relevant to the circumstances. The usual period within which proceedings must be commenced is six years from the date when the cause of action accrued, except where the Limitation Act 1980 provides otherwise.

The actual date from which time starts to run is relatively clear cut in cases involving breach of contract where time starts to run from the date of the breach.

For claims in tort, however, the matter is more complicated and, for example, an action in negligence accrues only when some damage or loss is suffered by the wronged party. This is subject to an overriding long-stop limitation period of 15 years⁵.

Where the action is based on the fraud of the defendant, or where any fact relevant to the claimant’s right of action has been deliberately concealed by the defendant, or the claimant’s action is for relief from the consequences of a mistake, time does not begin until the claimant either has, or could with reasonable diligence have discovered the fraud, concealment or mistake⁶.

Where an action is brought by a beneficiary either in respect of any fraud by a trustee or to recover from a trustee property converted to the trustee’s use, section 21(1) of the Limitation Act 1980 provides that no limitation period applies.

Causes of action

The merits of the claim will need to be assessed at an early stage. This will involve examining the legal causes of action that may be advanced on behalf of the wronged party.

While there is a range of causes of action under company law and trust law (including tracing) the most common situation that an advisor is likely to come across is one involving an element of ‘mis-selling’. This will usually involve alleging deceit, misrepresentation or negligent mis-statement on behalf of the wronged party. Frequently, all three causes of action are advanced together.

The basic elements and ingredients of each cause of action are discussed below. The tort of deceit is established when all of the following ingredients are present:

1. There must be a false representation made as to past or existing fact made by the defendant, who knows that the representation is untrue or who has no belief in its truth or who is reckless as to its truth;

2. There must be an intention by the defendant that the investor will rely upon the representation;

3. Actual reliance by the investor on the representation.

Section 2(1) of the Misrepresentation Act 1967 provides a tortious action where the misrepresentation was made negligently. The investor needs only show that the representation was false, that he or she entered into a contract in reliance on it, and that he or she suffered loss as a result. The burden of proof then shifts onto the defendant to show that he or she reasonably believed the representation to be true, both when it was made and at the time the contract was made.

The case of Hedley Byrne & Co Ltd v Heller & Partners Ltd⁷ forms the foundation of the modern law on negligent misstatement. In this case the House of Lords held that a person who made a negligent statement could owe a duty of care to a person who suffered economic loss through reliance upon the statement.

An investor may recover damages for financial loss where he can show that:

He relied on a professional adviser to provide investment advice or to conduct investment business on his behalf; and
The professional adviser realised that the investor was relying upon his skill and judgement in providing investment advice or conducting investment business.

In addition, in order to make a successful claim, the investor must prove three further elements. First, he must show that the professional adviser acted negligently in the exercise of his skill and judgement.

Second, he must show that the negligence caused him to suffer financial loss. Finally, the investor must prove that the loss was reasonably foreseeable.

Costs

Where an investor decides to pursue the matter by taking action in court, while he may recover his legal costs for the proceedings if he is successful, he is in danger of having to pay the defendant’s costs if he is unsuccessful. The investor is also at risk of having an adverse costs order made against him where he fails to beat a part-36 payment⁸.

Parties

It is essential to establish by whom and against whom an action is to be brought. It may be that more than one party is, or potentially could be, liable. There is a wide discretion for the claimant to bring an action against a number of parties and any number of claimants and defendants may be joined as parties to a claim⁹.

On commencing a claim the investor may find that there are large numbers of other people with a similar experience, usually, but not always, as a result of dealing with the same defendant. Where a number of potential claimants have the same interest in a claim the court has the power to order that the claim be continued by or against one or more persons who have the same interest as representative of any other persons who have an interest¹⁰.

Where, on the other hand, a number of claims give rise to a common or related issue of fact or law, the court may make a group litigation order¹¹.

Where there are very large numbers of people affected, action in the court is sometimes commenced by one or more action groups formed for that very purpose.

Other factors

The investor should also weigh up the other consequences of litigation. The process can be stressful and may involve the investor committing more time than at first envisaged. However, it is often the case that the ‘stakes’ are much higher for the defendant who is often a company with a reputation in the marketplace, which it is keen to preserve. As such, the defendant is unlikely to want the publicity that a high-profile open-court hearing is likely to generate.

References

1. The purpose of the FOS stated in section 225 (2) of the Financial Services and Markets Act 2000 is to provide a scheme “under which certain disputes may be resolved quickly and with minimum formality by an independent person”

2. Contrast with the Parliamentary Ombudsman where the complaint must pass through a MP

3. Contrast this with the normal position in court proceedings where the costs follow the event [CPR rule 44.3(2)(a)]

4. For example in the year 2004/2005 just under 62 per cent of complaints had been dealt with within three months. The corresponding figure for the Health Services Ombudsman was just over 30 per cent

5. Section 14B Limitation Act 1980

6. Sections 32(1)(a), 32(1)(b) and 32(1)(c) Limitation Act 1980

7. [1963] 2 All E.R. 575

8. See CPR rule 36.20(2)

9. See CPR rules 7.3 and 19.1

10. See CPR rule 19.6(1)

11. See CPR rules 19.10 and 19.11

Mohammed Asif is a barrister and chartered tax advisor. He can be contacted on 0161 833 6000.