When you act on advice from a professional and things go wrong, you can seek redress, but time is against you. Often the problem is the point at which you discover your investment is now worthless or has attracted the attention of the tax authorities. But stories of pensioners losing their nest eggs or tax avoidance schemes attracting HMRC’s interest or worse, continue to undermine confidence in the financial sector.
Sarah Perry, Head of Dispute Resolution at law firm Wright Hassall, who helps clients claim against professional advisers, explains to LM: “When you pay someone for investment advice, either by fee or commission and their advice proves to be poor, bad or fraudulent, you can seek to recover your losses. However, the clock is ticking and time is limited for you to bring a claim, which could be a problem for pension advice, when it might be years before problems are spotted.”
Recognising a claim
Advice from any professional adviser can be wrong or at least inappropriate, but in recent years there has been a sharp rise in claims against financial advisers and professionals, mostly concerning:
- financial investment miss-selling
- tax avoidance schemes.
HMRC is taking an increasingly aggressive approach to tax recovery, which is especially evident in relation to tax avoidance schemes, with challenges raised on a regular basis.
To the surprise of many, HMRC is now questioning what professionals previously considered to be ‘vanilla schemes’ in terms of tax planning. Financial investment mis-selling claims usually arise where an individual has invested into a fund on receipt of professional advice.
Having been advised for years to ride out the rough times, there often comes a point when an investor is unable to contact their adviser, and when they seek to drawdown on their investment, they can’t and panic ensues. Those losses arise infrequently, but will often have devastating effects, typically being linked to an individual’s pension and retirement planning.
When dealing with financial investments where an individual has lost money, which is easily traceable, a potential negligence claim can be identified very quickly.
When claims relate to tax avoidance schemes, things are more difficult, because it can take years for a claim to materialise from HMRC following an open enquiry into a previous Tax Return. It is not unusual for HMRC to investigate someone’s tax affairs many years after the original investment took place, and if HMRC consider fraud to be involved, then they can go back many years.
Evidence and immediate actions
In both types of claims, it’s essential to collate all communications, paperwork, emails, etc., to establish what the individual was told by their adviser and the risk they were prepared to accept.
If a person has been sold an unregulated collective investment scheme, then there are specific requirements a financial adviser must follow to ensure they can even promote that particular investment. If that process has not been followed, then establishing a breach of duty should be straight forward. However, simply establishing a breach of duty does not automatically result in a damages award.
Having appointed a solicitor with experience of litigating against professional advisers, an investor will still have to work closely with them to establish the causation position i.e., had appropriate advice been given, what would the individual have done.
The Courts are aware of parties looking at matters retrospectively with perfect hindsight, so all clients have to establish what their mind-set and plans were at the time, ideally by reference to documents from the period of the advice.
It is essential in all financial negligence claims to establish what ‘Know Your Client’ work was undertaken by the professional adviser. To be able to offer appropriate advice, there are some key things the adviser needs to understand:
- What the individual wanted out of the investment;
- The timeline over which the investment was to run;
- What likely returns the investor would want from the investment;
- How much risk the investor was willing to accept;
- How much of their portfolio the investor was willing to stake.
If an individual has not had a conversation addressing these points with their financial adviser, it’s unlikely the adviser can prove justification for the investment decisions they made.
When participating in a tax scheme, the investor must have been given the opportunity to make an informed decision about potential consequences, with all risks explained in detail - documentary evidence should be sent to the client.
There should also have been some assessment of the individual’s risk profile to know whether it was appropriate to promote the scheme. If that information is not forthcoming from the professional adviser, this would serve as the foundation for a claim in negligence.
Solicitors can request information from the professional adviser involved, but all documents held by the individual investor should be sorted into a chronological order and given to the solicitor.
As soon as a significant amount of money has been identified as lost or HMRC have served an Accelerated Payment Notice, Follower Notice or Demand for Payment, then the individual concerned should speak to an experienced solicitor to establish whether there is the possibility of a claim for professional negligence. If a claim exists, it must be commenced prior to the limitation date as determined by the Limitation Act 1980. When time starts to run for each claim will vary, as will the length of time in which to bring a claim.
Generally, the starting point is six years from the breach of contract. One of the fall-back provisions, which usually applies in tax avoidance cases due to the delay in HMRC bringing their claim, is three years from the date in which someone is reasonably put on notice as to the potential for a claim against the professional. There are other dates from which time can run, but anyone who suspects they might have a claim, should seek expert legal advice before the six-year contractual period has passed to ensure the claim does not ‘expire’.
If limitation is fast approaching, then there are two options available for the solicitor. Firstly, they can work with the negligent professional to enter into a Standstill Agreement, so the matter can be investigated before proceedings are issued. This effectively freezes time for the period of the Agreement, which is contractually agreed between the parties and can easily vary from a month to several years. Secondly, without a Standstill Agreement, protective proceedings can be issued, with a Claim Form at Court stopping time for the purpose of the Limitation Act 1980. This then allows 4 months to formalise the claim and serve the necessary documents on the adviser.
Steps to compensation
Once a Solicitor has been instructed, they will decide whether it is best to pursue the claim through the Financial Ombudsman Service (FOS), Financial Services Compensation Scheme (FSCS) or the Courts.
If professional negligence proceedings are commenced, as part of the Professional Negligence Pre-Action Protocol a Letter before Claim will be drafted by the Solicitor. Once received, the adviser has three months and three weeks to formally state their position.
The professional adviser will usually refer the dispute to their insurer, who will instruct solicitors to respond on their behalf. If matters cannot be resolved during the pre-action protocol period and no form of alternative dispute resolution can be achieved, then the Solicitor will advise on whether issuing proceedings is the appropriate next step.
Once proceedings are issued, the Court process takes over and the parties must adhere to the timeframes imposed. Once directions have been set, depending on the size of the dispute, a trial is likely to start in 9 to 24 months’ time.
The FOS may be appropriate if the claim is for less than £150,000. If the professional has gone out of business then a claim to the FSCS may be appropriate (depending on the position with ongoing insurance), however, this is likely to be subject to a cap of £50,000.
In conclusion
Thanks to the disposable income available to those who have sought advice from professional advisers in recent decades, the sums involved ensure dissatisfaction will lead to complaints, which in turn will lead to action.
For anyone with money invested following advice from professionals, there are warning signs to watch for and actions to mitigate losses, but most people never receive compensation because they never make a claim or wait too long before talking to a solicitor.
