Acting to stop harm: the FCA and Appointed Representatives
The long awaited Supreme Court decision of Manchester Building Society v Grant Thornton provides some much needed and useful clarification on what constitutes and amounts to “negligent” advice.
Manchester Building Society (MBS) brought a claim against its auditors, Grant Thornton UK LLP, (“GT”) in 2013 after GT negligently advised MBS that its accounts could be prepared using a method known as ‘hedge accounting’. As a result, MBS entered into various fixed rate mortgages hedged against long term swaps.
GT claimed that accounts prepared using ’hedge accounting’ gave a true and fair view of MBS’ financial position when in fact the accounts prepared using ‘hedge accounting’ served to obscure the true financial position of MBS, hiding volatility in MBS’ capital position.
In 2013, GT informed MBS that its advice on the ‘hedge accounting’ method had been incorrect. MBS was then required to close the interest rate swap contracts early and incurred substantial break costs of over £32million.
As a result, MBS brought a claim against GT to recover the damages of the cost of closing out the swaps.
Despite the fact that GT admitted that it gave negligent advice to MBS, GT denied liability for the claim as it alleged that it did not owe MBS a duty of care to protect it against the losses arising from the closing of the interest swaps and therefore the losses were not recoverable.
It was held that MBS was not able to recover the £32million from GT as the negligent advice did not fall within the scope of the duty principle established by SAAMCO (see below), but instead was loss incurred as the result of market forces which was something GT had no control over.
The well-established SAAMCO principle (taken from the name of the decision in South Australia Asset Management Corp. v York Montague Ltd  AC 191) established in the 1990s (and later clarified in the case of BPE v Hughes Holland and others  UKSC) sets out the rule that a claimant must establish that its loss fell within the scope of the duty owed by the defendant to the claimant in order to be successful with a professional negligence claim. In particular, the SAAMCO principle provides a distinction between “advice” given by a professional and “information”. Those categories distinguish between the duty to provide information for the purpose of enabling someone else to decide on a course of action (the “information” category) and a duty to advise somebody as to what course of action should be taken (the “advice” category).
This distinction between advice and information cases is important because professionals providing information will only be liable for the losses arising as a result of that information being wrong. However, professionals providing advice will be liable for all of the losses flowing from the transaction.
MBS appealed the above decision. The appeal concerned whether the loss suffered by MBS as a result of GT’s negligent advice fell within the scope of its duty of care.
The Court of Appeal dismissed MBS’ appeal. The Court of Appeal found that this was an “information" case, as opposed to an "advice" case and that the scope of GT’s duty was to provide ‘information’ only, not ‘advice’. It was held that GT had provided information and it was ultimately MBS’ decision to enter into the swaps which was also based on other commercial considerations, not just the advice. The Court of Appeal found that MBS had failed to satisfy the burden of proof test as required by SAAMCO.
Accordingly, the Court of Appeal held that the loss sustained by MBS was not within the scope of the GT’s duty of care.
MBS appealed again. A panel of seven justices unanimously allowed the appeal. The Supreme Court found that MBS had suffered a loss that fell within the scope of the duty of care assumed by GT. The Supreme Court held that the Court of Appeal had been wrong to say that the loss suffered by MBS was not within the scope of GT’s duty of care.
The Supreme Court determined that the distinction drawn between "advice" and "information" cases in the SAAMCO principle should not be treated as a rigid rule and instead clarified that the duty of care assumed by a professional should be governed by the purpose of the duty (judged on an objective basis) by reference to the reason why the advice was sought and being given.
Therefore, the correct approach "in the case of negligent advice given by a professional adviser one looks to see what risk the duty was supposed to guard against and then looks to see whether the loss suffered represented the fruition of that risk".
Applying the law to the facts of this case, the Supreme Court held that the purpose of GT’s advice was clear… “the society looked to Grant Thornton for technical accounting advice whether it could use hedge accounting in order to implement its proposed business model within the constraints arising by virtue of the regulatory environment, and Grant Thornton advised that it could. That advice was negligent.” Accordingly, MBS had suffered a loss a result of GT’s incorrect and negligence advice.
However, the Supreme Court considered that an overly ambitious application of the business model by MBS amounted to contributory negligence and therefore agreed that a 50% reduction should be applied to the damages resulting in GT being ordered to pay £13.4million.
In moving away from a strict application of the SAAMCO principle, the Supreme Court has set out a more straightforward approach of examining whether the loss is something which the professional advice was supposed to guard against.
This is good news for potential claimants looking to bring a negligence claim against their professional advisor as the simplified approach makes it more difficult for defendants to rely on the ‘information’ only aspect of a transaction when giving advice as a defence to a potential claim.
The Supreme Court decision also highlights the importance of the professional setting out the scope of its retainer/work in writing so as to avoid any later disputes as to what the professional was instructed to do. This links back to an earlier blog on the importance of written retainers which can be found on our website here.
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