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OUTER HOUSE, COURT OF SESSION [2008] CSOH 144 |
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CA52/07 |
OPINION OF LORD GLENNIE in the cause CHRYSALIS SCOTLAND LIMITED Pursuers; against CLYDESDALE BANK INSURANCE BROKERS LIMITED Defenders: ________________ |
Pursuers: C
Defenders: A Young QC;
Introduction
[1] This is a claim for damages for professional negligence arising out of investment advice given to the pursuers by Graeme Lind, a Financial Planning Manager employed by the defenders, in June and July 2000, on the basis of which advice they invested £1 million in a Clerical Medical Premier Offshore With Profits Bond ("the Bond"). The pursuers contend that, through Mr Lind, the defenders failed to exercise reasonable skill and care in the investment advice which they gave. They contend that in advising the pursuers to invest such a sum in the Bond, the defenders failed properly to take account of the pursuers' investment needs and, in particular, the level of risk to which they were prepared for their funds to be exposed and the length of time for which they wished the money to be invested. More specifically, the pursuers contend that the defenders failed to advise them of the possibility of a Market Value Adjustment ("MVA") being applied were the Bond to be cashed earlier than 2012. The nature of an MVA (sometimes referred to as a Market Value Reduction or "MVR"), and its potential effect upon such a Bond, is discussed in paras.[40] to [45] below. The pursuers say that had the proper advice been given, and had they been advised of the possibility of an MVA being applied on encashing the bond earlier than 2012, they would not have invested that sum in the Bond but would instead have placed the money on deposit. They claim damages by reference to the difference between the amount realised on encashment of the bond in January 2006 and the sum which they would have obtained at that date had they placed the sum on deposit. The sum claimed is £251,586.27 plus interest.
[2] No issue of law arises on the question of liability. It is accepted on behalf of the defenders that a financial advisor in the position of Mr Lind, when advising clients such as the pursuers, had a duty to mention the existence of MVAs and the possibility that an MVA might be applied to the particular investment. It is accepted that such a financial advisor could not rely solely on providing the life company's printed literature to the client; that he was required to discuss MVAs with the client and confirm those discussions in writing; and that he was also required to explain what an MVA was, how it might apply and the possibility of it applying in the future in adverse market conditions. Although the experts called by the parties agreed with Mr Lind that a financial advisor could give little meaningful advice to the client as to the actual likelihood of an MVA being applied on a policy in the future, that duty went as far as to require the financial advisor to explain that the MVA might apply in adverse market conditions. Further, it was agreed between the parties that it was not enough simply to mention these points; the advice given had to be effective advice, that is to say advice which was brought home to the client and, so far as the financial advisor was able to judge, understood by the client.
[3] The issue in the present case is whether, in the course of meetings leading to the pursuers making the investment, Mr Lind did give such advice to the pursuers. That is a question of fact to be determined upon an assessment of the evidence given by Mr and Mrs Robinson for the pursuers and Mr Lind and Ms MacKinnon for the defenders.
The
Facts
[4] I should say at once that this is not a case where I have formed any adverse impressions as to the credibility of any of the witnesses. They were all, in my opinion, doing their best to assist the court. The factual questions have to be determined by an assessment of the reliability of the witnesses in giving their evidence. Whilst there are always difficulties in assessing reliability, the difficulties were made more acute in the present case by the fact that the witnesses were speaking to events which had occurred nearly 8 years before they gave their evidence. Although there were some contemporaneous notes of the relevant meetings between the parties, questions were raised as to their accuracy. I shall consider this in more detail when I come to discuss the evidence.
[5] I propose to begin my consideration of the facts by looking at the evidence given by Mr and Mrs Robinson. Their family circumstances are relevant. They were married in January 1976 and have three daughters. In June 2000 those daughters would have been aged about 13, 18 and 20. Mr Robinson has spent most of his career in the hospitality business, both in the hotel trade and in developing an outside catering business. He started his own catering company and, after some 16 years during which he built it up to become, in his words, a "market leader", sold it in 1996 to a French company. With the proceeds of sale he took a stake in Heart of Midlothian Football Club ("Hearts"), of which he became Chief Executive in 1997. This was a turbulent period during the life of the club and Mr Robinson found it stressful. In 2000 he came to the view that another five years in that post would be enough for him. He had invested a considerable sum of money in Hearts and realised that involvement with a football club was, as he put it, "high risk".
[6] The pursuers ("Chrysalis") were incorporated in about 1992 for the purpose of holding and investing funds accrued by Mr Robinson through his business interests. Mr and Mrs Robinson own all the shares in Chrysalis and are directors of the company. Chrysalis became the holding company for the catering business. When that catering business was sold in 1996, the proceeds of sale went to Chrysalis. Between 1996 and 1999 Chrysalis invested a substantial sum on the money markets, earning interest fixed by reference to the bank rate from time to time. This was a safe investment which satisfied Mr Robinson at the time. Mr Robinson said in evidence, and I accept this evidence, that he and his wife had formed the view that they wanted to make sure that at least £1,000,000 was ring fenced so as to be available for educating his children and maintaining a reasonable lifestyle.
[7] Mr Robinson had banked at the Clydesdale Bank for some 35 years, in the course of which he had built up a working relationship with the regional manager. In about 1999 he was encouraged to speak to the defenders, an associated company of the Bank, about better ways of investing his money. A meeting was arranged with Stewart Siegal of the defenders, as a result of which Mr Robinson decided to remove the £1,000,000 from the money market and invest it in an AIG bond, a quarterly bond divided into four funds, with limits on the amount by which the capital could increase or reduce each quarter. It is apparent, however, that Mr Robinson became dissatisfied with the performance of the bond. Some funds performed well, others less well, and he thought that it was not performing any better than when his money had been on deposit.
[8] Mr Siegal left the defenders' employment in about the spring of 2000. In May or June 2000, Mr Lind contacted Mr Robinson, introducing himself as Stewart Siegal's successor. Mr Robinson told Mr Lind that he thought that the AIG bond was not performing well and was considering whether or not to continue it. He asked for advice. Mr Lind suggested the possibility of making a change and Mr Robinson indicated that he would consider this before the next quarterly review.
[9] Mr
Lind and Mr Robinson met at Mr Robinson's office at Tynecastle Stadium on
"At our meeting Chris [i.e. Mr Robinson] confirmed that he was less than happy with the performance of the bond and the fact that although guarantees were in place the bond was not moving up and in fact was falling in value. I explained the nature of the contract and the fact that the value had fallen recently. This was I explained due to stock market volatility. The only funds which could be guaranteed not to fall in value were the 100% funds which provide less opportunity for capital growth."
Mr Robinson agreed that this reflected the discussion. He did not agree, however, that the fourth paragraph accurately represented what had been discussed. This paragraph reads as follows:
"We discussed other investment options outwith the AIG bond and in particular the option to move to some form of With Profits environment which would provide the opportunity for regular and steady growth although stock market based. We discussed the potential downsides to moving to a different fund/product provider i.e. potential of underperformance of new fund vs old fund, established costs and both the encashment penalties of the existing investments and any new investment made."
Mr Robinson took issue with the suggestion that there was any discussion about moving to some form of "With Profits environment". He said he would not have known what that was. He also said that there was no discussion about moving to a different provider or the "potential downsides" such as under performance and encashment penalties. The meeting ended, according to Mr Robinson (and consistent with the last paragraph of the file note), with a decision to maintain the position "as is" until the new quarter and that Mr Lind would phone Mr Robinson before the new "lock in" date to discuss performance and future options.
[10] There were two telephone conversations between Mr Lind and Mr
Robinson on 6 or
[11] In the fourth paragraph of his file note, Mr Lind records the second conversation as having been not only about encashing the bond but also looking "towards alternative investment options". He records confirming not only that the surrender penalty for the AIG bond would be £48,476 but also that, in order to provide as competitive a deal as possible, "commission would be foregone of 5% of any new investment made". Mr Robinson denied that anything was said during that conversation about alternative investment options. In his evidence he said that he had decided at that point to put the money back on deposit.
[12] When considering the reliability of the different accounts given of the meetings and conversations in June and July 2000, I shall in due course have to consider the reliability of Mr Lind's file notes. I have already noted that the date ascribed to the telephone conversation in the file note at 7/11 must be wrong - the conversations must have taken place on 6 July, not 7 July. I should also note that in the fifth paragraph of that same file note Mr Lind says this:
"In the meantime
I called Clerical medical international and asked that they provide an
illustration based on a £1 million contribution. As agreed with Calum Brewster [a manager of
the defenders in
The inference from this paragraph,
and in particular from the phrase "in the meantime", is that Mr Lind contacted
Clerical Medical after his telephone conversations with Mr Lind on 6
July, or at least after the first of them.
This is not what happened. Mr
Lind in fact contacted Clerical Medical some days before those
conversations with Mr Robinson. At 6/1
of process is a letter from Clerical Medical to Mr Lind dated
[13] The letter from Clerical Medical of
"The current reversionary bonus rate is 5.5%. The establishment charge is 1.44% for each of the first 5 years. There are exit penalties during years 1, 2, 3, 4 and 5 of 9%, 7.5%, 6%, 4.5% and 3 % respectively, if an amount in excess of the 10% maximum penalty-free withdrawal limit is enchased. It should also be pointed out that a MVA could be applied in exceptional circumstances although we do guarantee that this will not happen in the case of regular withdrawals, or amounts of less than and up to £25,000, or, on death, or, on the MVA-free date which can be set 12 years or more after the investment is made."
[14] Mr Lind met Mr Robinson again the following week when the
latter had returned from holiday. The
meeting took place at Tynecastle on 11 July and, according to Mr Robinson,
lasted about half an hour. Mr Robinson explained
that he had offered Mr Lind the chance to come and show what he had to
offer. Mr Lind was persuasive about the
Clerical Medical Premier Bond. Mr
Robinson said that he told Mr Lind that he would only look at the product if
his capital was guaranteed. The income
did not have to be huge - bank rates were doing well and his priority was to
ensure that his capital was safe.
According to Mr Robinson, Mr Lind explained that it was an offshore bond
and confirmed that the capital element would not reduce. Being an offshore bond, the growth in the
fund would only be taxed when it was brought back to the
[15] Mr Lind's file note of the meeting is at 7/16 of process. It states that the purpose of the meeting was to discuss Mr Robinson's ongoing investment options following the surrender of the AIG bond. It refers to "a lack of time at the meeting", as a result of which they were unable to complete a customer information form "although Chris confirmed that the circumstances were pretty much the same as previously". According to the file note, Mr Robinson "confirmed that the money was available for investment in the company's name and he was happy to view it over at least a 5 year period". The file note records that Mr Lind told Mr Robinson that a CIF (a customer information form) would have to be completed before any business was transacted "in order that we could be sure of the suitability of the advice." It notes that a "terms of business letter" was provided for Mr Robinson's records.
[16] Mr Robinson accepted most of this as accurate. However, he said that no terms of business letter was given to him on that occasion. He also joined issue with the notion that the investment was to be for "at least" a 5 year period. He was clear that he wanted to be able to realise the money after 5 years.
[17] The file note goes on to note that there was discussion about "the With Profits concept via the CMI Premier Bond". Mr Lind suggested that, since Mrs Robinson was a co-director of the company, any investment should be done on a "joint life last survivor" basis. It notes that a quotation was provided, as well as a KFD (Key Features Document) and further product information from Clerical Medical. Mr Robinson accepts that a quotation - or rather, the illustration at 7/15 of process - was provided, but he denies that a KFD or other product information was given to him. There was then, according to the file note, some discussion about the main attraction of the With Profits bond, that being "steady long term growth within a low risk environment". There was mention of the fact that Clerical Medical would give up their 5% commission, so that the initial allocation would be 105.5%. Mr Lind discussed bonus rates and emphasised that they were not guaranteed.
[18] The controversial part of the file note is in the fourth paragraph, which reads as follows:
"I explained the nature of a market value adjustment which could apply and the optional MVA free date of 12 years. The encashment penalties were also explained in detail and the fact that 10% of the investment may be withdrawn in any 1 policy year without early encashment penalties applying."
Mr Robinson accepted that there was explanation of the early encashment penalties, but said that there was no discussion at all about MVAs.
[19] According to the file note, and this is confirmed by Mr Robinson, Mr Robinson was happy with the concept (albeit that there is a dispute as to precisely what was explained) and suggested that Mr Lind should call him in the next week to arrange a time to discuss matters further and complete the relevant paperwork if required.
[20] In his evidence in chief and under reference to his account of this meeting, Mr Robinson expanded upon his approach to funds being locked in for any particular period. He said that he and his wife had discussed their financial position and their future plans. The children would be going to university. His job was pressurised. They had agreed that within five years he would exit Hearts. He would need to find a purchaser for his stake in Hearts. He was thinking of getting back into catering. He might need money for a business start up or for the purchase of property in towns where his children were going to university. He was 49 years old. He was not thinking about a 12 year investment. There was no way in which he would have been interested in the bond if it had been explained to him that an MVA might be applied or if 12 years had been mentioned. The bond was attractive because of its initial bonus. He said that Mr Lind had called this a "guaranteed bond" and had said that he would not be surprised if it went up to £2 million over 5 years, a comment which Mr Robinson says that he took with a pinch of salt. The encashment option of up to 10% per annum without penalty was attractive, and might free up cash for buying a flat for children at university. Mr Lind had warned him about the establishment costs - that registered clearly with him - and he accepted that he was attracted by the fact that even within the 5 year period there was sufficient flexibility to take money out for investing for the children.
[21] As I have already said, Mr Robinson accepted that an
illustration, rather than a quotation, had been shown to him at the meeting of
[22] The last meeting in the sequence took place on
[23] Before setting out what Mr Robinson says was discussed at the meeting, I should first quote the file note (7/19 of process):
"Chris had called me to say that he thought they would proceed with my recommendations although a suitable time needed to be arranged when his wife Liz was available. I confirmed that I had completed my formal recommendations although I would require to ensure via the completion of a Customer Information Form that the advice being provided was suitable.
I was introduced by Chris to his wife Liz and a CIF was completed. As per our previous discussions, their circumstances were pretty much as before although Chris's worth in Hearts was reckoned to be considerably more than before. We discussed other areas of financial planning although Chris and Liz's only real interest was to discuss the company investment.
I explained again the concept of With Profits Investment as well as the product terms for the benefit of Liz. The commission give up and special terms offered were confirmed as well as the statutory 14 days cooling off period. Both were happy to proceed and asked that I complete the paperwork on their behalf."
The paperwork completed at the meeting included the following: a Client Information Form (CIF) completed by Mr Lind and signed by Mr and Mrs Robinson; a "Confirmation of Agreement - File Note" signed by Mr and Mrs Robinson and Mr Lind; a CMI Premier Bond Application Form completed by Mr Lind and signed by himself and Mr and Mrs Robinson; and a CMI Premier Bond Supplementary Corporate Application Form signed by Mr and Mrs Robinson.
[24] Mr Robinson said that at the meeting they went through the features of the bond, particularly the enhancement at the beginning and the ability to take out 10% per annum. His wife was pleased with this. He said that the Customer Information Form was completed at the meeting at speed, though it was clear that some of it had been filled in in advance. He commented, and this is consistent with the second paragraph of the file note, that Mr Lind seemed to be trying to see if he could do other deals with them.
[25] On page 12 of the Customer Information Form (7/20) there is a section headed "Attitude to Risk" asking the investor to indicate on a scale of 1 to 10 what level of risk he is prepared to accept under each of the main financial planning areas. All the boxes indicating particular financial planning areas are left blank except for that applicable to "Investment" where the figure 4 has been inserted. There is a key underneath that explaining the "level of risk" indicated by each number. By the number 4 there is the following explanation:
"Low risk - some fluctuations in capital value in real terms".
The type of investment associated with this category includes Index Linked Gilts, Gilt Edged Stocks, Fixed Interest Stocks/Corporate Bond PEPs, Currency Funds, Distribution Bonds and With Profits. To get a further indication of what is meant by level 4, it is useful to refer to the level of risk either side of it. Level 5 is described as "moderately secure but long term expectation of preservation in value" and refers to investment in managed funds and property funds. Level 3 is described as "very low capital risk - no fluctuation in capital values" and refers to bank accounts over £20,000, building society deposits over £20,000, offshore banking accounts and short dated cash (money funds).
[26] The Confirmation of Agreement - File Note (7/21) contains a tick in the box asking whether the business transacted matches the recommendations. In the box headed "If not, what was agreed and why?" there is the following text:
"Report + Recommendations explained in detail. Commission give up of 5% explained + confirmed. Quotation + cooling off notice also explained. Mr and Mrs Robinson happy to proceed."
The reference to "Report +
Recommendations" is a reference to a document bearing a cover sheet describing
itself as "Financial Planning Report and Recommendations" (7/18). It took the form of a letter to Mr Robinson
at his home address dated
[27] There is a dispute as to whether this was handed over to Mr and Mrs Robinson at the meeting. Mr Lind is adamant that it was but Mr and Mrs Robinson dispute this. The letter begins in this way:
"I refer to our recent discussions and write to confirm my recommendations concerning the reinvestment of the proceeds of your AIG Guaranteed Stock market Bond."
It then goes on to say:
"You wish to look to re-invest approximately £1,000,000 over the medium to long term (i.e. 5 years plus) with a view to obtaining better returns than those currently available from Bank Deposits."
On the second page, under the heading "Circumstances", the letter states:
"You confirmed that you would be happy for any new investment made to be for at least a 5 year period. Encashment penalties would apply if the policy proceeds were to be withdrawn within a 5 year period of investment."
On the next page, under the same heading, the letter continues in this way:
"Due to a lack
of time at our meeting of
Under the heading "Risk Profile" there is a reference to Mr Robinson's attitude to risk as being Level 4. There is then some discussion in the document of "Alternatives", the "Traditional Investment Approach", how a company can "benefit from stock market performance", share portfolio, unit trusts, "'Onshore' Insurance Bonds", the "Offshore Advantage" and finally, on page 6, "Recommendations". So far as relevant this last section contains the following:
"I confirm therefore that I recommend that you effect an offshore With Profits Premier Bond with Clerical Medical International (CMI) for the investment of £1,000,000.
The aim of the suggested investment is to provide a better investment return than that currently available from deposit based investments. This is importantly achieved within a 'low risk' environment'.
As Mr Robinson is a co-director in Chrysalis Scotland (LGD) I would recommend that the Bond be effected in the Company's name with both you and Mrs Robinson as the lives assured. The policy benefits should be written on a second death basis for maximum flexibility.
.....
There is always the chance that the new investments selected may underperform when compared to the AIG Life Investment. It is my belief that the fund is much better suited, given your cautious attitude to risk, to provide you with a steady rate of return which allows you to benefit from the benefits of stock market investment within a low risk environment.....
....
All companies reserve the right to apply a market adjustment factor in adverse stock market conditions, which can reduce the value of with profits units if it is decided to encash the plan at this time. This will not apply on death, or to most existing regular income withdrawals of up to 10% per annum. The application of the market value adjustor is designed to protect the interests of those investors who wish to remain within the fund."
On page 7 the letter discusses some aspects of the particular Clerical Medical Bond and says this:
"At the end of 10 years, if the funds remain invested, a loyalty bonus of a further 1% will be added. There is a guarantee that no Market Value Adjustment will be made on the 12th anniversary of the investment."
In the Appendix there is again a reference to a "Market Adjustment Factor" which may be applied in "adverse stock market conditions". There is no reference here to the time at which there is a guarantee that no MVA will be applied.
[28] Mr Robinson said that this letter was never shown to him at the meeting. Indeed, he made the point that it would have taken a good half hour or so to go through that document. The meeting itself lasted no more than 30-40 minutes. Mr Robinson said that if he had seen this, with its reference to 12 years and a guarantee that no MVA would be applied on the 12th anniversary of the policy, it would have rung alarm bells. Further, at the top of page 7 the letter referred to a "diversified portfolio of investments". To him this would have sounded a bit like the previous investment with AIG and would have caused him concern. He said that there was no discussion of this at the meeting. He did not see this document until many years later. Although the Confirmation of Agreement - File Note stated that "Report + Recommendations" had been explained in detail, Mr Robinson says that he took this to refer to the Illustration which had already been provided (7/15). He was happy to proceed on the basis of what had been explained to him by Mr Lind.
[29] There was some discussion in evidence as to what documents were left with Mr and Mrs Robinson at the meeting. I shall return to this point in due course.
[30] Mrs Robinson's account of the events leading up to that meeting was based both on her discussions with Mr Robinson about what they wanted to achieve and upon what he told her of his conversations with Mr Lind. She was able to confirm those parts of his evidence.
[31] Mrs Robinson was able to give direct evidence of the meeting of
[32] Mrs Robinson was asked specifically about the reference in the Report and Recommendations to the MVA. She was certain it had not been mentioned: if it had been, "I would have had to have it explained to me", she said. If she had seen the reference to an MVA free window after 12 years, she would have said "stop right there, why are you thinking of the twelfth anniversary". They were not thinking of 12 years - they were already 2 years behind schedule by reason of cashing in their 5 year AIG bond after 2 years and starting again with Clerical Medical. If it had been explained, and she had been told it would be 12 years before there was a guarantee that withdrawals would not be subject to an MVA, she would have said that they could not go ahead. If she had been told that it was extremely unlikely that an MVA would be applied, but that if one was applied it could be in any amount, she would have said "forget it".
[33] Graeme Lind was about 31 at the time of these various
meetings. He had studied Business
Studies at
[34] Mr Lind's recollection of the meetings and telephone
conversations was largely dependent on (a) his file notes and (b) his
recollection of his usual practice. I
did not find this surprising. It is
therefore sufficient, as a summary of his evidence, to refer to what I have
already said about his file notes. That
is not to say that he pretended to having no actual recollection of what had
taken place. Some things in his file
notes he claimed to remember clearly, such as having had a discussion about
investment into a With Profits bond at the meeting of
[35] Referring to his file note of the meeting of
[36] As I have already noted, the controversial part of this file note lies in the fourth paragraph, with its mention of MVAs and the MVA free date of 12 years. Mr Lind explained that he had narrated it in his file note because it was a specific MVA. He could not say that Clerical Medical had never applied an MVA before, but it was extremely rare. He said that he had thought that Mr Robinson had understood what he had explained. But, he said, it was 8 years ago and he accepted (in his evidence in chief) that he could not remember specifically what was discussed. He did not recall Mr Robinson talking about simply putting the money on deposit. He thought that the discussions about the MVA would have taken up about 5 minutes of the meetings - the points about the MVA were mentioned but they would not have spent any time on them.
[37] Referring to the meeting with Mr and Mrs Robinson on 28 July 2000, and his file note (7/19), Mr Lind said that the Report and Recommendations was handed over and discussed, and they linked it back in to the illustration and the KFD. He had prepared the Report and Recommendations. It had been approved within the company. Sometimes it would be posted to the client and on other occasions it would be handed over at a meeting. Here it was handed over. At one point he recalled going through it at the meeting and leaving a copy with the Robinsons. Later he said that he remembered the Report being there but he could not remember going into details. He explained that he made sure everything was done properly because he was aware that Mr Robinson was a high profile figure and a longstanding customer of the bank.
[38] Asked about the involvement of Mrs Robinson at the meeting, Mr Lind said that he would have mentioned the points, including penalties, the terminal bonus and the MVA. He did not recall if he mentioned 12 years to her, but he was certain that he mentioned the MVA because that was part of what was normally discussed. His standard practice would be to mention the 12 year free date, but he would not have laid any stress on it because it was so unlikely that MVAs would be applied. He was not concerned about the mismatch between the 5 years minimum investment period and the MVA free date of 12 years, because MVAs had not been applied.
[39] As I
have indicated earlier, there is some dispute as to whether the Key Features
Document (KFD) was given to Mr Robinson at any of the meetings prior to him
taking out the policy. The file note of
the meeting of 11 July (7/16) notes that a KFD was provided to Mr Robinson at
that meeting. The Confirmation of
Agreement - File Note of
[40] The
importance of the KFD and the other documents for the present litigation is in
their description of how the MVA might apply to the Bond. The KFD (7/90) seeks, as its name suggests,
to summarise the key features of the CMI premier bond. It describes the Bond as a "single premium,
whole of life, unitised life assurance policy available to
§
In the case of the Offshore With-Profits Funds, the
combination of the surrender charge and the possible application of an MVA (see
below for both) could mean that you may not get your money back if you
surrender in the first few years.
.....
§
If you take money out of the Offshore With-Profits Funds,
either by switching or encashing, the amount paid may be reduced to reflect the
current value of the underlying assets to protect remaining policy
holders. This is known as the Market
Value Adjuster (MVA).
§
Whilst we expect the MVA to apply only occasionally, we do
not apply it in the following circumstances:
§
in the event of a death claim
§
when you have asked Clerical Medical to cancel units on a
regular basis, provided that the request was received before the publication or
notification to investors of an MVA, and that the amount of withdrawals in the
preceding 12 months is less than 10% of the amount invested in the bond.....
§
when you cash in part or all of your bond on an MVA -free
date (provided you confirm at least 30 days, but not more than three months,
before the date that you wish to proceed with the encashment) ..."
The KFD goes on to say that an MVA might also apply on
switching funds.
[41] One of
the other documents received from Clerical Medical after the investment was
made was a brochure (7/91) describing the CMI premier bond as "a flexible
investment bond with the advantage of offshore status". Amongst the details given was information
about the "Establishment charge" and the "Surrender charges", the latter
applying if an investor wished to encash part or all of the bond within the
first five years but subject to the exception of a withdrawal on death or where
regular withdrawals up to 10% per annum were taken. These are matters about which
Mr Robinson was clearly told at the meetings and there is no dispute about
that. It also contains, at page 8,
details relating to the MVA. I should
quote this in full:
"Market Value Adjuster (MVA)
If you take money out of the
Offshore With-Profits Funds, the amount paid may be reduced in some unusual
circumstances. The purpose of an MVA is
to protect Offshore With-Profits unit holders from the loss that would arise if
significant monies were switched or encashed at a time when the face value of
the units was higher than the value of the underlying assets. These funds are structured to give
competitive returns over the medium to long term and therefore, there is a
higher chance that early exits, particularly those in the first few years, will
attract an MVA.
MVA-free date
Clerical Medical guarantees
that no MVA will apply for withdrawals made on the twelfth anniversary of units
allocated upon any investment or switch into any of the Offshore With-Profits
Funds. In addition there will be further
MVA-free dates every three years thereafter.
Provided that you confirm
thirty days, but not more than three months, before any of these dates that you
wish to proceed with an encashment or switch we will ensure that an MVA will
not apply."
It then goes on to explain that they expect the MVA
"to apply only occasionally" but that they do not apply it in certain
circumstances such as death or withdrawals up to 10% as already summarised by
reference to the KFD.
[42] Finally
in this connection I should refer to the Policy Provisions applicable to the
CMI premier bond (7/93). These provide a
definition of the MVA as follows:
"A deduction which may be
made by the Company from the value of units of an Offshore With-Profits Fund
cancelled on any encashment under section 5 or any exchange under section 4 in
order that the amount payable, or the amount applied in the allocation of units
in any other Fund (as the case may be) shall reflect as nearly as possible the
growth in value of the underlying assets of the Fund during the period units of
the Fund have been allocated to the Policy and/or having regard to the need to
protect the interests of other policyholders whose policies have allocated to
them units in the Fund.
By way of example, the
circumstances in which the Company may decide to make such a deduction include
(but without limitation) any one or more of the following:
(a) where the growth in
value of the assets underlying the Fund since the Investment Commencement Date
relating to the units encashed is below that which the Company reasonably
expected to justify the Bonus Interest Rate during that period;
(b) where the values of
markets affecting the value of the assets underlying the Fund have, in the
reasonable opinion of the Company, fallen significantly;
(c) where a number of
Investors are encashing units of the Fund at the same time;
(d) where the amount payable
on encashment of a Policy, including any other amounts paid on encashments of
units of the Fund in the previous 12 months, is considered by the Company to be
significant."
It then goes on to identify in the same manner as in
the KFD the circumstances in which the MVA will not be applied. Later in the Policy Provisions in section 5,
which deals with encashment, there is a statement that an MVA may be applied
except in the same circumstances as have already been identified.
[43] It was
agreed between the parties in a joint minute that Clerical Medical had not
applied an MVA to their With Profits Policies prior to
[44] MVAs
are used by life assurance investment companies when the investment market is
volatile. Mr Goodyer explained that
they did it to avoid heavy dilution of the With Profits fund by policy holders
who decided to cash in early to avoid possible financial loss; if they did not
apply an MVA, they would find that the reserves of the With Profits fund would
have been depleted by customers who had cancelled early and this would unfairly
penalise the remaining policy holders in the fund. Mr Carlisle confirmed that when one was
looking to the circumstances in which an MVA might be applied, one was looking
for something more than a marginal fallback in the Footsie Index. With Profit funds deliberately smooth out
investment risks and can absorb minor set backs on the stock market. But if there was a fall of, say, 10-15% he
would expect consideration to be given to applying an MVA. But it was always at the discretion of the
particular life office and involved assessment by actuaries. The purpose was to maintain equity between
those who cashed in and those who left their investment in place. Both experts were agreed that the fact that MVAs
had not been applied for many years and the fact that an advisor could not be
expected to predict the likelihood of an MVA being applied at any particular
time in the future did not relieve him of the duty to advise the potential
investor of the risk that an MVA might be applied and to explain the sort of
circumstances in which that might happen.
[45] The
parties lodged in process at 7/75 a letter from Clerical Medical giving the
history of the applications of MVAs to all investments in their Sterling
Off-Shore With Profits Fund from the time the investment was made in the third
quarter of 2000. No MVA was applied
until
[46] The
policy documentation was sent to Mr and Mrs Robinson by the defenders on
[47] Having
considered carefully all the evidence and documents put before me, I have come
to the conclusion that Mr Lind did not give any explanation to the pursuers, or
to Mr and Mrs Robinson personally, of what MVAs were and when and in what
circumstances they might apply. I
consider that it is probable that MVAs were not mentioned at all. However, if they were mentioned, it seems to
me that they can have been mentioned only briefly and in passing and certainly
not in such a way as to bring home to Mr and Mrs Robinson, or to any reasonably
prudent investor, the impact that they might have upon the investment which
they were about to undertake.
[48] In
coming to this conclusion, I emphasise again that I have not formed the view
that any of the witnesses were dishonest in their evidence. But I did form the view that in terms of
reliability the evidence given by Mr and Mrs Robinson was to be preferred. Certain criticisms can be made of their
evidence. I consider that
Mr Robinson was probably wrong in saying that the KFD was not given to him
at the meeting of
[49] The
starting point, so it seems to me, is that Mr Robinson had an investment in an
AIG 5 year bond which was not performing as satisfactorily as he would have
wished. He wanted to review that
investment. He was minded to break the
bond and place the money on deposit. He
was persuaded by Mr Lind to consider the CMI premier bond and was persuaded
that this was an attractive investment.
It had little risk of loss of capital if kept in place for 5 years. Encashment penalties only applied during the
first 5 years and there was the facility to allow withdrawals without penalty
even during that time. Of more
importance, however, to Mr Robinson's thinking was the strategy upon which he
had decided with his wife. That was to
invest the money for 5 years or possibly more but with the emphasis upon being
able to have the cash available after 5 years.
I accept his explanation of his thinking and his discussions with Mrs
Robinson about their children's education, the possible investment in
university flats, his likely departure from his position at Hearts, and so
on. I accept that he was cautious about
an investment in which he would risk losing part of the capital invested. Had he been told that an MVA might be applied
to his policy upon withdrawal, it seems to me that he would have pressed for
more information about it. I am
satisfied that he did not know what an MVA was at this time. Had the nature of an MVA been explained to
him, and had he been told that the first MVA-free date was 12 years into the
investment, I am satisfied that he would have regarded this as an unacceptable
mismatch between his intent of a 5 year investment and a policy under which he
might be penalised if he withdrew the cash before 12 years had passed.
[50] From Mr
Lind's point of view, he was new to Mr Robinson's account. He was relatively young and
inexperienced. It seems to me that he
may well have been slightly "star struck" when given Mr Robinson's file, asked
to handle his investments and invited to meet him at Tynecastle. In assessing the reliability of his
recollection, I have to take into account the fact that whereas for Mr Robinson
the investment of a sum of £1 million was a significant act, for Mr Lind this
client, however important, was one of very many to be looked after. He is less likely, in my opinion, to have a
clear recollection of what was discussed.
He accepted, candidly, that his evidence was to a large extent based
upon the file notes that he made after each meeting or conversation and that is
some cases was based on what he would normally have done. But I also bear in mind, and it seems to me
that this is fundamental to an assessment of whether or not he would have
mentioned the MVA, that at the time at which these discussions took place (mid
2000) life offices had not imposed MVAs for many years and the prospect of them
being applied was considered remote.
[51] The
meetings and discussions with Mr Robinson and, at the end, with
Mrs Robinson were all relatively brief.
I need say little about the first meeting at Tynecastle on 6 June. Although Mr Lind had by then obtained the
quotation from Clerical Medical (at 6/1), he did not show this to Mr Robinson
or discuss its terms with him. Mr Lind
does not say that he raised the question of an MVA at this stage. Nor did he claim to have mentioned it in the
telephone conversations of
[52] The
final meeting was with Mr and Mrs Robinson at their home on
Conclusion on liability
[53] For
these reasons, therefore, I find that the defenders were in breach of duty to
the pursuers in failing to bring to their attention the risk that an MVA might
be applied upon their withdrawing funds from the Bond after 5 years.
[54] There
was some discussion about whether, assuming Mr Lind had explained the risk of
an MVA being applied to the policy to Mr Robinson at the meeting of 11 July
2000, the defenders would nonetheless be in breach of duty if he failed to
bring it also to the attention of Mrs Robinson at the meeting of
Damages
[55] I turn
now to the question of damages. The
pursuers' case is that had an explanation about the MVAs being given to them,
they would not have gone ahead with this product but would have been likely to
opt to invest their £1 million in an appropriate deposit account. Their evidence was not seriously challenged
on this point. It is argued for the
defenders that they might still have been attracted to the CMI Premier bond
because of the initial enhancement of £55,000 which offset the penalty of withdrawing
from the AIG bond. But I accept the
evidence given by Mr and Mrs Robinson.
The tenor of their evidence was that they were not greatly enthusiastic
about another bond to replace the AIG bond.
They were persuaded by Mr Lind to invest in the CMI premier bond. Mr Robinson's instinct had been to place the
money on deposit. It seems to me clear
from the evidence I have heard that had the MVA been explained, and in
particular had it been linked to a 12 year MVA-free date, this would have been
sufficient to make Mr and Mrs Robinson shy away from an investment about which
they had never been very enthusiastic.
[56] Accordingly,
I approach the question on the basis that had they been properly advised they
would not have taken out the CMI premier bond but would instead have placed the
money on deposit. The pursuers have put
before the court (at 6/56) three schedules showing how the money would have fared
on deposit. An investment of £1 million
from 20 July 2000 (the date when the bond was taken out) to 20 January 2006
(when it was encashed), earning simple interest, would have given a value as at
20 January 2006 of £1,221,507 at bank rate minus 0.5% and £1,244041 at bank
rate. Had the money been invested in a
building society earning interest compounded at three monthly rests, as at 20
January it would have been worth about £1,272,209. The schedule covering this last calculation
is defective in two respects. First, it
assumes that the money was invested on 3 July rather than
[57] It was
argued that the appropriate measure of loss was simply the amount of the MVA
deducted in January 2006. That figure is
£182,560.72. It is said that that is the
precise figure which can be attributed to the failure to give proper advice on
the MVAs. Any other figure takes into account the risk that one investment will
over or under perform compared with another.
Put another way, that sum of £182,560.72 is the loss attributable to the
specific duty breached. On the facts of
this case, I do not accept this argument.
It seems to me that, once I accept that, had the proper advice been
given, the pursuers would have invested the £1 million in a different manner,
the proper measure of their loss is the difference between the investment that
would have been undertaken and the investment that was undertaken. In so far as it is relevant to this point,
there is no doubt in my mind that Mr Lind was well aware that he was "selling"
this policy to the pursuers, and was aware that if they were not persuaded by
the matters he put before them they would have put the money on deposit.
[58] Next,
the defenders argued that the pursuers were contributory negligent in failing
to read the Report and Recommendations, the KFD and the other CMI
materials. I do not accept this. I have found, of course, that Mr Robinson was
provided with the KFD on
[59] Finally,
an argument was raised about mitigation.
The defenders criticise the Robinsons in failing properly to consider in
January 2006 the possibility that the MVA might reduce in the relatively near
future. Had they held on to their
investment for a while longer, the withdrawal would not have been subject to an
MVA. The percentage rates for the MVA
were coming down, albeit slowly. Mr
Robinson did not take any specific advice about whether the MVA might reduce or
be removed. It was not clear in evidence
that any such advice would have been forthcoming. Indeed it seems to me unlikely that any life
office or independent financial advisor would want to take the risk of giving
such advice. The tenor of the expert
evidence was that it was impossible to predict.
I do not think that the Robinsons can be criticised for deciding to take
their money out after the 5 years rather than leave it in there with the risk
that the MVA might increase rather than reduce.
Further, Mr Robinson explained that they had a use, possibly even a
need, for the money. They wanted to
invest in property in
[60] Mr
Robinson did in fact explore with the defenders the possibility of another
solution. He offered to assign the bond
to the defenders at its current value, without any deduction for the MVA. If they were confident that it was a valuable
product and that MVAs would reduce, or if they were happy to keep it until the
end of the 12 year period, they could have taken up his offer. They would be taking the risk. In response the defenders suggested only that
they might be willing to lend to Mr Robinson against the bond if he required to
release cash at the end of 2005. Under
this arrangement it would be the pursuers who would continue to take the risk under
the Bond. If the defenders were
unwilling to take the risk that MVAs would increase rather than reduce, why
should Mr Robinson take that risk? I see
no basis upon which the pursuers can be criticised for deciding to encash the
bond when they did.
Disposal
[61] For
those reasons, I shall sustain the first and second pleas in law for the
pursuers, repel the defenders' pleas in law, pronounce decree for payment by
the defenders to the pursuers of the sum of £237,698.27 plus interest thereon
from the date of citation until the date of payment, and continue the cause in
respect of all questions of expenses.