Avoiding the costs of mis-selling

A number of firms of solicitors that were authorised by the Law Society to carry out investment business are now facing complaints arising from alleged mis-selling of financial products. Firms may also have to deal with complaints that arise from the activities of a 'predecessor' practice, even if they no longer carry out investment business.


Most of the complaints currently under investigation arise from the stock market falls that either directly affected the value of investments or led, in the case of endowment policies, to warnings that the eventual value of investments would not meet investors' expectations.


The Law Society's jurisdiction to deal with complaints against solicitors in these circumstances arises not from financial services legislation but from section 37A and schedule 1A of the Solicitors Act 1974. In other words, such complaints are dealt with on the same basis as any other complaint of inadequate professional service. This gave the Law Society power, after 1991, to award compensation in cases where financial loss could be shown to have arisen as a direct result of inadequate professional service, up to a current maximum of £5,000.


Solicitors who were authorised to carry out investment business by the Law Society prior to 1 December 2001 were required to comply with the Solicitors Investment Business Rules and other rules in force at the relevant time. They should be able to demonstrate, from the records kept in accordance with those rules, that they have done so. Any failure to comply will be regarded as prima facie evidence of inadequate professional service that could lead, if a finding is made, to an award of compensation.



So far as possible, the Law Society will adopt the same approach as the Financial Services Ombudsman in relation to these complaints. So, for example, in a recent adjudication, experienced investors who had purchased similar products before, and where the solicitors could demonstrate that an appropriate risk assessment had been carried out, were not successful in claiming compensation for the fall in value of their investment.



In contrast, first-time buyers who were sold an endowment policy were successful in claiming compensation for the shortfall in value of their policy. In that case, the solicitors were unable to demonstrate that proper advice had been given as to the suitability of the product, the availability of alternatives and the attitude of the client to risk. In such cases, the 'loss' is calculated in accordance with a formulation approved by the Financial Services Authority.


It is likely that a significant number of such complaints will arise in the near future as a result of recent publicity. Where solicitors have evidence to show that they have complied with the appropriate rules, they would be well advise to safeguard it.


This column is written by a Law Society adjudicator