Suitability and risk

Mr G and Ms D instructed solicitors in 1994 in connection with a property purchase. Both were recently divorced and had preserved limited resources from their previous matrimonial situations. The solicitors offered financial services and agreed to arrange the new mortgage. All advice given to Mr G and Ms D was by correspondence and no personal attendances took place during the transactions.


A mortgage was arranged on an interest-only basis, supported by an endowment policy that provided life cover for the loan amount, and was targeted to achieve a maturity value of at least that amount at the end of its term. Mr and Mrs G (by then married) complained to the solicitors in 2003 after receiving a letter from the life office warning of a likely shortfall in the maturity value of the policy. They complained that the risks involved in relation to the endowment were never explained to them at the time, and that no other alternative repayment options were considered before the endowment was taken out.


The solicitors' file showed that they had completed a financial information form at the outset of the matter, which contained all of the relevant information about the couple's personal and financial circumstances. However, there was no evidence to show that their attitude to risk had been considered. Nothing in the solicitors' file indicated that any other methods of repaying the mortgage had been considered or discussed with Mr G and Ms D at the time, and there was no evidence to show, apart from sending out product literature containing general risk warnings, that they had been given any advice about the potential risks involved with an endowment mortgage.


The solicitors submitted that Mr G had previously had an endowment mortgage and would have been aware of the nature of such policies. They maintained that there was nothing to indicate that the policy chosen was unsuitable for Mr G and Ms D on the basis of what was known at the time. They argued that their practice in dealing with financial services was compliant with the Solicitors Investment Business Rules (SIBR) at the time, and that there was no justification for claiming that the professional service provided was inadequate.


A Law Society adjudicator found that the solicitors had not complied with the SIBR because they had not considered the clients' attitude to risk, or considered the suitability of the proposed product in relation to the clients' circumstances. Furthermore, the solicitors had not explained to them the nature of the risks involved. The solicitors were directed to pay compensation on the basis of an assessment of the value of the policy made using a mortgage fundamentals calculation, which is the system also used by the Financial Ombudsman Service in assessing claims.


Every case before the adjudication panel is decided on its facts. This case study is for illustration only and should not be treated as a precedent


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