Insurence Law - Giselles Employer - Case Study Example

Background Professionals are respected all over the world because they have special knowledge and insight that the average person does not. This is the reason we are wiling to pay large sums of money to these professionals so that they can give us the benefit of their wisdom and insight. It does not matter whether the professional in question is a doctor, a financial advisor, or an accountant; all such professionals need to take their responsibilities seriously, and often subscribe to a code of conduct so that they will not engage in activities that bring harm to their clients or put their colleagues and their professional association in disrepute. Professionals, whether financial advisers or money managers, are expected to honour a duty of care to their clients. One case that highlights such a duty of care came to light in 1999 and involved Mercury Asset Management, which is a British asses manager that had been acquired by American companay Merrill Lynch and Unilever pension, the plaintiff. When the two established the agreement, the expectation was that Merrill Lynch would manage the 1 billion pound firm so that it would be at least 1% over an established benchmark, with not more than a 3% downlimit. Since January 1997 when the investment agreement was set up there were five quarters in which the investment was 8.93 per cent below the benchmark. “The question at issue was: did Merrill Lynch fail to exercise the highest standards of care and expertise, or even reasonable care and expertise?” (Ellison 2003). While most investment managers do not explicitly promise a return, this particular investment agreement spelled out clearly what the expectations were on the part of Merrilly Lynch. In other words, Merrill Lynch believed in its expertise as professional money managers and Unilever fully trusted them to be able to execute the promise. Regarding the issue of duty of care, “There is no automatic duty in any relationship, whether contractual or not, but where a customer relies so much on the expertise, skills and integrity of an asset manager, who invariably holds out as being in possession of these skills and qualities,t he consensus seems to be incontestably that there is a duty of care to manage the investments in a reasonable manner” (Ellison 2003). In the case of Monty and Giselle, the question is whether Giselle held herself out or encouraged the reliance on her advice by Monty. Especially since the two seemed to have known each other over a period of time, Giselle may have established her professional expertise in many ways, through for example, communication that she makes regarding her successes at work, successes that would no doubt encourage Monty to count on any such advice given by Giselle in what amounts to a professional capacity. The government of UK is acutely aware of the problems that arise when consumers seek advice from financial planners and advisers and has sough to do something about it. “The government has directed its attention towards addressing the problem through the establishment of the Financial Services Authority and the introduction of the Financial Services and Markets Act 2000 and, in both cases, protection of the consumer and reglation of the provider’s behaviour are a priority” (Ethical marketing in financial services 2005). In the current case, Monty has $20,000 that he has decided to invest. The money has taken him a long time to save and he relies on his friend, Giselle, who obviously must know how long it took Monty to save the money, and his desire to increase the value of the money through some kind of investment opportunity. Also, Monty, having known Giselle for a long time, knows that she does have the insight of a professional and that she can be trusted to give good advice. When Monty asks Giselle if it is a good idea to invest in Mercantile Bank, Giselle gives every impression of giving serious advice because she looks around, making sure that nobody else hears what she is about to do. She gives the thumbs up sign, which signifies her belief in the value of the said investment. She does not indicate that she is joking and if Monty had known her to be a joker, he would not have taken the advice seriously. Monty learns that night that Mercantile Bank has been in serious trouble for a long time, information that those in the know within the financial services field would no doubt be aware of. It seems that Giselle gave bad advice to Monty, for which Monty wants to explore all his options, including the possibility of filing a lawsuit. Standard of Care Investment advisers owe to their clients a duty of care. This means that at all times they will endeavour to give the best advice possible. They cannot give sloppy advice and claim ignorance. They are professionals, which does not mean that they will always be right but that they will make sure that the advice they give is based on information that they believe to be accurate. In other words, they will always endeavour to give the client the benefit of their research and judgment. In Hong Kong, for example, investment advisers are encouraged to follow the rules of the Securities and Futures Commission (SFC). These rules are designed in such a way that they provide a measure of protection for clients. The system, in Hong Kong, however, is not adequate in the minds of some investment advisers. One such adviser, according to Martin Debra, “would prefer one super regulatory body, like in Britain, to the present system in Hong Kong of several bodies.Even though Britain is highly regulated, the rules of the financial planning industry are clear” (Debra 2004). Whether in the United Kingdom or in Hong Kong it is generally agreed, as per the code of ethics of financial services associations, for such advisers to put the interests of their clients ahead of their own. “When the public goes to a financial adviser they require expert advice, just as they would need expert advice from a doctor if they were sick or a lawyer if they had legal matters. In a sense, they are passing the responsibility on to an adviser and he or she is accepting that responsibility and is remunerated for it. "Financial advisers cannot have it both ways - they cannot give advice and then not take responsibility for it” (Martin 2005). This raises the question of whether Giselle was indeed giving advice to Monty. There is no indication that Monty paid Giselle for the advice, which would have helped to establish some kind of contract between the two. On the other hand, since the two had been friends for a long time, Monty could assume that the advice, serious as it was, was being given on the basis of a friends’ prerogative, and that issues of remuneration could be discussed later. Certainly, if the two have known each other for a long time then there is no reason why advice and issues of compensation have to go through a formal process before being valid. This is in no way to say that friends should not draw contracts; far from that. There is the simple observation that as friends the two could do business anywhere and do not need to be sitting in an office, face to face with each other, before acknowledging that one is providing much needed financial service advice to the other. Giselle must have known or ought to have known that Monty trusted her advice and that he would follow through. If she had known that the advice she was providing was wrong and she went ahead and did so with an intent to deceive, then she could very likely be guilty of negligence. What Giselle did is not necessarily criminal, and negligence is generally not considered criminal. As Jonathan Herring writes in Criminal Law, “Many believe that negligence should not play a role in criminal law; that a criminal liability should require that the accused actually possesses a specific state of mind, and does not merely fall short of some required standard of conduct” (Herring 2005 98). The basic definition of negligence takes into consideration whether the defendant behaved in “which a reasonable person would not” (Herring 2004). Giselle Giselle may have felt that because of the setting her advice would be taken as a bit of a joke, not seriously. As a professional, she would normally be expected to provide advice in an office setting or when the purpose of the meeting was expressly to deal in a client-adviser relationship. This does not appear to be the case. The two were friends rather than having an adviser-client relationship. Certainly, Giselle must have known that giving inadequate advice could lead to tremendous problems but if she did not feel that she was providing professional advice then she certainly would not have expected Monty to follow through by investing in Mercantile. Especially since there is no indication that Monty paid for the advice, Giselle could argue that she was not in any contractual situation with Monty and that the communication between the two could not be regarded as a business relationship for which she should have to bear consequences for negligent advice. There is no question that there was a financial loss and that this was because Monty followed advice given by Giselle. But the question still remains if Giselle’s behaviour, that is, sharing the information, erroneous as it was, with Monty was a breach of her professionalism, exposing herself to a potential lawsuit. Giselle’s Employer In the United Kingdom, the issue of impropriety in the financial sector is nothing new. Examples include “Robert Maxwell's raiding of his employees' pension fund; the collapse of the Bank of Credit and Commerce International; the fraudulent activities of Barlow Clowes; rogue traders who shook Morgan Grenfell and devastated Barings; colossal debts incurred by 'Names' on high-risk Lloyds syndicates; the voluntary liquidation of Knight Williams, the UK's self-styled 'largest retirement income specialist'; dubious home income plans sold to elderly people; and the protracted investigation of the mis-selling of personal pensions” (Aldridge 1998). Some of these dealers had to answer for their malfeasance. Some of the blame has rested on financial advisers. As Aldridge explains, the reason for fingering financial advisers when something goes awry is not difficult to understand. First, the relative brevity of their professional training makes their claim to an esoteric knowledge base tenuous. Second, most of the products they sell are standardized mass-market commodities requiring no specialized understanding on the part of those who buy or sell them. Third, this soi-disant profession is poorly regulated: the regulatory bodies established under the Financial Services Act 1986 have been criticized as lax, indolent and self-serving. Fourth, their professional motivation is questioned. The widespread use within the personal financial services sector of commission-based systems of remuneration implies a commercial rather than professional incentive structure. (Aldridge 1998) In fairness, there is no indication that Giselle was tied in any way to Mercantile. If so, this is something that Monty’s lawyers would benefit from as they argue their case in court. They could make the case that even though Mercantile was a sinking ship, Giselle felt a professional obligation to push the products of that company even if it meant that her friend, Monty, would lose a substantial amount of money investing in the company. There is another sense in which Giselled did not act appropriately and that is her ignoring of the Financial Services Act 1986 which imposes on financial advisers a duty to really know their client. One might argue that because Giselle and Monty were friends, she did know him, including knowing such information as age, health, marital status, income, tax position and other commitments. “In addition, financial advisers must ascertain the clients' investment objectives, time-horizon for investing, and attitude to various risks (Filmer, 1997, p. 83)” (Aldridge 1998). Since Giselle did not go through the formal process of gathering such information the company could argue that she was not really offering professional advice. She was just having fun with her friend and that it was stupid of Monty to follow the “advice.” Employers need to remind their employees of their duty of care and of their need to be professional at all times. Giselle could have avoided any potential trouble by simply refusing to offer any advice. After all, if the two had not established a relationship as client and adviser, there was no need for Giselle to offer advice that could have been misconstrued. The managers of a company have a responsibility to ensure that those on the frontlines are aware of professional codes of conduct as well as the company’s own internal rules relating to the ethical handling of relationships with clients. Advice offered by Eva Heffernan and Joanne Wardale in the article “The NatWest Three,” is apropos: “Another issue highlighted by the Bermingham case is the risk of personal dealing with clients. The problems this poses – in terms of potential breaches of principles and rules in relation to conficts of interst and market abuse are well understood” (Heffernan and Wardale 2006). Firms should also ensure that they have liability insurance to fund any legal representation that may be necessary because of an employee’s error or negligence. The growth in compensation culture in the UK means that employers need to be prepared in case of negligence on the part of the company or its employees. “The Office of Fair Trading found average premiums for employers' liability insurance last year rose by 50 per cent, public and product liability by 30 to 40 per cent and professional indemnity by 30 to 60 per cent. :This followed a six-year period during which liability insurance premiums fell in real terms by about 14 per cent” (Burgess 2005). For Giselle’s employer, as indeed for other businesses across UK, by law, any businesses that has within its employ someone from outside the family of the owners needs to have employers’ liability insurance cover. This is for safeguarding the well being of employees. In case an employee become ill because of something in the workplace, such an insurance cover would be essential. Such an insurance cover may also include coverage for legal fees in case of a law suit. While the minimum required is 5 million pounds, employers may opt to take more depending on the kind of industry they are in and the potential for things to go wrong for employees. Public liability insurance makes provision for any damanges that may be awarded by a court or other competent authority because of injury caused to the person by one’s business or damage caused to the other person’s properly. In the worst case scenario such payments could bankrupt a company that is ill prepared for such possibilities. Most companies like to insure the contents of their office. While this is not directly related to a possible payout to a litigant, it is possible that vandalism or burglary could result in the loss of important documents that might lead to problems with some clients, necessitating a payout of some sort. So, office and contents insurance, while not direct, is also important. Finally, there is professional indemnity insurance, which is of the greatest relevance to Giselle’s employer. Even though this is not required by law, many clients expect such cover these days, knowing that in case there is a problem, they have recourse to funds because of the insurance cover. Bibliography Aldridge, Alan. “Reproducing the value of professional expertise in Post traditional culture:Financial advice and the creation of the client.” Cultural Values, Vol. 2 Issue 4 (Oct 98):445, Burgess, Kate. “Living with the Brokovich factor.” Financial Times, (Jun 7, 2003):25. Ellison, Robin. “Asset managers: What is the duty of care?” Pensions, Vol. 9 Issue 1 (2003):14-21. Elliott, Catherine & Quinn, Frances. Criminal Law, Fifth Edition. London, UK: 2004. “Ethical marketing in financial services: The continuing importance of fiduciary responsibility.” Journal of Financial Services Marketing, Vol. 10 Issue 2 (2005):103. “Five essential insurance products.” http://money.uk.msn.com/Insurance/Insight/Guides/Insurance_basics/article.aspx?cp-documentid=144034 (2007) Retrieved: February 9, 2007. Herring, Jonathan. Criminal Law, London, UK: Palgrave Macmillan, 2005. Herring, Jonathan. Criminal Law: Text, Cases, and Materials. Oxford, UK: 2004. Martin, Debra. “Ambiguous rules put investors at risk; A leading executive calls for the effective regulation of advisers to give customers more protection should investments turn sour.” South China Morning Post (September 3, 2005):8. Yonge, William. “The marketing of investments and financial services in an dfrom the UK: The new regime.” Journal of Financial Services Marketing, Vol. 7 Issue 1 (June 2002):80-97. Read More