Professional Negligence - Financial Professionals Professional Negligence - Financial Professionals

What is professional negligence?

Professional negligence occurs where an accountant, auditor or financial professional fails to exercise the reasonable skill and care expected of a reasonably competent member of their profession, and that failure causes loss.

The fact that a professional has made a mistake does not automatically mean they have been negligent. Professionals are often required to exercise judgement and different competent professionals may reasonably take different approaches. The key question is whether the advice or conduct fell below the standard expected at the time it was given, without the benefit of hindsight.

What duties do accountants and financial professionals owe?

The duties owed by an accountant or financial adviser will usually depend on the scope of their engagement and the work they agreed to undertake. Engagement letters, terms of business and other communications are often central to understanding the extent of those duties.

In general, professionals are expected to exercise reasonable skill and care, comply with applicable professional standards and advise on matters falling within the scope of their instructions. Depending on the circumstances, they may also be required to warn clients about significant risks that become apparent while carrying out their work.

Can I bring a claim if an investment or tax scheme failed?

Not necessarily.

Investment products and tax planning arrangements often involve a degree of commercial risk. A poor outcome does not automatically establish negligence. However, a claim may arise where the adviser failed to explain significant risks, recommended an unsuitable product, failed to assess the client's circumstances properly or gave advice that fell below the standard expected of a reasonably competent financial professional.

Each case depends on its particular facts, including the advice given, the information available to the adviser and the client's circumstances at the relevant time.

Are accountants responsible for introducing clients to tax schemes or investments?

In some circumstances, yes.

The courts have recognised that accountants may owe duties in relation to introductions they make to investment opportunities or tax planning arrangements. Whether a duty arises will depend on factors such as the nature of the recommendation, the client's level of sophistication, the extent to which the accountant assumed responsibility and whether the client relied on the accountant's expertise when deciding to proceed.

Can auditors be liable for professional negligence?

Yes.

Auditors are expected to conduct their work with reasonable skill and care and in accordance with applicable professional standards. Claims may arise where auditors fail to identify material accounting irregularities, overlook important information, carry out inadequate investigations or issue opinions which fall below the standard that a reasonably competent auditor would be expected to achieve.

Do financial advisers have a duty to explain risks?

Often, they do.

The courts have increasingly emphasised the importance of proper communication between financial advisers and clients. Depending on the circumstances, a financial adviser may be expected to explain the material risks associated with a recommended investment or financial product so that the client can make an informed decision.

The extent of that obligation will vary according to the nature of the advice, the regulatory framework governing the adviser, the complexity of the transaction and the experience of the client.

What evidence will be needed?

The strength of a professional negligence claim often depends on the available evidence. Relevant documents commonly include engagement letters, accounts, audit reports, tax advice, investment recommendations, suitability reports, emails and correspondence, together with records demonstrating the financial loss allegedly suffered.

Many claims also require expert evidence from an independent accountant, auditor or financial professional to help establish whether the defendant's conduct fell below the required professional standard.

Can claims be resolved without going to court?

Yes. Many professional negligence disputes are resolved through pre-action correspondence, negotiation or mediation without the need for formal court proceedings. Early legal advice can help clarify the strengths and weaknesses of a claim and often assists the parties in reaching a commercial resolution.

Where settlement cannot be achieved, court proceedings may be necessary to recover the losses suffered.

What compensation can be recovered?

The aim of a professional negligence claim is generally to place the claimant in the position they would have been in had the negligence not occurred.

Depending on the circumstances, recoverable losses may include financial losses caused by negligent advice, additional tax liabilities, lost investment opportunities, professional fees incurred as a result of the negligence, losses arising from failed transactions and the costs of putting matters right.

How long do I have to bring a claim?

Professional negligence claims are subject to strict limitation periods. In many cases, claims must be brought within six years of the negligent act or omission, although alternative time limits may apply depending on when the negligence was discovered and the specific facts of the case.

Because limitation issues can be complex, legal advice should be sought as soon as possible.