When professional financial advice goes wrong

Financial advisers play an important role in helping individuals make informed financial decisions. While no adviser can guarantee that an investment will generate a positive return, the law nevertheless imposes clear obligations to ensure that any investment recommended is suitable for the particular client.

These obligations recently came under scrutiny before the Court of Appeal in Malcolm Mason vs Aventis Financial Planning Limited, where the court upheld a decision of the Arbiter for Financial Services after finding that part of a retail investor’s pension had been invested in a financial product that was unsuitable for his agreed investment profile.

The case arose from a complaint filed by Malcolm Mason, who had transferred his pension in 2013 after seeking professional investment advice from Aventis Financial Planning Limited, formerly known as Lawsons Equity Limited. As part of the advisory process, Mason completed a confidential client fact-find which classified him as a retail client with a balanced attitude towards risk. The documentation also recorded that he had no financial qualifications or significant investment experience, and wished to invest in a manner broadly equivalent to a mainstream UK equity fund.

Despite this profile, approximately one quarter of Mason's pension was invested in the Prestige Alternative Finance Fund, a Cayman Islands-based investment fund. Years later, when Mason sought to withdraw his pension benefits, he discovered that this investment had become illiquid, therefore preventing the closure of his pension whilst fees continued to accrue. He subsequently lodged a complaint before the Arbiter for Financial Services, alleging that the investment recommended to him was incompatible with the risk profile and investment objectives that had been established at the outset of the advisory relationship.

The arbiter upheld the complaint, concluding that the Prestige Alternative Finance Fund was unsuitable for a retail investor with a balanced risk profile. Aventis appealed the decision, arguing, amongst other things, that the investment had been appropriate, that the arbiter had exceeded his powers, and that part of the compensation awarded fell outside his jurisdiction. The Court of Appeal, however, rejected each of these arguments and confirmed the arbiter’s decision in its entirety.

The court’s analysis centred on whether the advice provided by Aventis Financial Planning Limited was appropriate for Mason’s individual circumstances. Although the company argued that the investment portfolio reflected Mason’s objectives and that the losses were ultimately caused by external factors, including the COVID-19 pandemic and changes in interest rates, neither the arbiter nor the court accepted those arguments.

The court attached particular importance to Mason’s investor profile. He had been classified as a retail client with a balanced attitude towards risk, yet part of his pension was invested in the Prestige Alternative Finance Fund, a product which the Court noted was intended for experienced investors and classified as a higher-risk investment. The judgment further observed that the fund required a minimum investment of £60,000, despite Mason having invested just over £12,000 in it.

Endorsing the arbiter's conclusions, the court stated that “the appellant was not the appropriate investor for this type of investment”. It went on to observe that the adviser nevertheless invested approximately 20% of Mason’s pension in a fund that was considered unsuitable for a retail client with his risk profile.

The judgment serves as an important reminder that the duty owed by financial advisers is not limited to recommending investments capable of producing favourable returns. Rather, advisers must ensure that the products they recommend are suitable for the particular client. Consequently, the legality of the advice is assessed by reference to the client's circumstances when the recommendation is made, and not simply by looking at how the investment subsequently performs.

The judgment is also noteworthy for its confirmation of the broad remedial powers vested in the Arbiter for Financial Services under Chapter 555 of the Laws of Malta. On appeal, Aventis argued that the arbiter had exceeded his jurisdiction by not only awarding compensation but also directing that any future proceeds deriving from the Prestige Alternative Finance Fund be assigned to the company itself, thereby allowing Mason to sever his relationship with the investment altogether.

The court rejected this argument. Referring to Article 26(3)(c) of the Arbiter for Financial Services Act, it held that the arbiter’s powers extend beyond the mere award of monetary compensation and include the authority to “review, rectify, mitigate or alter the conduct complained of or its consequences”.

Applying that provision, the court concluded that requiring Aventis to assume control of the disputed investment, after compensating Mason for his losses, formed part of rectifying the consequences of the unsuitable advice.

In doing so, the court reaffirmed that the role of the arbiter is not confined to determining whether a financial services provider has acted improperly. Where appropriate, the arbiter may also fashion practical remedies aimed at restoring the complainant, as far as possible, to the position they would have occupied had the unsuitable conduct not occurred.

This judgment is an important reaffirmation of the legal obligations that govern the provision of investment advice. In dismissing the appeal, the court confirmed that the assessment of whether financial advice is appropriate does not depend on whether an investment ultimately proves profitable or loss-making, but on whether the recommendation was suitable for the particular client at the time it was made. In doing so, the court reinforced the importance of properly assessing an investorss objectives, financial circumstances, level of experience and appetite for risk before recommending any investment product.

The judgment also provides valuable guidance on the role of the Arbiter for Financial Services within Malta's regulatory framework. By confirming both the findings of the Arbiter and the remedies awarded, the court reaffirmed that the legal protections afforded to investors extend beyond the award of compensation and may include practical measures aimed at rectifying the consequences of unsuitable financial advice.