The difference between ‘advice’ and ‘information’
In a recent article in Norton Rose Fulbright’s Financial Institutions Legal Snapshot newsletter, Patrick Bracher, a director of the firm and an insurance law specialist, says: “This is not specifically part of South African law, but it is relevant when considering liability, for instance, of brokers under the Financial Advisory and Intermediary Services Act.
“The difference is between providing information for the purpose of enabling someone to decide on a course of action and advising someone as to what course of action to take.”
The English Appeal Court recently found that accounting firm Grant Thornton was not responsible for the losses incurred by Manchester Building Society when it entered into financial transactions on the basis of its professional advice. The case rested on the fine line between information and advice. Although the accounting firm had advised the building society on accounting practices, the court found it was not responsible for the subsequent transactional course of action taken by the building society.
What is relevant is a 2017 case involving a commercial insurance broker referred to in the judgment. The broker had advised a reinsurance company on what is known as retrocession insurance (whereby reinsurance companies spread their risks) and the reinsurance company had suffered losses as a result.
In this case, the broker was found liable for the loss: it was giving advice and not merely information, because it took responsibility for the whole transaction and it should have foreseen the losses.
The judge commented: “In order to recover the foreseeable loss suffered as a result of entering into the transaction, it is necessary to show that it is an ‘advice’ case. An ‘advice’ case is where ‘it is left to the adviser to consider what matters should be taken into account in deciding whether to enter into the transaction. His duty is to consider all relevant matters and not only specific matters in the decision’. He is ‘responsible for guiding the whole decision-making process’. In such circumstances, ‘the adviser’s responsibility extends to the decision’ to enter the transaction, and he is liable for the foreseeable losses flowing from having entered into it.”
Bracher says: “If a person who is under a duty to take reasonable care to provide information on which someone else will decide on a course of action is negligent, that person is responsible only for the consequences of the information being wrong. The professional person is not responsible for losses that would have occurred even if the information provided had been correct. But the person who gives advice and takes responsibility for the whole transaction, if negligent, will be responsible for all the foreseeable loss which is a consequence of that course of action having been taken.”
What can South African financial advisers take away from this, Bracher asks.
“The purpose and effect of their advice is relevant. A professional giving advice should have clear terms of business setting out the scope of their responsibility for the decision-making process and for the transaction which results from the advice given,” he says.