FCA authorised · FRN 7249520117 325 0027Quote & buy →
An IFA's contractual duty runs to the client who signed the client agreement. The harder question is whether someone outside that contract can sue when the advice turns out to be unsuitable. The answer in England and Wales runs through two strands of common law: the tripartite test in Caparo Industries plc v Dickman [1990] 2 AC 605 and the assumption-of-responsibility analysis in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. For the underlying mechanics, see the Caparo three-stage test explained.
The reason this is not an academic point is that professional indemnity claims against advisers rarely come from the neat, single-client fact pattern. A recommendation made to one person is read, relied on and acted on by a wider circle — a spouse, an adult child arranging a parent's care funding, a lender taking security over a pension-backed loan, a trustee passing a suitability report up the chain. When any of those non-clients loses money, the question of whether the IFA owed them a duty of care determines whether the firm's PI policy is even engaged. Understanding where the duty starts and stops is therefore the first step in understanding what a policy needs to respond to.
The IFA owes the client a contractual duty to advise with reasonable care and skill, a concurrent duty in tort, and statutory duties under COBS — most notably the suitability rules in COBS 9. Breach is measured against the standard of the reasonably competent IFA; see the Bolam test for IFAs.
These duties overlap rather than compete. The contractual duty is defined by the retainer — what the client actually engaged the firm to do. The tortious duty exists in parallel and can be wider in its remedies and its limitation period. The regulatory duty under COBS is not, in itself, a direct cause of action for every claimant, but it sets the benchmark of competent practice a court or the Financial Ombudsman Service will apply when deciding whether the adviser fell short. In practice a claim usually pleads all three: that the advice broke the contract, was negligent, and departed from the regulator's suitability requirements. A PI policy written for advisers is designed to pick up civil liability arising from any of these, which is why the wording of the insuring clause — and the definition of "professional business" within it — matters as much as the limit.
Caparo asks three questions: was the loss reasonably foreseeable, was there sufficient proximity between adviser and claimant, and is it fair, just and reasonable to impose a duty? Hedley Byrne overlays the first two by asking whether the adviser assumed responsibility for the accuracy of the statement to the person who relied on it. Possfund Custodian Trustee Ltd v Diamond [1996] 1 WLR 1351 sharpened the point: information given for a particular purpose, to a defined class who the maker knew would act on it, can found a duty even where there is no contract.
The practical filter, then, is knowledge and purpose. A duty is far more likely where the adviser knew the identity of the person who would rely, knew the specific transaction the advice would be used for, and gave it in circumstances where reliance was the obvious and intended consequence. It is far less likely where the material was general, circulated to an undefined audience, or picked up by someone the adviser never had in contemplation. That distinction — a defined class relying for a known purpose versus the world at large reading a generic document — is the single most useful lens for predicting whether a third-party claim will get past the duty stage.
The common pattern is the spouse of the advised client. Where the IFA knew the advice would be acted on jointly — joint life cover, a couple's retirement plan — proximity is rarely difficult. Foreseeability of loss to the non-contracting spouse is plain. The Financial Ombudsman Service has treated jointly-relying spouses as eligible complainants in their own right where the facts support it, even when only one name appears on the client agreement.
Beyond spouses, the same reasoning reaches other family members who are drawn into the advice. An adult child who attends meetings to arrange equity-release or long-term-care funding for a parent, or a beneficiary named in a trust the adviser structured, may sit close enough to the transaction for proximity to be arguable. The determining factor is again whether the adviser knew that person would rely, not merely that they were present. Advisers reduce ambiguity here by recording clearly who the advice is for, addressing the suitability report to the intended recipients, and documenting where a non-client is expressly told the advice is not directed at them.
Defined-benefit transfer advice is the area where the duty boundary is tested hardest. The structure usually involves:
The position becomes harder where the IFA's research note circulates to other scheme members through a workplace introducer. A generic note that a member finds on the trustee's website, without knowledge by the IFA that it would be relied on by that individual, will usually fail at the proximity stage.
DB transfer work also carries an elevated claims profile that feeds directly into insurability. Because unsuitable transfers can crystallise very large losses — the difference between a guaranteed lifetime income and a depleted pot — individual claim values are high, complaints can arrive years after the advice, and insurers scrutinise this activity closely at renewal. Firms that have carried out DB transfer business should expect specific questions on it in the proposal, and should check that historic advice remains covered on a claims-made basis even after they stop writing new cases.
Lenders relying on a suitability report can bring a claim where the IFA knew the report would be put before them. Sub-purchasers of an investment recommended in a marketing document follow the Possfund logic: if the document was issued to induce the secondary purchase and the IFA knew that, a duty can arise.
These commercial third-party claims tend to be larger and more aggressively pursued than consumer complaints, because the claimant is a business quantifying a defined financial loss. A lender that advanced funds on the strength of a report, or an investor who bought on the back of a circulated recommendation, will look to the adviser's PI cover as the effective source of recovery. That is why the limit of indemnity is not just a regulatory box to tick but a genuine exposure question.
The FCA requires personal investment firms to hold professional indemnity cover, and its rules prescribe minimum limits of indemnity on both a per-claim and an aggregate basis, together with limits on the level of any policy excess relative to the firm's resources. Those minimums are a floor, not a recommendation. Sizing cover sensibly means looking past the regulatory minimum to the firm's actual risk shape.
The relevant inputs are the value of assets advised on, the concentration of that book (a handful of very large cases is a different risk from many small ones), the types of business written — DB transfers, unregulated or illiquid investments, and defined-benefit or high-net-worth advice all push the appropriate limit upward — and the potential for a single event to generate multiple linked claims. Because most PI policies are written on an aggregate basis, a firm with several substantial matters running at once can exhaust a limit that looked comfortable against any single claim. Advisers should also check how defence costs sit against the limit, whether cover is inclusive or in addition, and how the aggregate is reinstated, if at all.
Caparo is the court's test. The Financial Ombudsman Service applies its own statutory standard — what is fair and reasonable in all the circumstances (s228 FSMA 2000). Eligibility under DISP 2.7 is broader than common-law proximity: a spouse who is not a contracting party can still be an eligible complainant where they have a beneficial interest or are a joint policyholder. The practical effect is that an IFA may face an upheld FOS award in a case where a court would have struck out the claim at the duty stage. PI cover should be checked against both possibilities.
This dual exposure — court and Ombudsman — is why the "duty of care" analysis alone is an incomplete picture for an adviser. A firm can be technically correct that no common-law duty was owed and still be directed to pay redress by the FOS on fairness grounds. A well-constructed PI policy should respond to Ombudsman awards and directions as well as to court judgments, and the firm should confirm that the policy's definition of a claim captures a FOS complaint, not only formal legal proceedings.
Mr A consults an IFA about transferring his DB pension. Mrs A attends both meetings, asks her own questions about household income in retirement, and the suitability report is addressed to "Mr and Mrs A". The transfer proceeds; two years later it is unsuitable on the FCA's transfer value analysis criteria. Mrs A sues in her own right. Foreseeability is clear, proximity is established by the IFA's knowledge of joint reliance, and a duty is fair, just and reasonable on the facts. By contrast, a member of Mr A's former scheme who downloads the IFA's generic transfer template from the trustee's portal and acts on it without contacting the IFA is unlikely to establish proximity — the IFA did not know the document would be used by that person for that purpose.
Yes, in principle. The absence of a contract does not end the analysis. If the loss was foreseeable, there was sufficient proximity, and it is fair, just and reasonable to impose a duty — or if you assumed responsibility for a statement the person relied on for a known purpose — a duty of care can arise on the Caparo and Hedley Byrne reasoning. Whether it does turns heavily on what you knew about who would rely and why.
Most adviser PI wordings cover civil liability arising from the professional business, regardless of whether the claimant was a contracting client, provided the liability falls within the insuring clause. The point to check is the definition of covered activities and any exclusions, not the claimant's contractual status. If in doubt, have the wording read before you rely on an assumption.
It should be, but confirm it. Because the FOS applies a fair-and-reasonable standard that is wider than common-law duty, you can face an upheld complaint where a court claim would fail. A policy that only responds to litigation, and not to Ombudsman complaints and directions, leaves a gap. Check that the definition of a claim expressly includes FOS matters.
The FCA sets minimum per-claim and aggregate limits for personal investment firms, but the right figure depends on the assets you advise on, the concentration of your book, and the type of business — DB transfers and illiquid or high-value advice justify materially higher limits. Because cover is usually aggregated, weigh the possibility of several claims in one policy year, not just the largest single case.
Because it generates high-value, long-tail claims. An unsuitable transfer can crystallise a very large loss, complaints can surface years later, and PI is written on a claims-made basis. Insurers therefore ask detailed questions about historic DB work and may apply specific terms to it, so keep clear records and confirm that past advice remains covered even after you cease writing new cases.
For sector context see Apex's guide to PI insurance for IFAs and the parallel accountants' PI guide.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 724952. This entry is general information, not advice on any particular policy.
