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 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.
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 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.
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.
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.
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.
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.
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.