Solicitors often come across clients with claims against banks and other financial institutions concerning failure to operate accounts correctly, including failure to carry out the client’s instructions, leading to loss on the client’s account which would otherwise not have occurred. There may be an element of loss of opportunity i.e. the alleged wrongdoing preventing the client from making an investment or investments which would, in turn, have yielded a further return. In recent years there has been a surge in these claims, but care is needed in assessing such cases, especially as it is may be difficult to distinguish between general market volatility and wrongdoing, if any, on the part of a bank.
These are complex cases, and will include a consideration of issues such as liability on the part of the financial institution, whether any regulatory guidelines were breached in the operation of the accounts, and whether the client’s actions contributed to the loss suffered. Once the legal and factual issues have been considered, and advice taken on the strength of the case, attention will turn to quantifying losses. The nature of the loss will come from the way in which the account is operated.
Adam Stronach is a director at Harwood Hutton Limited, an accountancy practice, and a member of the Network of Independent Forensic Accountants (“NIFA”). He has worked on expert cases concerning the operation of client accounts. “In one case, the allegation was that the bank had failed to operate a corporate client’s current and deposit accounts correctly. When the current account was about to go into overdraft, there should have been an automatic transfer of funds from the deposit account, but such transfers were not taking place. The client’s cheques weren’t honoured and it went into liquidation, claiming that had the bank operated the account correctly this course of events could have been avoided.”
More recently, Adam gave evidence in a High Court case concerning a failed investment. “In these cases, financial modelling is key. It is important to understand how the accounts were being operated absent the matter complained of. Depending on the allegations and counter allegations, it may be necessary to look at what was intended to happen, including whether there was a loss of opportunity to undertake further investments. In all cases, reconstructing the accounts and the returns made can be a complex and detailed piece of work. But once the expert is content that the financial model is robust, it can be used to consider different possible outcomes i.e. what if scenarios, providing clients and the courts with valuable analysis of the likely loss.”
Loss of opportunity is different in concept to loss of profits. Loss of profits is regarded as a pure economic loss. But a distinction is usually drawn between past economic loss to the date of trial and future economic loss which is much less certain. Loss of opportunity arising from the acts of a financial institution represents the chance to earn a return in the future, and the claimant has to show the court that he or she would have had a good chance of obtaining such returns. The expert’s role in such cases is to calculate the value of the lost opportunity, and it is for the court to determine whether a discount, if any, should apply to such loss calculations because of the uncertainties in obtaining the returns it is claimed would have been made. It can be costly for the financial institution concerned depending on the rates of return accepted by the court and the period over which such returns apply. So early advice on liability and loss should be sought.
The expert accountant will need to make assumptions about what the additional returns might be. The main reason a client may have chosen the original investment, which was subsequently denied, was because of a belief that it would realise better than average returns when compared to the rest of the client’s portfolio. One method is to look for comparable investments i.e. if I lost the chance to make a particular investment, is there a comparable investment that I could have made instead. But finding such a comparator can be very difficult, especially if the original investment was unique in nature and not capable of replication.
In summary, in any claim for loss in a case against a financial institution there needs to be very careful consideration of liability issues, in the context of the facts of the case. This is before loss experts attempt to measure what the losses might be including the loss of opportunity that might flow from investments that the client alleges it was prevented from making. Careful financial analysis and modelling are important to assessing losses in these cases and engaging an expert with the appropriate experience is key when quantifying the impacts of the alleged wrongdoing.