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Financial advisor should exercise reasonable skill and care by Cleo van Rooyen

In the case of Oosthuizen v Castro (Centriq Insurance Co Ltd as Third Party) [2017] 4 All SA 876 (FB) the court confirmed the duty of a financial advisor to act with reasonable skill and care.

Facts of the case:

Mrs Oosthuizen (“Oosthuizen”), a widow, inherited a substantial amount from her husband’s estate. She approached Mr Castro (“Castro”) for investment advice. Following his advice, Oosthuizen invested in a specific fund and eventually lost all her money. She then sued Castro for the damages. Castro’s professional indemnity insurer joined the action as a third party. Both denied liability for the loss.

Castro’s liability to his client:

The court accepted that Oosthuizen’s investment and eventual financial loss resulted from Castro’s advice. Oosthuizen based her claim on Castro’s contractual duty to her, alleging that he failed to act honestly and fairly, that he misrepresented the negative media reports on the investment company, that he did not exercise reasonable care when advising her, and that he failed to exercise the degree of skill, care and diligence that is expected of someone in his position. The judge took into account the personal circumstances of Oosthuizen: she was a widow with a young child and in a vulnerable position. In this case several financial journalists had warned investors about this type of investment. Castro was aware of this but failed to investigate the risks and to warn Oosthuizen. Castro was held to be negligent and even dishonest in his advice to Oosthuizen. He failed to exercise the required degree of skill, care and diligence one would expect from a financial advisor and he was liable to repay to Oosthuizen the amount she had invested.

The liability of the professional liability insurer to indemnify Castro:

The insurer denied liability stating to Castro, relying on an exclusion clause in the insurance contract. This clause excluded the insurer’s liability in respect of claims for loss arising from depreciation in value of investments. The court rejected this argument, deciding that the claim was based on Castro’s negligent advice and not on a representation, guarantee or warranty in respect of the value of the investment. The claim for loss in this case therefore fell outside the ambit of the exclusion clause and the insurer was liable to indemnify Castro to the extent of his liability to Oosthuizen.

This judgment confirms the contractual duty owed by financial advisors to clients, to exercise reasonable skill and care when advising on investments.