Employers are increasingly providing employees with access to independent financial advice to support their financial wellbeing. To encourage greater employee take-up, employers may also pay for that advice. In particular, this is the case in relation to pension matters, given that the employer's pension arrangement is likely to be the most valuable benefit to the employee.

In recent years, there has been a marked increase in "pension liberation" fraud. This is where employees have been persuaded to transfer their pension benefits to an unregulated scheme, usually with the promise of being able to access their pension before the age of 55 (the minimum age that a pension can generally be paid), with penal tax charges for the employee and loss in pension savings. This has again emphasised the importance of the employer in supporting employees to have access to an independent financial adviser (IFA).

The benefits to the parties are clear. Employees will have access to an IFA on whom it is to be expected that the employer will have carried out due diligence, instead of being left to find one for themselves in the market. Employers may be able to negotiate better commercial terms where they engage a particular adviser than where they are paying towards an IFA of an employee's choice.

There are, however, risks for the employer if the employee suffers a loss as a result of negligent advice given (or fraud) by the IFA.

Employer duty of care

All employers owe a common-law duty of care to their employees. Employers have a duty to ensure the health, safety, welfare and mental wellbeing of their staff. This duty of care extends to provision of information, instruction and training, and is a personal, non-delegable duty. It cannot be discharged by entrusting the safety of one employee to another, or to an independent contractor.

Therefore, where an employee has suffered a loss as a result of negligent advice given by an IFA, the employee could make a claim against the employer. The employee could try to argue that the employer has breached its duty of care, where the employee's loss is attributable to any neglect on the employer's part when selecting and engaging the IFA and monitoring the suitability of the IFA after its engagement.

Can the employer be vicariously liable?

An employer can be vicariously liable for the actions of its employees or agents. It is difficult to establish that an employer has an employment relationship with the IFA, as the IFA would generally be a company independent of the employer carrying out its own independent business.

An employer could, however, be vicariously liable for its agents.

In the case of Frederick & ors v. Positive Solutions (Financial Services) Ltd [2018] EWCA Civ 431, the court considered whether an employer was liable to its employee for the fraudulent actions of an IFA whom the employer had engaged. In this case, the employee (and his family) of Positive Solutions remortgaged their property to invest in a fraudulent investment scheme set up by the IFA that had been engaged by the employer and, as a result, lost all their money.

In the first instance decision, the court decided that the employer, Positive Solutions, was vicariously liable for the loss caused by the agent. Although the IFA was not an employee of Positive Solutions, Positive Solutions had assumed the liability for the actions of the IFA when recommending it to its employee. The decision was overturned on appeal.

To determine vicarious liability, outside an employment relationship, the court considered the following tests: (a) was harm wrongfully done by an individual who carries on activities as an integral part of the business activities carried on by the defendant and for its benefit (rather than his activities being entirely attributable to the conduct of a recognisably independent business of his own or of a third party); and (b) was the commission of the wrongful act a risk created by the defendant by assigning those activities to the individual in question? The Court of Appeal held that the employer could not be held vicariously liable for the loss the employee suffered because: (i) the misappropriation of the monies by the IFA was not done in any way as an integral part of Positive Solutions’ business activities; and (ii) it did not occur within the course of the IFA’s agency. In addition, the employer was unaware of the agent's acts which meant that the second stage of the test to establish a duty could not be satisfied.

The case highlights that the bar for establishing that the employer is vicariously liable for the actions of an IFA is quite high.

Steps employers can take to mitigate risks

• The key step that an employer could take to mitigate its potential liability is to carry out its due diligence on the IFA. This should be done not only before appointment, but also throughout the engagement of the IFA by the employer. If, at any time, the employer becomes aware of any negligent advice (and certainly of any fraudulent activity by the IFA), it should consider terminating the arrangement.
• Although clearly relevant factors, selecting an IFA purely on the basis of price, or because a previous business relationship exists between the employer and the IFA, should be avoided. Selection should be on the basis of wider, careful and documented due diligence.
• Checks should be carried out that the IFA is, and continues to be, authorised by the FCA. An employee could be entitled to compensation of up to £85,000 from the Financial Services Compensation scheme in certain circumstances, where the IFA is FCA registered.
• The employer should make it clear to its employees that the selected IFA is not the only option available on the market and that there are other IFAs that can provide similar services. The employer should also state that it does not personally endorse any independent advice provided by the IFA and will not be liable for the advice.
• Where the employer is paying for the advice, it should also consider offering to pay/make a (fixed) contribution to an IFA of the employee's choosing. This would avoid any argument that the employee had been encouraged or induced to use the employer's IFA only.
• The terms of the agreement with the IFA should be considered carefully:
  • The termination provisions should be flexible enough to allow the employer to terminate the agreement without delay where negligent advice has been given, or immediately where there is evidence of any fraud or the IFA ceases to be FCA authorised.
  • Cross indemnities. In Frederick & ors v. Positive Solutions (Financial Services) Ltd [2018] EWCA Civ 431, the Court of Appeal held that the indemnity from the IFA in favour of Positive Solutions did not impact on the issue of whether Positive Solutions was vicariously liable. It is not unusual for IFAs to seek indemnities from the company. These should be resisted on commercial grounds (the IFA is getting paid for the advice it provides and must accept liability) but also because it could be compromising the independence of the IFA (i.e. if the employer is effectively standing behind any liability the IFA could owe to the employee).

The pensions angle

In the context of pensions, the law actually requires an employee to obtain appropriate independent advice when transferring any defined benefits they may have to a money purchase arrangement, where the benefit is valued at £30,000 or more.

Where the transfer is employer-instigated, employers must pay for appropriate independent advice where they, or the trustees of the pension scheme, write to the members and set out the option to transfer in terms that encourage, persuade or induce a request to transfer.

The Pensions Regulator has issued guidance for employers in this area, which employers should aim to follow.