The recent FCA Final Notice against Foreman Financial Services Ltd (FFSL) is a timely demonstration of why firms should take decisions of the Financial Ombudsman Service (FOS) seriously, even when they disagree with them.
The complainant (Mr C) received advice from FFSL to transfer his existing pension to a Self-Invested Personal Pension (SIPP), through which he could invest in an overseas property (Harlequin). Mr C's entire pension pot was being used to fund the deposit on Harlequin, with the balance of funds being raised by way of a loan. Harlequin was never completed and Mr C effectively lost his pension pot.
Mr C was in fact the pre-existing client of another financial adviser who had attended the Harlequin presentation with Mr C and who was (presumably) in favour of Mr C investing in Harlequin. However, that adviser was not authorised to give pensions advice and so referred Mr C to FFSL for the sole purpose of arranging the SIPP and facilitating the investment in Harlequin.
In a decision dated 9 September 2016, the Ombudsman found that Mr C was already heavily exposed to property and the transfer of his pension pot to the same sector represented an unsuitable and highly risky investment, even for someone with a "dynamic" attitude to risk. Harlequin was additionally a very risky proposition. The Ombudsman found that, despite the prominent role of the other adviser in the causal chain, FFSL was under a duty to give Mr C suitable advice as to the wisdom of the SIPP and the Harlequin investment. The Ombudsman found that, had Mr C been given suitable advice, he would not have transferred his pension to a SIPP. The Ombudsman then set about determining what was, in his view, a "fair" calculation of the damages to be paid to Mr C. The Ombudsman's decision consisted of a quantification methodology for FFSL to follow rather than a set figure.
Mr C accepted the Ombudsman's decision, which then became binding on FFSL under s.228(5) of the Financial Services and Markets Act 2000 ("FSMA"). FFSL did not elect to challenge the decision at this stage, however failed to pay out on the Ombudsman's decision. Whilst the details are not provided, it appears that both the FOS and the FCA requested FFSL make payment on a number of occasions. Whether its failure to pay was a point of principle or solvency, is not clear from the Final Notice.
The FCA determined that FFSL had breached DISP3.7.12R(1) which requires an authorised firm that is the subject of an adverse FOS determination to pay out on the award. The FCA also determined that FFSL had acted in breach of Principles 6 and 11 of the FCA's Principles for Businesses, namely treating customers fairly and being open and co-operative with the FCA. Most significantly, the FCA determined that by virtue of these events, FFSL was not satisfying the suitability Threshold Condition (set out in paragraph 2E of Schedule 6 of FSMA). This requires (amongst other matters) that an authorised firm be fit and proper, conducting its affairs in a sound and prudent manner and appropriately having regard to the interests of consumers.
The Enforcement Guide (EG 8.5.2) provides the non-payment of a FOS award as an example of the type of circumstance that may cause the FCA to cancel a firm's permissions. As such, the FCA's action against FFSL is, whilst in one sense surprising, not without foundation.
Many firms receive decisions from the FOS with which they disagree. The process of decision making by the FOS can often be opaque and slow, especially in more complex or fact-heavy cases leading to disenfranchisement in the process. The fairness approach adopted by the FOS (mandated by DISP3.6.1R) may be at odds with a firm's own assessment of its legal position. Also, whilst there are no formal precedents, decisions of the Ombudsman are publicly available. An adverse decision can therefore have wider consequences, either to the firm's reputation or by encouraging other claims. Whilst it is open to a complainant to seek to enforce an Ombudsman's award through the Courts, for many this is prohibitively expensive. All of these factors may cause a firm to cynically refuse to pay out on an adverse decision.
The Final Notice in FFSL shows why such an approach would be very unwise as it puts the very future of the firm on the line. Additionally, whilst not an approach the FCA appears to have taken in the FFSL matter, there is no reason why senior managers could not also be subject to individual FCA enforcement action as being "knowingly concerned" in the firm's breach. In short, FOS decisions should be taken seriously. Firms are advised to engage as best they can with the FOS process before decisions are taken and then, if they are subject to an adverse award, either appeal it (ultimately through to a judicial review) or satisfy it through payment up to at least the statutory maximum (currently £150,000 per claim). There is no suggestion that firms might suffer a similar fate to FFSL if they do not pay out the full recommended amount, if more than the FOS' enforceable maximum.
Assuming that Mr C has not yet received any money, then his only recourse may now be against the Financial Services Compensation Scheme.