In R (on the application of Aviva Life & Pensions (UK) Ltd) v Financial Ombudsman Service & ors  EWHC 352 (Admin), the Administrative Court held that a decision of the Financial Ombudsman that an insurer’s avoidance of a consumer life policy was not fair and reasonable, notwithstanding that the insurer was entitled to do so under the relevant law, was not Wednesbury unreasonable. The Financial Ombudsman is free to depart from the relevant law in deciding what is fair and reasonable in all the circumstances.
In November 2013 Mr McCulloch took out a life policy (the Policy) with terminal illness benefit with Aviva. When applying he declared that he was not undergoing any medical investigations, experiencing symptoms or awaiting any test or investigation. However, at that time Mr McCulloch had been referred by his GP for psychiatric assessment, and was awaiting a CT scan. Following the CT scan, Mr McCulloch was diagnosed with Fronto-Temporal Dementia, a terminal condition, the effects of which he was suffering from at the time of applying for the Policy. He notified Aviva of a claim for terminal illness benefit in December 2013.
Aviva declined the claim and avoided the Policy for misrepresentation, and in June 2014 a complaint was made to the Financial Ombudsman Service (FOS). The FOS upheld Mr and Mrs McCulloch’s claim. Whilst acknowledging that the psychiatrist referral and scan were treatments Mr McCulloch should have disclosed, the FOS held the misrepresentation in not doing so was innocent, taking into account Mr McCulloch’s condition. The FOS directed that Aviva should reinstate the Policy on its original terms and consider Mr McCulloch's terminal illness benefit claim.
Aviva filed an application for judicial review seeking a quashing order on the basis that the FOS’s decision was Wednesbury unreasonable. The FOS consented to a quashing order on the grounds that the decision was inadequately reasoned, but denied that it was Wednesbury unreasonable.
Rules of the FOS and the relevant law
Section 228(2) of the Financial Services and Markets Act 2000 (FSMA) provides that the FOS is to determine complaints “with reference to what is, in the opinion of the ombudsman, fair and reasonable in all circumstances of the case”. FCA Handbook Rule DISP 3.6.4R clarifies that, in deciding what is fair and reasonable, the Ombudsman will take into account, amongst other things, the relevant laws and regulations.
Sections 2 and 3 and Schedule 1 to the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) provide that an insurer is entitled to avoid a contract of consumer insurance for a careless representation, if it would not have accepted the risk at all had the representation not been made. The standard of care required is that of a reasonable consumer.
Do the FOS’s Rules permit it to depart from the relevant law?
It was agreed by all parties that Aviva was entitled under CIDRA to avoid the Policy for careless misrepresentation, and thus Aviva’s decision to do so was in accordance with the relevant law. Aviva submitted that that was the end of the matter. It submitted that the question for the court was whether it could be rationally (in the Wednesbury sense) said that its decision was not fair and reasonable, and as it had followed the relevant law it could not be so.
The FOS submitted its role was not to conduct a quasi-judicial review of Aviva’s decision, but to determine itself whether that decision was fair and reasonable. The question for the court was thus whether that determination was irrational. As DISP 3.6.4R only obliges the FOS to take into account, amongst other things, the relevant law, it was open to a rational Ombudsman to conclude that conduct in accordance with the relevant law was nevertheless not fair and reasonable in all the circumstances.
Mr Justice Jay rejected Aviva’s submissions. He held that the logic of those submissions would force the FOS to reject any complaint where the relevant law had been followed. However, s228 FSMA and DISP 3.6.4R were clear that the FOS is to carry out its own assessment of whether a decision was fair and reasonable, in which compliance with the relevant law was but one factor. Following the decision of the Court of Appeal in R (Heather Moor & Edgecomb) v FOS  EWCA Civ 642 he held that it was open to the FOS, acting rationally, to find that a decision made in accordance with the relevant law was nevertheless not fair and reasonable in all the circumstances.
Mr Justice Jay thus found that it was open to the Ombudsman to hold that Aviva had not acted fairly and reasonably, despite following the relevant law and practice. Accordingly, the FOS’s decision was not Wednesbury unreasonable.
This case serves as a reminder to those subject to the jurisdiction of the FOS that there are two related but distinct standards to which they are held: have they complied with the relevant laws, codes of practice and regulatory guidance; and is the outcome fair and reasonable in all the circumstances. Meeting the first does not automatically ensure compliance with the latter and thus financial services firms cannot always rely on their legal rights against a consumer in complaints before the FOS. When considering whether to fight or settle consumer complaints, financial services firms will need to evaluate not only any risk of non-compliance with their legal and regulatory obligations, but, as an independent factor, the risk that the outcome will be viewed by the FOS as not fair and reasonable.
These twin standards create both uncertainty as to the outcome of FOS complaints, and the possibility of diverging outcomes between complaints to the FOS and claims brought in the courts on the same issues. Mr Justice Jay expressed concern on this possible divergence of standards and the lack of clarity in the relationship between what the law proscribes and what is fair and reasonable; he also acknowledged that Aviva would have succeeded had this claim been brought in the County Court. However, as the case law and statutory regime governing the FOS currently stands, it is clear that the FOS does have the discretion to depart from the relevant law in deciding what is fair and reasonable.
This case also serves as a reminder of the respective roles of the FOS and of the Administrative Court in dealing with consumer complaints. The FOS’s role is not to judicially review financial services firms’ treatment of their customers, but to decide for itself whether that treatment was fair and reasonable in all the circumstances. Thus the FOS will apply objective reasonableness and fairness tests to complaints. However the Administrative Court will only quash a decision of the FOS on reasonableness grounds if that decision was unreasonable in the more limited Wednesbury sense. Thus in matters where a number of legitimate decisions or actions were open to the relevant firm, the FOS will not afford the firm the same degree of latitude in judging its decision that the Administrative Court will give to the FOS.