The High Court has confirmed that the Financial Ombudsman Service ("FOS") does have to consider relevant law when considering complaints but does not have to apply it strictly if in the view of the Adjudicator, it would lead to a conclusion contrary to what is fair and reasonable in all the circumstances. However, if the FOS does depart from the law, it must provide detailed reasons.
R (Aviva Life & Pensions (UK) Ltd) v Financial Ombudsman Service  EWHC 352.
The FOS jurisdiction
FOS provides an independent and informal complaint resolution procedure for the financial services industry without the need for resort to the courts. FOS's jurisdiction derives from Part XVI of the Financial Services and Markets Act 2000 ("FSMA 2000"). The rules governing complaints-handling by FOS are set out in the FCA Handbook. Principally, a complaint is to be determined with reference to what is, in the opinion of the Ombudsman, fair and reasonable in all the circumstances of the case.
In considering what is fair and reasonable in all the circumstances of the case, the Ombudsman will take into account relevant: (a) laws and regulations; (b) regulators' rules, guidance and standards; (c) codes of practice; and (d) what was considered to be good industry practice at the relevant time. Case law has established that the words "in the opinion of the Ombudsman" recognise that the Ombudsman may be subjective in arriving at its opinion of what is fair and reasonable. However, if the determination is perverse or irrational, that determination is liable to be set aside.
In July 2006 Mr and Mrs McCulloch took out a joint life policy ("the joint life policy"). At some point before August 2013, Mr McCulloch developed dementia. In early August 2013 Mr McCulloch, with the written consent of Mrs McCulloch, cancelled the joint life policy. In November 2013, Mr McCulloch applied to Aviva for a single life policy with terminal illness benefit ("the single life policy"). The application did not disclose that he had been consulting his GP in relation to possible mental health issues since September 2013, that Mr McCulloch had been referred for psychiatric assessment, and that he was awaiting a CT scan. Aviva accepted Mr McCulloch's application.
Following the result of his CT scan, Mr McCulloch's dementia was diagnosed. On 11 December 2013 Aviva was informed that Mr McCulloch was in a hospice, that his condition was terminal, and that the family wished to notify on his behalf a claim for terminal illness benefit.
Aviva declined the claim on the grounds of misrepresentation, and avoided the policy. It was accepted that Aviva had acted in accordance with the law in declining cover. A complaint was submitted to FOS regarding Aviva's handling of policies. The principal focus was Aviva's failure to discharge its ethical and moral obligations. The complaint regarding the joint life policy was rejected but the complaint regarding the single life policy was upheld. The Adjudicator reasoned that Mr McCulloch's non-disclosures were due to his illness and were innocently made. Aviva disagreed with the Adjudicator's conclusions and the case was referred to an Ombudsman for final determination. The Ombudsman upheld the complaint regarding the single life policy.
Aviva issued proceedings seeking an order quashing the decision. In its Acknowledgement of Service, FOS accepted that more detailed reasoning could have been provided and consented to a quashing order but limited its concession to inadequacies in its Ombudsman's reasons. FOS did not accept other allegations and criticisms of the decision, including the contention that the decision was unreasonable. Notwithstanding FOS’s concession that the decision should be quashed, Aviva sought a determination of the Court regarding the reasonableness of the Ombudsman’s decision.
The Court found that FOS was right to concede at the earliest possible stage that the Ombudsman's determination was flawed for inadequacy of reasons. Whilst the Ombudsman had not followed relevant law, guidance and practice, she was not required to do so but it was incumbent on her to explain why she did not. That was settled law and the Court affirmed it.
The second question for the Court was whether the Ombudsman's decision was irrational, in the sense of being "so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it" (referred to as Wednesbury unreasonableness).
It was not in dispute that Aviva followed the relevant law, guidance and practice. The Court found that in that sense, and to that extent, it could not rationally be said that what Aviva did was wrong, unfair or unreasonable. However, the inquiry was wider than that question because it is open to the Ombudsman to decide that the insurer did not act fairly and reasonably despite its adherence to sound legal principle, guidance and practice.
The Court could not conclude that it would be outrageous to hold an insurer to its contract in the unusual circumstances of this case. Despite the policy direction that the relevant area of law has taken, as well as guidance and codes of practice that reflect it, an Ombudsman properly directing itself as to its powers could reach a different view. In reaching such view, the Ombudsman would need to support the determination by careful reasons, which had not been done in this instance, but the Court could not find that the decision was Wednesbury unreasonable.
The Ombudsman's Final Decision was quashed and FOS was ordered to pay Aviva’s costs up to and including the costs of filing the Acknowledgement of Service. However, Aviva was ordered to pay the costs of the FOS thereafter: Aviva should have accepted the FOS's offer.
The decision reaffirms the position that the FOS is not bound to follow strictly the law when making its determinations but must instead make decisions that are “fair and reasonable in all the circumstances”. The law in this regard has not changed but the High Court has made it clear that this is the correct approach. The case does highlight that where a determination departs from law and common practice, the FOS should be expected to provide detailed reasons and the FOS should be held to account in that regard.
When responding to FOS complaints, financial institutions should ensure that all relevant information is passed on to the Adjudicator. Fairness and reasonableness is not just about the interests of the complainant, but must also accommodate the commercial interests of the financial institution so it is important to consider submissions carefully and not simply focus on the legal merits of the dispute.
The Court did express concerns about the FOS jurisdiction “which occupies an uncertain space outside the common law and statute”. The Court recognised that the relationship between what is fair and reasonable, and what the law lays down, is not altogether clear. The Judge noted that the approach of the Court to date has been to assert that a sufficient connection exists between these two categories because (i) the legal principles and rules are clear, and (ii) the Ombudsman must give clear reasons when departing from the law.
The Judge’s comments are interesting because they highlight concerns about who, or what, “defines the contours and content of fairness and reasonableness”. In circumstances in which financial institutions may be conducting themselves entirely within the remit of the law and in accordance with industry practice, the FOS jurisdiction creates uncertainty for their complaints handling teams. Whilst the judicial position in relation to the FOS jurisdiction is clear, with the prevalence of claims being referred to FOS, it is likely that the tension between the law and what is fair and reasonable, will be thrust into the spotlight again.