Aviva Life & Pensions (UK) Ltd v. Financial Ombudsman Service [2017] EWHC 352 (Admin)

The High Court has upheld an application for judicial review by Aviva, which had challenged a decision made by the Financial Ombudsman Service (FOS).

The decision made by FOS arose from Aviva’s avoidance of a life insurance policy on the grounds that the policyholder, Mr McCulloch, failed to make relevant disclosures in his application. Mr McCulloch was suffering from a rare form of dementia; FOS determined that it was Mr McCulloch’s illness that resulted in the non-disclosure rather than any carelessness or negligence on behalf of the policyholder. FOS also determined that Mr McCulloch’s policy be reinstated. This ran contrary to the relevant law (s2 and s3 of the Consumer Insurance (Disclosure and Representations) Act 2012) which allows an insurer to void a policy in the event of a careless misrepresentation.

Aviva applied for judicial review on two grounds. The first was that, whilst FOS could depart from the law under s228(2) of the Financial Services and Markets Act 2000 (FSMA), the Ombudsman failed to follow the requirements set out in (Heather Moor and Edgecomb Ltd) v. FOS [2008] EWCA Civ 642 by failing to provide detailed reasons for the decision to depart from the relevant law. It is worth noting that FOS had already conceded it failed to comply with the requirements in Heather Moor. The second ground was that the Ombudsman had shown Wednesbury unreasonableness (i.e. that no rational person who had applied their mind to the case could have reached that conclusion) in departing from the relevant law.

The court concluded that FOS had not followed the procedure set out in Heather Moor and quashed the finding that Aviva should reinstate Mr McCulloch’s policy. Despite this finding, Jay J held that Mr McCulloch’s complaint remained live and would need to be redetermined by FOS.

The more significant finding was that the court disagreed with Aviva that the Ombudsman had not demonstrated Wednesbury unreasonableness in departing from the law. Whilst the court accepted Aviva had followed the relevant law and guidance, it was not irrational under the “unusual circumstances” for the Ombudsman to uphold Mr McCulloch’s complaint. There was no evidence of carelessness or negligence on behalf of Mr McCulloch; it was his illness that led to his failure to comply with the law. The law did not make a provision for innocent misrepresentations; accordingly it was not implausible for FOS to believe that reinstating the policy would be fair and reasonable. The judge acknowledged that making such a finding may suggest that FOS was free to apply a general policy in contradiction with the law. To that end, Jay J indicated that FOS would likely have to explain its broader rationale for such a policy decision in the future. Interestingly, the judge expressed his personal concerns with the jurisdiction of FOS and its ability to depart from the established law. Apart from the Ombudsman being required to give detailed reasons when it decides contrary to the law, Jay J stated that he was not entirely satisfied that the relationship between what is fair and reasonable, and what the law lays down, has been sufficiently defined by the Court of Appeal. Further, the breadth of FOS’ discretion under s228(2) does not absolve it from consistency when it comes to making decisions.

The decision in Aviva is significant for insurers even if the case appears to simply apply the law set out in Heather Moor. That is, any complaints upheld by FOS which involve a contradiction of the law will need to contain detailed reasons explaining why such a contradiction was fair and reasonable in the circumstances, and a failure to provide those reasons should result in that decision being quashed. However, insurers will need to be aware that this will not defeat a complaint entirely; it will lead to a redetermination of the complaint by FOS and may result in the same decision being made.

More significantly, the requirement for FOS to provide detailed reasons may open the decision up to a claim of Wednesbury unreasonableness if the decision can be shown to be so irrational that no other Ombudsman would have reached the same conclusion. Whilst that claim was unsuccessful on this occasion the facts in Aviva are unique; the case involved a party with unusual circumstances (a rare illness leading to a failure to disclose that illness) and it is likely be limited to its facts in future judgments. Further, whilst obiter, Jay J’s concerns regarding FOS’ powers under s228(2) FSMA 2000 may indicate that there is a gap in the law which requires further judicial clarity.