An earlier version of this article first appeared in the September 2017 issue of Butterworths’ Journal of International Banking and Financial Law.

In Full Circle Asset Management Ltd v Financial Ombudsman Service Ltd [2017] EWHC 323 (Admin) the Administrative Court refused to quash a decision of the Financial Ombudsman Service Ltd (FOS) following allegations that the Ombudsman had erred in law by departing from a regulator’s standard without justification. The case illustrates the approach that FOS will take when determining a customer complaint and the inherent difficulties in challenging a FOS decision by way of judicial review.


Full Circle Asset Management Ltd (FCAM) provided Mrs King with a model portfolio discretionary investment service. Retired and in her early 60s, Mrs King required an income of £1,200 per month. According to FCAM’s 'attitude to risk and loss' document she was a 'medium risk investor'. FCAM sent her a suitability letter proposing that she open an investment account which FCAM would manage along the lines of its model portfolio. Mrs King duly transferred about £450,000 to FCAM.

Over the next 15 months Mrs King lost some £90,000 on her investment. She complained to FCAM and later to FOS, arguing that her money had been invested in a portfolio which was too risky. FOS upheld her complaint and FCAM subsequently sought a judicial review of FOS’s decision.

The legal framework

S.228(2) of the Financial Services and Markets Act 2000 stipulates that a complaint should be determined by reference to "what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case".

As part of the complaint handling rules in the FCA Handbook, DISP3.6.4R provides that when considering what is fair and reasonable in all the circumstances of the case, the Ombudsman will take into account:

"(1) relevant (a) law and regulations; (b) regulators’ rules, guidance and standards; (c) codes of practice;…"

FCAM sought to challenge the Ombudsman’s decision on the basis that:

  • Mrs King had been prepared to accept a "medium risk"
  • The portfolio she invested in had been "medium risk"
  • A skilled person’s report (SPR) had confirmed that the portfolio was properly characterised as "medium risk"
  • The SPR had been accepted by both the Financial Services Authority and its successor, the Financial Conduct Authority (FCA), and this set a regulator's standard which should have been taken into account when considering what was "fair and reasonable in all the circumstances of the case"
  • The Ombudsman had erred in law by failing to explain why he had departed from this standard and his decision should be quashed

Judicial Review

In a judicial review the court is limited to reviewing the process by which a decision was made so as to assess whether the decision is fundamentally flawed due to some illegality, irrationality or procedural unfairness or because some legitimate expectation has not been met. It is not an appeal on the facts unless it can be shown that a factual finding was infected with legal error. In the instant case, the court noted that contrary to FCAM’s position, the Ombudsman had made a key finding of fact that FCAM had made a personal recommendation to Mrs King. That finding was not open to challenge in the judicial review.

In considering the Ombudsman’s approach the court noted that he had not disagreed with the SPR’s conclusion that the overall portfolio was of medium risk generally, nor that the FCA had accepted this. He simply did not think that the SPR’s conclusion disposed of Mrs King’s complaint. In his view FCAM had made a personal recommendation and that meant that it should have carried out a proper suitability review in light of Mrs King’s specific circumstances rather than relying on its rather crude classification of her as an 'average risk investor'. Having examined what FCAM knew, or should have known, about Mrs King’s personal circumstances, the Ombudsman had concluded that the portfolio was unsuitable for her. It was not geared to produce adequate income and contained an excessive proportion of higher risk investments. She did not have the investment expertise to understand the inherent risks. Had she done so, she would not have made the investment.

Whilst FCAM had alleged that it was procedurally and substantively unfair that having had its Model Portfolios approved as medium risk by the FCA it should then be confronted by a FOS decision which criticised it for using one of those portfolios for a medium risk investor, the court was satisfied that the Ombudsman had not departed from the industry standard set by the FCA. There was no unfairness or breach of the European Convention on Human Rights. The Ombudsman had dealt comprehensively with the evidence and arguments addressed to him and had explained his reasons fully.

The grounds for bringing a judicial review are narrow. Whilst FOS should take regulators’ standards into account, such standards will not necessarily be dispositive; the Ombudsman must consider what is fair and reasonable in "all the circumstances of the case". The crucial point here was the finding that a personal recommendation had been made. That brought the issue of suitability into play.

If suitability is an issue, investment managers must take heed of the FCA’s Principles for Businesses and the Conduct of Business Source Rules. It will not be sufficient to simply evaluate a customer’s general appetite for risk and then match that with a product of similar risk profile. There must be a deeper understanding of the customer’s specific needs and objectives, their expertise and capacity for loss.