He who dares, loses...

This year saw another IFA try to take a stand against the Financial Ombudsman Service. The battle ground: case fees and the injustice of deciding a complaint on the basis of what is ‘fair and reasonable’ (s228 FSMA 2000), even if it flies in the face of the common law position.  

The two issues were dealt with in separate cases. The first, a complaint about inappropriate advice to leave a final salary pension1. An adverse finding by the adjudicator was upheld by the Ombudsman on the basis the decision was “fair and reasonable”.  

The Court of Appeal held that the words “fair and reasonable in all the circumstances of the case” would have been unnecessary and inappropriate if Parliament intended the Ombudsman to determine the complaint in accordance with the common law. In addition, the power was clearly subjective. If the Ombudsman was deciding a complaint on the basis of the common law he would be bound by what the law is and not what he considered the law to be.  

The Court reconciled this outcome with the firm’s right to a fair hearing under Article 6 of the Human Rights Act. The Ombudsman is required to take into account the relevant law, regulations, regulators’ rules and guidance and standards, relevant codes of practice and, where appropriate, what he considers to have been good industry practice at the relevant time. He is free to depart from the relevant law, but if he does so he should say so in his decision and explain why it was reasonable to hold the advisor liable.  

There does, however, have to be consistency in the Ombudsman’s decisions in order that firms can be assured that they will not be liable to their client in the absence of some “exceptional factor”, particularly as the FSA has moved from rule based to principle based regulation. Whilst the judicial review was unsuccessful on these facts, watch this space as to whether the door has been left ajar for other firms to take a stand where the Ombudsman fails to treat like cases alike.

Case fees

The second case concerned endowment mortgage schemes2. The firm contended that the requirement for a firm to pay a case fee, even though the Ombudsman had dismissed the complaint, was unreasonable and unlawful on the basis it had only become payable as a result of the Financial Ombudsman Service’s failure summarily to dismiss the complaint when it was first made.  

The court was not persuaded. It held it was far from clear that the Ombudsman owed a duty to the firm to consider summary dismissal. We suspect the prevailing reason, however, is that there were a host of public policy reasons for finding in the Ombudsman’s favour. The Court of Appeal was keen to avoid a scenario where a liable firm could avoid paying a fee on a technicality (because summary dismissal was not considered). It also wanted to avoid making the collection of case fees subject to inquiry and dispute and to litigation as firms challenged whether the complaint should have been summarily dismissed.  

Leave to appeal to the House of Lords has been refused in both cases.

2. Financial Ombudsman Service v Heather Moor & Edgecomb Ltd [2008] EWCACiv 643