The Financial Ombudsman Service ("FOS") has recently issued a provisional decision upholding a complaint regarding alleged mis-selling by a bank recommending investment in the AIG Enhanced Variable Rate Fund ("EVRF"). In summary:

  • The investors invested around £3.2 million in the EVRF in early 2008 following the bank's recommendation to do so. AIG suspended withdrawals from the EVRF in September 2008, due to the large number of withdrawal requests it had received following media speculation as to the financial viability of its American parent company. The investors suffered a significant loss following the subsequent closure of the EVRF in December 2008.  
  • The bank had rejected the investors' complaint on the basis that, in normal circumstances, the EVRF provided a high level of capital security and was suitable for very low and no risk investors looking for a high rate of return.
  • The FOS upheld the complaint on the basis that "extreme market risks are an established risk of all investments" and although the "precise form of these events may not have been predicted [...] that does not mean they were not foreseeable." The investors were awarded the maximum available under the FOS jurisdiction of £100,000 plus interest. The Ombudsman also set out a calculation as to how the loss should be calculated and recommended that, if the loss was more than £100,000 before interest, then the balance should also be paid, and interest on that balance.  

The decision by the FOS to uphold the complaint demonstrates its ability to make decisions that depart from English case law. This product involved is the same as that in Rubenstein v HSBC, but the outcome could not have been more different. In Rubenstein, the Court held that HSBC could not have foreseen, and therefore be responsible for losses caused by, the 2008 collapse.  However, in this complaint, the Ombudsman has found the exact opposite.

The Ombudsman appeared to be influenced by and placed weight on the fact that the investment took place at around the time of the Northern Rock problems, "when six months earlier queues had built up outside its branches and some customers feared they would lose their deposits."

Rubenstein is going to appeal later this year. In the meantime, firms dealing with suitability complaints should be aware that, whatever the Court of Appeal decides, the breadth of the Ombudsman's jurisdiction means that he can effectively sidestep English law.