The jurisdiction of the Financial Ombudsman Service (FOS) in determining complaints, and the manner in which this should be exercised when the Ombudsman departed from strict law, was examined on an application by an Insurer for judicial review of an FOS decision.
The FOS’s jurisdiction derives from Part XVI of the Financial Services and Markets Act 2000 (FSMA 2000). Pursuant to section 225 of FSMA 2000, the FOS provides an independent and informal complaint resolution service for the financial services industry, designed to avoid the need to revert to the courts.
In this case, which involved an exercise of the FOS’s compulsory jurisdiction, section 228(2) of FSMA applied, provided that:
“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.”
The rules governing complaints handling by the FOS are set out in the FSA Handbook under the section entitled “Dispute Resolution: Complaint” (DISP). DISP 3.6.4 R provides that in considering what is fair and reasonable, the Ombudsman will take into account:
- Laws and regulations.
- Regulators’ rules, guidance and standards.
- Codes of practice.
What he considers to have been good industry practice at the relevant time, where appropriate.
The application concerned claims against the Insurer under two life policies issued to a Mr and Mrs M. These were a joint policy, which had been cancelled by the Ms prior to the claim arising, and a single policy issued to Mr M, which had been avoided by the Insurer on the basis of a misrepresentation.
By its application, the Insurer challenged an FOS Ombudsman’s decision that (i) the Insurer had done nothing wrong by refusing to reinstate the cancelled joint policy but that (ii) on the basis that Mr M’s representation had been innocent, the joint policy should be reinstated and the claim considered.
It was common ground that the Ombudsman’s decision was flawed for the inadequacy of the reasons which were given. The Court quashed the decision, so the M’s complaint fell to be re-determined. The court emphasised that in particular it was incumbent upon the Ombudsman to explain why she had departed from the relevant law, guidance and practice in holding that the innocent character of Mr M’s misrepresentation were grounds for reinstating the policy – this being irrelevant as a matter of strict law.
However, in view of the importance of the point, the court also considered the Insurer’s second argument, which was that the Ombudsman’s decision had been “Wednesbury unreasonable” or in other words so unreasonable that no reasonable authority could ever have come to it1. This involved considering the FOS’s jurisdiction in determining complaints.
The court held that the question for the Ombudsman was not solely whether the Insurer had followed the relevant law, guidance and accepted practice, but whether the Insurer had acted fairly and reasonably in all the circumstances of the case. This was not a process of review or examination of the Insurer’s decision, but of the Ombudsman reaching her own evaluative assessment of the decision reached.
It was not enough for the Insurer to show that it had followed the relevant law, guidance and accepted practice, an approach which had previously been rejected by the Court of Appeal2. Instead, the enquiry may be wider, because the Ombudsman may decide that the insurer did not act fairly and reasonably despite its adherence to sound legal principle, guidance and practice.
On this basis, the court was not persuaded that it would be outrageous to hold an insurer to its contract in the circumstances of a case such as this. The Wednesbury unreasonableness test was not therefore met. The court did however stress that careful reasons would need to be given for any lawful decision upholding the Ms’ complaint.
The case helpfully describes the exercise in which the FOS is engaged when determining complaints under section 228 of FSMA 2000. It is therefore of interest not only to insurers, but to other financial institutions which are subject to this regime.
The case is also noteworthy for the reservations expressed by the court over a jurisdiction expressed in these terms. In particular, Mr Justice Jay commented as follows:
“I do have personal concerns about a jurisdiction such as this which occupies an uncertain space outside the common law and statute. The relationship between what is fair and reasonable, and what the law lays down, is not altogether clear. [...] Who, or what, defines the contours and content of fairness and reasonableness? [...] It might be said that this jurisdiction is penumbral because its shadows cannot be illuminated.”
Insurers may share Mr Justice Jay’s concerns, it appears that their actions are subject to review by the FOS, even where they have adhered to sound legal principle, guidance and practice.