Financial Ombudsman need not apply English law
24 June 2008
The Financial Ombudsman Service (the FOS) considers more than 100,000 complaints each year from virtually every corner of the financial services industry. But must the FOS determine complaints in accordance with the rules of English law? "No", said the Court of Appeal in the recent case of R. (Heather Moor & Edgecomb Ltd.) v. Financial Ombudsman Service.
Background
Mr Lodge was a British Airways pilot approaching retirement age. He sought advice about his BA final salary pension scheme from Heather Moor & Edgecomb Ltd. (HME), an independent financial adviser. HME advised Mr Lodge to leave the scheme on retirement and to invest the proceeds in a so-called "section 32" pension plan.
Mr Lodge followed HME's advice. Little more than four years later, however, the value of his pension fund had fallen 23 per cent leaving him around £340,000 worse off than if he had stayed in the BA scheme. After failing to obtain redress from HME, Mr Lodge complained to the FOS. It upheld his complaint and ordered HME to provide compensation.
HME applied for a judicial review of the FOS's decision. It claimed, amongst other things, that the FOS was required to determine complaints in accordance with the rules of English law, that the FOS had instead decided Mr Lodge's complaint by reference to what it considered to be "fair and reasonable" and that its decision should therefore be quashed.
Decision
The Court of Appeal dismissed HME's application. The role of the FOS is created and governed by statute, it said, and the critical statutory provision is section 228(2) of the Financial Services and Markets Act 2000. It provides that the FOS must determine complaints by reference to what is "fair and reasonable in all the circumstances of the case". According to the Court of Appeal, that standard allowed the FOS to depart from the common law as long as its decisions were not perverse or irrational.
The Court of Appeal's view was not altered by Article 6 of the European Convention on Human Rights, the effect of which is that the FOS must satisfy the requirements of "law". Those requirements are met, said the Court of Appeal, because the FOS's own rules require it to take account of the relevant law, regulations, regulators' guidance, codes of practice and good industry practice, and to give reasons for its decisions.
For good measure, the Court of Appeal found that the FOS had in any event correctly applied the relevant principles of English law to Mr Lodge's case.
Significance
The importance of this decision lies not so much in the failure of HME's application as in the general observations that the Court of Appeal made about the FOS. In short, the Court of Appeal gave the FOS a resounding "thumbs up". It evidently regards the FOS as an invaluable forum for alternative dispute resolution in the financial services sector and would like to see its (already substantial) case load continue to expand. To that end, the Court of Appeal was keen to ensure that the FOS is not stifled by the imposition of strict legal doctrine and was consequently happy to back the FOS's flexible "fair and reasonable" jurisdiction.
Postscript
In a related judgment handed down the same day (Financial Ombudsman Service v. Heather Moor & Edgecomb Limited), the Court of Appeal lent further support to the FOS. HME contended that it should not have to pay case fees to the FOS for four other complaints against it that (unlike Mr Lodge's complaint) had failed. The Court of Appeal rejected HME's argument, holding that the FOS's system of case fees is "a perfectly rational response" to the need to fund the FOS.
R. (Heather Moor & Edgecomb Ltd.) v. Financial Ombudsman Service [2008] EWCA Civ 642
Financial Ombudsman Service v. Heather Moor & Edgecomb Ltd. [2008] EWCA Civ 643
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