Peter Hamilton: The FOS is ignoring the law on complaints

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Does the Financial Ombudsman Service fail to take the law into account when making its awards? I have come across awards that arose from income protection contracts in which it seems to have developed its own rules contrary to what the law would be on the issues in question.

The relevant facts of one such case were that the insured had made a claim in respect of a disabling illness that had prevented him from working. The insurer had dealt with the claim up to a certain date. However, after that date, the insurer asked the insured to provide fresh medical evidence in support of his claim he continued to be disabled and could not work. Unsurprisingly, the terms of the contract entitled the insurer to ask for that evidence from time to time and if the insured did not co-operate or provide the required medical evidence the insurer was entitled to refuse to carry on paying benefit under the contract.

When the insured did indeed fail to provide the evidence, the insurer duly refused to continue to pay the contractual benefit. The insured complained to the FOS and the ombudsman upheld the claim and required the insurer to continue to pay the benefit. The reason the ombudsman gave was that it had an established practice that required the insurer to show the insured had improved in health before it could stop making payments. The FOS gave no reasons for preferring its own practice to the clear terms of the contract.

That practice has the effect of overriding the perfectly reasonable terms of the policy: it is surely acceptable for the insurer to insist the insured undergo medical examinations and provide medical evidence in support of the continuing claim. By failing to do so, the insured is in breach of the express terms of the contract and the general mutual duty the insurer and the insured deal with each other with the utmost good faith. It is not only natural for the claimant to have to prove his entitlement to the benefit under the contract but it is also what the policy says. Yet the FOS practice places the burden of proof on the insurer to prove the health of the claimant has improved to the extent he is no longer disabled from working. That is impossible if the claimant refuses to undergo a medical examination or otherwise to provide up to date medical evidence.

Can this practice of the FOS be reasonable and in accordance with its statutory duty? The answer is no.

The starting point is that the FOS is required by s.228(2) of the Financial Services and Markets Act 2000 to decide complaints “by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case”. Meanwhile, the Court of Appeal has ruled the FOS is not obliged to apply the relevant law as if it were a court, unlike the various ombudsman schemes the FOS superseded.

The FOS is, however, required by the rules in the FCA’s Handbook at DISP 3.6.4 to take the relevant law into account in its consideration of what is fair and reasonable in all the circumstances of the case (it is also required to take into account other matters such as the FCA’s own rules, guidance and standards, and good industry practice). Thus Lord Justice Stanley Burnton said in the same Court of Appeal decision:

“[The ombudsman] is free to depart from the relevant law but if he does so he should say so in his decision and explain why.”

Recently, in a case between the governors of the London Oratory School and a schools adjudicator, Mr Justice Cobb had to decide what the duty “to have regard to” guidance meant in a very different context: namely, what was the duty of the governors of a school when framing a school’s admission policy. The school’s governors had to “have regard to any guidance from”, in this case, the Roman Catholic Archdiocese of Westminster.

The judge decided the governors must take the relevant guidance into account and, if they decide to depart from it, must have and give clear reasons for doing so. Those reasons must be proper or legitimate.

It follows that because the FOS did not give any reasons for applying its so-called practice, and had failed to give effect to the contract, it had not properly taken the law into account.

There is one important general conclusion as well. All those dealing with the FOS must take every opportunity to emphasise that when it decides complaints that involve departing from the law, regulators’ guidance, codes of practice or good industry practice, it must give reasons and they must be clear, proper and legitimate. Failure to do so exposes the FOS to judicial review.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk