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Adam Samuel: Advisers do not benefit from their day in court


We frequently read of some IFA or another complaining that their human rights have been infringed and that an application for judicial review should immediately be launched.

Every granting of permission to appeal or challenge a regulatory decision is greeted with exaltation, however, the court room is not the friend of the financial services industry. The law simply is not designed to help it in its struggles with the regulator or the Financial Ombudsman Service.

When advisers use the courts against their clients, it takes on the appearance of unethical bullying. Even disputes about departing advisers, corporate deadlock within businesses and rows with product providers do not benefit from litigation.

Let’s start with some basics. Parliament gave the FSA and now the FCA certain powers which means that, unless the regulator uses them in a way that no reasonable regulator could or for what someone can prove is an improper purpose, its policy decisions cannot be challenged.

Enforcement, authorisation and approval decisions can only be attacked in front of the Upper Tribunal, an altogether better place anyway for the threatened adviser. The reason for this is the Upper Tribunal essentially still reviews the FCA’s decision as if it was the regulator. A court has no such powers.

Any challenge to the FOS is, frankly, a waste of money unless the IFA has the funding of his or her professional indemnity insurer. Parliament has had two chances to alter the legal framework of the ombudsman in the 2010 and 2012 Financial Services Acts and declined to take either. Since we live in a democracy, the courts will interpret that as meaning the body politic wants the FOS to stay as it is.

Westminster’s rejection of calls for appeals mechanisms and the application of the Limitation Act means judges give the ombudsman a broad scope to make its own decisions on what is reasonable. 

There have been two successful industry challenges to the FOS in the courts since 2001.

The first, Garrison Investment Analysis vs Financial Ombudsman Service, involved an irrational decision on redress and a decision that appears to have been over-generous to the IFA on liability. The court upheld the first ruling, finding an absence of any connection between the remedy ordered and the failing identified by the ombudsman or any loss that might have followed from it.

Oddly, a full review of the ombudsman’s decision, rather than the limited scrutiny offered by judicial review, would probably have revealed that the precipice bonds recommended by the IFA were entirely inappropriate – which would have cost the IFA more than the redress ordered by the FOS and reduced by the court. 

In the end, the IFA had to pay part of the costs of the application, reflecting its failure on its challenge to the ombudsman’s ruling on liability. So, this case may well have benefited the lawyers rather more than the other players.

In the other case, the FOS declined to contest an application where the ombudsman had found for the firm and then required it to stick by a settlement offer which had at this point been withdrawn.

One argument IFAs have had with the FOS concerned its use of hearings. Unfortunately, the result of judicial review and the European Court of Human Rights by Heather, Moor & Edgecomb was the European court ruling in favour of the FOS’s very limited use of hearings. This and the other cases that have raised the right to a hearing have all concerned cases where the IFA would have gained nothing from such an occasion. By bringing and losing these cases, the industry has just reinforced the ombudsman’s position. As for other uses of the courts to resolve internal corporate problems, this tends to use up more money than is at stake. A day with a mediator will almost certainly represent better value for money. An agreement to arbitrate in front of a one-person tribunal appointed by one of the industry bodies as a back-up in the event of a mediation failure is far better than a day in court.

Adam Samuel is an independent compliance consultant


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There is one comment at the moment, we would love to hear your opinion too.

  1. Julian Stevens 6th June 2014 at 10:02 am

    The FCA and the FOS have the power, the money (ours in unlimited amounts), the freedom from accountability and statutory immunity from prosecution to do, in effect, whatever they want. They don’t even have to take a scrap of notice of the TSC, other than turn up and take a few questions, as seen when Andrew Tyrie stated to Martin Wheatley that there’s a strong case for intermediaries to be reimbursed the £118m we were overcharged by the FSA. Wheatley, in effect, just told Tyrie to GFH and that was that. So totally unburdened by any sense of fair play is the FCA that it’s even scrapped its plan to overhaul the manifestly unfair system by which levies for small intermediaries is calculated.

    A Statutory Independent Regulatory Oversight Committee might well be able to address this sorry state of affairs but nobody, least of all APFA (supposedly our representative body but, in practice, just a talking shop) seems to be making any efforts to bring such a body into being.

    So nothing will change. Awful, isn’t it?

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