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Cause for complaint

IFA John Duerden has taken on the Financial Ombudsman Service in the Royal Court of Justice, winning what is potentially a landmark ruling that raises serious question marks about the way the ombudsman calculates redress.

Summing up, Mr Justice Sullivan concluded that the punishment meted out by the FOS was “irrational”, given that the aim of redress is to put the claimant back in the situation they would have been in had they not received poor advice.

The case in question stems from advice given by Duerden, managing director of Yorkshire-based IFA Garrison Investment Analysis, to retired couple Mr and Mrs Bell which led them to invest 20 per cent of their portfolio (59,088) in an NDF bond (NDF3) in 2000 and a further 20 per cent (52,903) in another NDF fund (NDF5) in January 2001.

When investments were hit by the stockmarket crash that followed the September 11 terrorist attacks, the couple complained to the FOS.

The FOS arrived at three different decisions. An adjudicator initially rejected the complaints for both NDF3 and NDF5. An ombudsman then reversed the decision and upheld the complaint for both investments before finally deciding that Duerden was to blame for NDF5 but not NDF3.

The ombudsman’s argument hinged on the notion that although it was acceptable to advise the Bells to invest 20 per cent of their portfolio in NDF3, it was not reasonable in any circumstances to invest 40 per cent in the products.

Duerden appealed, arguing that the ombudsman had failed to give adequate reasons for its change of mind. He also argued that it was wrong for the FOS to use its standard base rate plus 1 per cent formula to calculate redress as this assumed that the Bells would have had their money in a low-interest, low-risk savings account. Duerden argued that this was not consistent with the Bells’ high-risk investment profile.

In court, barrister Paul Stafford, representing Duerden, presented evidence – seen by the ombudsman when it investigated the case – that the Bells were high-risk investors who knew what they were getting themselves into. Key evidence included the fact that the couple had cashed in high-risk equities to invest in the NDF products.

He said that given the couple’s risk profile, it was unreasonable for the FOS to assume when calculating redress that the Bells would not have invested their money in equities, which suffered a similar loss to the NDF products over the same period.

Mr Justice Sullivan concluded that there was “no logical connection between the redress and the error” in this case. He ordered the FOS to pay 50 per cent of Duerden’s legal costs and ordered it to review the case.

Duerden, who funded the case himself, says he is delighted with the verdict and insists that he was not at fault over the sale. He says the case proves that the ombudsman’s methods for calculating redress are flawed and the fact that it arrived at three different judgments in his case demonstrates a lack of consistency in its decision making. He says: “The way the FOS calculates redress is wrong. The FOS is an arrogant organisation that has not listened to me one iota.”

Duerden’s lawyers, Financial Services Legal, believe the case could set a legal precedent and pave the way for a flood of similar challenges over redress calculations used for high-risk complainants.

FSL partner Gareth Fatchett says: “This shows that the FOS cannot just assume when calculating redress that complainants would have put their money in a piggy bank or stuffed it under the mattress. It shows that the FOS method is artificial and puts the client in a position where they actually do better than they ever could have.”

FOS spokesman David Cresswell is adamant the case has no wider significance.

“We are pleased that the judge did not find that the standard calculation of base rate plus 1 per cent is wrong. The difference was that in this case, the judge argued it was possible to work out what the investors would otherwise have invested in. But in many situations this is just not possible so the proxy formula is used,” he says.

Cresswell also says the IFA’s alarm over the different judgments reached by the ombudsman and adjudicator is misplaced. “This does not show inconsistency, it shows huge strength and proves the ombudsman is not just rubber-stamping adjudicator decisions, as is often claimed.”

Fatchett says: “The FOS will try and play this down. The simple fact is that the High Court has criticised and then quashed the way in which redress is calculated. This will save IFA firms vast amounts of money in the long term.”

Compliance consultant Adam Samuel believes the judgment could force the FOS to review the way it calculates redress, which he says is fundamentally skewed. He says the formula used can overcompensate, as in this case, or undercompensate.

Whether the FOS calculations are as skewed as Samuels suggests or not, this High Court judgment will give some encouragement to IFAs who believe they have been treated harshly by the FOS.

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