In its 2014/15 business plan, the FCA says it plans to consult on the introduction of a 15-year time limit for complaints to the Financial Ombudsman Service.
The previous position under the FSA was that the regulator would not consider a long-stop unless it could be shown to provide a clear consumer benefit. Such a criterion was unlikely ever to be met and it is good news for advisers if the FCA is moving away from this mentality. That said, so little detail was provided in the business plan that it is difficult to tell either way.
Since not having a long-stop is the exception rather than the rule with professional advice, a far more salient question than why financial advisers should benefit from a long-stop is why they should not. The long-term nature of financial advice is often trotted out as the reason behind the removal of the long-stop but many professional advice services have long-term consequences such as inheritance tax planning. What, then, is the justification for treating financial advisers so differently from other professional advisers? Answering this question ought to be central to any FCA consultation on the issue.
The actual implementation of a long-stop is, unfortunately, a long way off. In the meantime, there have been reports of advisers attempting to include a long-stop on complaints within their terms of business. While this is a natural reaction to the current lack of a long-stop, it is likely to be ineffective and inadvisable for two reasons.
The Conduct of Business Sourcebook prohibits a firm from seeking to exclude or restrict any duty or liability it has to a client under the regulatory system. So it is not possible to exclude or limit a firm’s liability for a breach of the FCA rules and principles.
For example, firms have a regulatory duty to provide their clients with suitable advice; any liability arising as a result of the firm’s provision of unsuitable advice cannot be excluded or restricted as it is a liability which has arisen under the “regulatory system”. If a firm included within its terms of business a contractual long-stop on all complaints, this would be an attempt to restrict its liability under the regulatory system, which does not itself provide for such a long-stop. The inclusion of such a term, as well as seeking to rely on it at a later date, would be a breach of Cobs.
It is possible to limit any liability which arises other than under the regulatory system but in the case of retail clients this is subject to the exclusion/restriction of being honest, fair and professional. In practice, however, for regulated advice, such a limitation is likely to be of little value as a firm’s liability under the regulatory system will be pretty comprehensive.
The FOS decides complaints on the basis of what it considers to be “fair and reasonable in all the circumstances of the case”. While it must “take into account” relevant laws, regulations, rules, codes of practice and good industry practice, it is not bound to apply them if it does not consider it fair and reasonable to do so.
In other words, the FOS does not have to follow legislation or common law when deciding complaints, nor does it have to apply contractual terms. Therefore, even if a long-stop clause was not a breach of Cobs, the FOS would not be bound to act in accordance with it and could, if it considered it fair and reasonable, ignore the clause and allow the complaint to continue notwithstanding a contractual limitation of liability.
An attempted judicial review brought against the FOS in recent years confirmed that it was entitled to ignore the 15-year rule in the PIA Ombudsman Rules even where the FOS explicitly acknowledged that had the complaint in question been brought under the old PIA Ombudsman Rules, it would have been time-barred. The FOS will not therefore entertain the enforcement of a contractual 15-year clause in a firm’s terms of business.
It is small comfort to note that the Limitation Act 1980, and therefore the 15-year long-stop, will apply to court proceedings. A client may issue court proceedings if they believe their loss to be in excess of the FOS maximum award of £150,000. So in that respect a firm’s liability is limited to £150,000 for any complaint more than 15 years old.
In summary, a contractual long-stop on complaints is likely to be a breach of Cobs and the FOS is entitled to ignore contractual terms if it considers it fair and reasonable to do so. It is not easy to get around the long-stop (or the lack thereof) and at least for the time being advisers must plan and account for there being no time-based limitation on their liability.
Claire Williams is a solicitor at Foot Anstey