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FOS is an affront to the rule of law

As readers of Money Marketing know, I have written before about the defects in the FOS system and have made suggestions for reform. The Government’s legislative plans for its new approach to financial regulation present an ideal opportunity to reform the FOS.

In response to the Government’s second round of consultation, Anthony Speaight, QC, and I have submitted a paper to the Treasury in which we have set out our constructive proposals for the reform of the FOS. We have had a meeting with the Treasury to discuss our ideas.

Anthony and I bring many years of experience to the issues. Anthony’s practice includes financial services law and he has had particular involvement in cases in which the impact of the Human Rights Act and the European Convention on Human Rights has been considered. Earlier this year, he was app-ointed a member of the Com-mission on a Bill of Rights.

I have been involved in the regulation of the retail end of the financial services market since Professor Gower published his review of investor protection in January 1984.

The essential point of our paper is to restore the rule of law to financial services compensation. Our prop-osals would benefit consu-mers and be fair to firms.
The defects in the FOS scheme are well known.

First, it is unbalanced. The firm is bound by a decision without any appeal on the merits. The complainant is not bound and can re-run the same case again in court. Complainants pay no fee but firms have to pay, even when a complaint is dismissed.

The FSA, which has the duty of making some of the rules which apply to FOS cases, has among its statutory regulatory objectives, the protection of consumers. This is not balanced by any objective to be fair to firms.

Second, the FOS does not have to make decisions in accordance with the law of England (or of Scotland in Scotland) and does not do so. Instead, it proudly proclaims that it makes its “own law”. The FSMA provides that a “complaint is to be determined by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case”.

The Court of Appeal has held that provided a determ-ination by the FOS is “fair and reasonable in all the circumstances,” it does not have to be in accordance with the law of England. This means that the FOS has the power to make a binding award against a firm for payment of up to £100,000 although the firm has committed no wrong under the law and although the law would impose no liability upon the firm.

Third, the FOS does not publish any of its decisions, even in anonymised form, despite the recommendation by Lord Hunt of the Wirral that it should do so. The FOS does not even keep a register of decisions although the FSMA envisages that it should do so. It is therefore difficult to discover in advance how the FOS might deal with a particular case.

Fourth, the FOS hardly ever holds oral hearings. Its own senior staff have suggested that it does so in one out of 10,000 cases. It defies belief that there can be a factual dispute which would benefit from the examination and cross-examination of witnesses in only so tiny a proportion of disputes. This is also at variance with the assurance given to the House of Commons when the Financial Services and Markets Bill was in comm-ittee by the then Treasury economic secretary, who said there would be a hearing whenever either party requested one.

English law requires a professional regulator to order an oral hearing where there is a dispute of fact which is central to an adjudicator’s assessment and which cannot fairly be resolved without an oral hearing.

Finally, there is so close a structural connection between the FOS and the FSA as to cast doubt on whether the FOS can be regarded as independent of the regulator. Thus, for example, the FSA appoints and may dismiss the chairman and directors of the FOS. The chief ombudsman and the FOS must report to the FSA on the discharge of their functions and the FSA must approve the budget of the FOS.

Such concerns are exacer-bated by the conduct of both organisations. For example, the FSA has asked the FOS to solicit complaints from investors and the FOS has done so – contrary to its own rules.

These features make the FOS system incompatible with the rule of law. The FOS is an affront to the rule of law. It is wholly unacceptable for a body with jurisdiction to order firms to pay compensation of (currently) up to £100,000, and a proposed new limit of £150,000.

The rule of law is not just an academic legal principle, it is a central pillar of the British constitution. Prof-essor Sir Neil MacCormick has written: “Where the rule of law obtains, the government of a state … is carried on within a framework laid down by law. … Where the law prevails, you know where you are and what you are able to do without getting yourself embroiled in civil litigation or in the criminal justice system… There cannot be a rule of law without rules of law…. Values like legal certainty and legal security can be realised only to the extent that a state is governed according to pre-announced rules that are clear and intelligible in themselves.”

Thus, under the law, I know in advance where I can and cannot park my car. But if I could park only where some official specified after the event, I would have no right to park at all. Similarly, if my right to my possessions is watered down to mean only a right to hold them until the FOS decides it is fair and reasonable for me to pay them to somebody else, then I have no “right” in a true sense to my possessions at all.

This conclusion is reinf-orced by the fact that there is no appeal and the fact that any judicial review of a FOS decision on the merits of a case is, for all practical purposes, impossible because of the vagueness of the subjective (“in the opinion of the ombudsman”) fair and reasonable criterion.

In my next article, I will go into the detail of our reform proposals. Briefly, these are that cases at the FOS would be decided by the adjudicators. Already they decide at least 93 per cent of cases.

The position of ombuds-man would be abolished. Instead, both the customer and the firm would be able to refer the adjudicator’s decision to a new first-tier tribunal. If the firm wished to refer the case, it would have to pay the amount awarded to the customer or into the tribunal, where it would be held pending the tribunal’s decision. The case would be completely reheard orally, with the examination and cross-examination of witnesses. English law would apply. Customers would not be exposed to a costs order against them.

If a firm initiated a refer-ence and lost, it would have to pay the customer’s costs. The money saved by the abol-ition of the position of omb-udsman would be used to create a legal aid fund to help customers present their cases to the tribunal.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court


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There are 26 comments at the moment, we would love to hear your opinion too.

  1. Coming from a lawyer educated in apartheid South Africa, this wildly inaccurate lecture on the rule of law is a bit rich. FOS has its defects but its model is copied worldwide by countries as diverse as Japan and Australia and with good reason. It gives consumers rights that they would not otherwise have and is relatively fair compared with other alternatives.

    The Court of Appeal in the HME case rejected most of the arguments presented here. Mr Justice Ouseley took a similar view.

    We have heard enough of this nonsense which is not worthy of this newspaper.

  2. Peter is of course right on all counts. The PanaceaIFA poll in April made very clear why IFAs are so upset about the way it works and the general unfairness of the whole system-

    I hope the Treasury listen. Obama said in an interview with Andrew Marr that the great thing about his job is that he can meet so many different people and the benefit is that he can listen and learn. I would like to think that this mindset could be employed at the FSA and FOS to restore fairness in a rotten system.

  3. Alistair E Niven 22nd May 2011 at 1:15 pm

    Peter gets right to the core and is in practice absolutely correct, the present arrangements are a disgrace and not remotely even handed. I believe his solution is entirely appropriate. He has enormous experience of financial services and consumers, I have admired his work since the early 70’s.

  4. Sledgehammers and nuts. How big a problem are we trying to fix and are the remedies being proposed proportional? (With the case of super injunctions, Twitter and Trafigura in mind as an example) I’m sure a good QC could present a strong case that recourse to Law can be counter-productive because of expense. And wasn’t basis of the FOS established by the industry that now whinges about it?

  5. John Blackmore 22nd May 2011 at 3:21 pm

    Good luck. You are going to need it. Personally I’ve had enough of being regulated by those with whom I can find little common ground.

  6. Mr Hamilton, it’s not just FOS that is an affront to the rule of law. The whole business of regulation may well be too. It should be proportionate and cost effective and it is patently not so.

    RDR is estimated by FSA as costing slightly less than £300 for every man, woman and child int he UK, with virtually no benefit to Jo Public.

    Having RDR thrust upon us removes the customer’s right to choose how he pays for services, which is against natural law.

    Depriving seasoned practitioners of grandfathering may well be a human rights issue; that one is fit and proper on 31/12/2011 and not so the following day cannot be right from a human rights point of view.

    On top of it all, that RDR is only there because the FSA board didn’t want to lose face by withdrawing it is indefensible. It is tantamount to making a Chartered Accountant, Barrister etc. retake their finals because the syllabus has changed.

  7. Simon Mansell 22nd May 2011 at 8:55 pm

    “Restore the rule of law to financial services compensation.”

    Well said Peter! FSMA gives FOS authority and FSMA 2000 was bad law. Now perhaps we have a chance to right a wrong.

    I wonder why Gordon Brown refused to release the legal opinion he said he had taken with regard to FSMA legality?

    Legal opinion published contradicted Brown.

    In 1999 Lord Lester of Herne Hill QC and Monica Carss-Frisk were asked to advise on the legality of FSMA when at Bill stage and this is the advice they gave:

    For the reasons given below, we consider that (1) the conviction of a firm of a disciplinary offence purely on the basis of a breach of one of the statements of principle, where the conduct in question does not fall within any detailed rule, evidential provision, code or guidance, would be contrary to Article 7 of the ECHR; and (2) disciplinary proceedings under the Bill would be treated as criminal in substance for the purposes of attracting the procedural safeguards guaranteed by Article 6 of the ECHR.

    Many IFA’s have know in their heart that their rights were being abused and for many who have been destroyed by such a system it is too late!

  8. Ironic the first poster is anon and makes personal attacks and inuendo whilst hiding behind their annonymity.
    I agree with Peter Hamilton, Either we have the same right sas everyone else in society or we have anarchy.
    The FOS is a flawed system (i’ve never had a complaint go to FOS about anything I’ve done, but I’ve been involved assisting clients in the reverse and my clients have won and would have won in law, but ironically the first adjudication declined the complaint, I had to point out errors in teh FOS research and decision and get a second adjudicator to look at it) My clients offered mediation rather than the Ombudsman, but the company declined and it cost them much more as a result of having to go to the FOS.
    The system should be mediation first (free to the consumer as FOS is at present) and only then on to the FOS, with both parties contributing with the winner being re-imbursed costs. Hearsay should not be accepted and fraud by consumers must be pursued as it it a CRIME.

  9. Increasingly Frustrated Adviser 23rd May 2011 at 9:46 am

    @ Anon. Stand up and be counted.Excellent article Peter. Very informative. I hope you manage to achieve doing something about it. I am fed up with being below the law before I have even done something wrong.

  10. Julian Stevens 23rd May 2011 at 10:18 am

    As usual, a well-written article from Peter, though the problem remains who, in a position of any influence, will take note and get something done about it? AIFA may lobby but, as usual, will probably get nowhere. The TSC has no powers beyond asking questions. MP’s may call for action but be fobbed off by Mark Hoban, and so on.

    The situation is intolerable and yet, it seems, unchangeable. So, if nothing can be changed, the only alternative is to seek authorisation under a non-UK regulatory jurisdiction which has no FOS or any equivalent. No FSCS either, not to mention the MAS. What are you waiting for?

  11. I totally agree with the first comment. You Guys get your heads out of your proverbials.If you wish to follow this course , it is going to cost more money to run. Where is it going to come fro?.All it would do is give more powers to the big guys like the Banks etc who have the resources to pay experts to appeal and drag it all out to the detriment of the industry and most important of all to the ordinary member of the public who decide to make their complaints themselves. Just look at the banks behaviour in the PPI fiasco. Where would the public be without the FOS? I say more power and more money by way of higher levies to the FOS. Thank you FOS for being there for us the Public.

  12. Simon 23rd May 2011 at 11:07 am

    To: gerry roberts | 23 May 2011 10:39 am

    Gerry you are wrong on costs and this is the old chestnut FOS keep bringing up. All we need to do is grant the defendant the same right of appeal as exists for the plaintiff and that is a right of appeal to the courts who would then apply “the rule of law” and judge the case accordinly.

    I am worried when people have an issue with the rule of law. Courts awards costs according to right and wrongs and they are born by the person who loses their case rather than the adviser win or lose. The plaintiff until that time has his/her freebie C/O the FOS. No one goes to law lightly.

    Remember that this right of appeal already exists but is only granted to the plaintiff – now that can’t be right.

  13. How many times I have heard FOS is an affront to the rule of law but to date no one from government has the courage to voice this. One can assume that the Parliament was happy for a Quango to make law in this country for a particular section. Surprisingly Peter has not mentioned Limitation Act, which has been totally ignored by the FSA and FOS. A mediation system, that is court based or follow those principles, which is available to all professions in UK should also be available in financial services for it to be fair. Otherwise it will be same system with another name.

  14. “The rule of law is a legal maxim which provides that no person is above the law, that no one can be punished by the state except for a breach of the law, and that no one can be convicted of breaching the law except in the manner set forth by the law itself. The rule of law stands in contrast to the idea that the leader is above the law (rex lex), a feature of Roman Law, Nazi law, and certain other legal systems” such as fsa and fos.
    In orther words, it is there to protect us from arbitrary decicion making.
    Anon & Gerry, if everyone except you were subject to fair treatment would you be agreeable?

  15. Excellent article.

    That consumers of financial advice need effective protection is clear.

    But establishing a body that is de facto tasked with only such protection, without making it subject to effective checks and balances will always result in unbalanced decision making and unfair results.

    That is the way that human beings behave and organisational cultures develop.

  16. @ Gerry Roberts – This is not having a go at you, so please don’t take it this way. It is aimed at forming and understanding opinion alone.
    I can’t find you on the FSA register to confirm that you are actually an adviser. As such, can you confirm whether you are or have been in the past?
    If you have never been an adviser, can you confirm your occupation, so we can compare your rights for your occupation against those being afforded us and we can then pose the question as to whether you would trade your rights to a law for a (theoretically) cheap alternative to the law.
    As I stated in my earlier post, I think alternative dispute resolution as an alternative to the courts is absolutely essential, but teh FOS is NOT a true ADR system as it is skewed. Hence my suggestion we have true ADR (mediation) before resorting to FOS and that payment should take place at that stage.
    It would be easy to keep the banks in line if that is what is worrying you even if w right to appeal or to resort to law was allowed, provided that the courts were allowed to impose an excessive penalty on those who decline to accept the FOS decision if they loose the case. This would be especially tru if the penalty was linekd to the directors rather than the shareholders.
    All these things just need a littlemore thought. The FOS system is fatally flawed and we have the chance to sort it out now.

  17. Anon and Gerry as Phill says tell us who and what you are, because either you have no understanding of the F Pack! or you work for them.

  18. Hi Phil.

    Have another look. Try ‘Gerald’.

  19. When speaking of the injunction fiasco
    Attorney General Dominic Grieve said: “It is our duty as parliamentarians to uphold the rule of law.”

    Only in the case of the rich and famous and not the humble IFA it seems

  20. @WTF – The onlt Gerald Roberts on the FSA register was a mortgage adviser who de-authorised some years ago, so I doubt the writer is him (but I could be wrong) hence why I felt it appropriate to understand the background of the writer so we can consider their willingness to waive the legal rights.
    I have challenged Hector Sants to waive his rights, but as everyone has heard him tell the TSC, he is not answerable to anybody and does nto want to agree to be so. He coudl voluntarily make himsefl subject to a higher body but has chosen not to, while we had it forced unknowingley upon us whilst our supposed representatives dropped the ball.
    Even when the government who brought in this twisted view of dubious legalities, including removal of our human rights and an illegal invasion of a sovereign state (Iraq), we still have not had our own rights re-instated and Mark Hoban is (as we expected he would be bearing in mind where he trained, for which read his CV) as bad as his predesceasors.

  21. Exasperated Me 24th May 2011 at 2:23 pm

    I wonder what the ECtHR is going to say about it.

  22. Simon Mansell 26th May 2011 at 9:53 am

    Will the real gerry roberts | 23 May 2011 10:39 am stand up an be counted. It would be valuable to know Gerry if your are:

    a) A consumer
    b) An Adviser
    c) A Regulator

    If a consumer – would you give up your right trail before peers and a right of appeal?

  23. I am staggered to find that even one FOS apologist exists.

    English Law derives from expereince and the application (in most instances) of common sense. FOS law derives its powers from the FSA’s interpretation of FSMA, an interpretation that will shortly be put to the test.

    Consider the loss of basic rights that advisers have to ensure.

    a) Unqualified/under-qualified adjudicators sitting in judgement

    b) no independent appeals process

    c) A system where, even if the complaint is rejected, the FOS can explore to find some area of the advice process that they dislike and so uphold the complaint.

    d) The lack of a personal hearing (a right which is enshrined within the ECoHR)

    e) A quasi-regulator which makes new law and applies hindsight values to historic decisions.

    f) The loss of the 15 year longstop protection

    g) The loss of the 3 years from date of awareness protection (in respect of mortgage endowments)

    I could go on….

  24. I am not trying to justify the FOS but I have to say from personal experience that justice and law are not always compatible. The use of superinjunctions may have been right in law but were they acceptable by common public consent. Was it right that Fred Goodwin obtained an injunction over someting that was of material interest to the FSA? How often do you see the rights of the victim subordinated to the rights of the criminal? My point is that the FOS should be able to ensure that justice is delivered fairly, quickly and efficiently and should not be dependent upon how smart your lawyer is or how much you can afford to pay him. Sadly law and common sense often get overlooked.

  25. As last nights news proves, those who act outwith the law, must eventually face the consequences.
    Fair point Sam, but if you had to choose would you rather face the law or a kangaroo court which doles out arbitrary “justice”
    If we can disregard the law in favour of common consensus then we should be very afraid indeed.

  26. The views expressed by Mr Hamilton here were rejected by the European Court of Human Rights in the Heather Moor & Edgecomb Ltd v. the United Kingdom on 14 June 2011 which found them “manifestly ill-founded” on every point except one which Mr Speaight could not argue before the Court because he had failed to present it to the English Courts first.

    The judgement can be studied at This should really be the end of arguments about human rights, the rule of law and FOS.

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