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IFA court win over FOS

An IFA has won a stunning High Court victory over the Financial Ombudsman Service, raising serious questions over the way it calculates redress.

In the Royal Courts of Justice in London last week, Mr Justice Sullivan overturned a FOS award against Garrison Investment Analysis for the alleged missale of NDF structured income products, arguing that its application of the FOS’s standard formula for calculating redress was “irrational” for such high- risk investors.

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

The couple complained to the ombudsman in 2004 after their investments faltered after 9/11 and the subsequent stockmarket fall.

Although a FOS adjudicator rejected both complaints, the ombudsman overruled the decision and upheld the couple’s complaint about the NDF5 sale. It said it was unreasonable in any circumstances to increase the investment in NDF products to 40 per cent.

The IFA appealed, arguing that the ombudsman had not given adequate reasons for its change of mind. It also claimed the FOS was wrong to use its standard method to calculate redress by assuming that the couple would have had their capital intact with a 1 per cent return.

Mr McManus QC, representing the FOS, argued that the 40 per cent investment was too risky for the retired couple who he said had made it clear that they wanted to reduce their exposure.

But the barrister acting on behalf of Garrison, Paul Stafford, presented compelling evidence, seen by the ombudsman when it investigated the case, that the Bells were experienced high-risk investors who had cashed in high-risk equity investments to invest in NDF bonds. He said that given the couple’s risk profile, it was unreasonable for the FOS to apply its standard redress calculation. Stafford also argued that the tumble in the stockmarket was unforeseeable and the Bells would have experienced a similar loss had they invested in equities.

Summing up, Justice Sullivan said he did not accept that the FOS reasoning on liability was inadequate but branded the FOS redress calculation “irrational” in this case and ordered the FOS to pay half Mr Duerden’s legal costs of 40,000.

Duerden says: “The FOS is an arrogant organisation that has not listened to us. This is not about the money, it is a matter of principle. I am delighted that someone of the judge’s standing has realised the way it calculates redress is wrong.”

FOS spokesman David Cresswell says: “The standard redress model has not been questioned in general, just for this particular case.”

Gareth Fatchett, a spokesman for Duerden’s lawyers Financial Services Legal, says: “This ruling will save IFAs vast amounts of money in the long term.”


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