The Court of Appeal recently heard the latest case of an IFA seeking to challenge the refusal of the Financial Ombudsman Service to apply the 15-year long stop.
In this case, the IFA also raised some other novel arguments challenging the authority of the FOS.
As always seems to be the case, the FOS emerged victorious and, on first impressions, relatively unscathed. Closer examination of the judgment, however, may reveal a chink in the FOS’s armour that firms will look to exploit in future when similar complaints are heard by FOS.
Bamber and BP Financial Services was a partnership of financial advisers regulated first by Fimbra from 1989, then by the PIA and finally by the FSA from December 2001. The partnership went through various phases, with partners leaving and the partnership dissolving and reforming with the remaining partners on at least two separate occasions. The partnership finally dissolved once and for all when the business was incorporated.
Advice was given on an endowment policy in April 1989. The clients first complained to the firm in July 2004 (over 15 years later). By the time the matter got to the Court of Appeal, it did not appear to be disputed that the original Fimbra firm was regarded, for regulatory purposes, as continuing throughout the various reincarnations of the partnership – potentially giving the FOS the ability to consider the complaint in question.
Under the Fimbra arbitration scheme, the maximum award was £50,000. Once the firm joined the PIA, the PIA Ombudsman could then consider complaints arising out of business conducted by the firm while a Fimbra member but could award up to £100,000. Crucially, both such schemes were bound by the law, so, in order to succeed, the complainant had to show negligence that had caused damage – the 15-year long stop also applied. The FOS, on the other hand, is bound only to determine complaints “by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case”.
You do not have to be a lawyer to note the broad discretion given to the FOS by such a woolly phrase.
Bamber sought to challenge the FOS on three fronts:- that the FOS was bound to apply the 15-year long stop;- that, in deciding what is “fair and reasonable” in this case, the FOS was bound to apply all the rules of the former Fimbra and PIA schemes and a failure to do so by the FOS was an “abuse of power and legitimate expectation”; and- that the FOS was not genuinely independent of the FSA despite the Financial Services and Markets Act specifically providing for the FOS’s independence.
Bamber failed to persuade the court that the FOS was bound to apply the 15-year long stop. This is no great surprise – the FSMA specifically provides that the FSA must make rules setting out the time limits within which cases must be brought and the court adopted the now well rehearsed argument that if the FSMA had intended for the FOS to be bound by the 15-year long stop, it could have said so. The fact that it did not and that it gave the FSA power to make its own rules on time-barring gives the FSA the discretion not to apply the 15-year rule.
It is difficult to dispute that position. It is clearly unfair that IFAs are the only group excluded from the protection given by the 15-year long stop and that inherent unfairness may itself be capable of challenge as being inconsistent with the European Convention on Human Rights. Challenging the way that the FSA has applied the FSMA to create its own time-barring rules, as in this case, is, however, unlikely to succeed.
This is where the decision is most interesting. Under the relevant legislation, when determining complaints about advice given before December 2001, the FOS is bound to “take into account what determination the former ombudsman might have been expected to reach, and what amount (if any) might have been expected to be awarded”.
It was not dealt with in detail in the judgment but it appears that the court did not consider that this duty stretched to the FOS or the FSA applying the 15-year long stop (as the former schemes would have done), possibly because the FSMA specifically makes alternative provision in this area.
What the court did say is that when the FOS goes on to make a decision on the merits of this case, it must be able to demonstrate that it has complied with the duty above to take account of what the former scheme would have done. The court went on to say that if the FOS fails to do this, the “decision would be liable to be quashed in any judicial review”.
This will have IFAs (and their lawyers) licking their lips. I would also bet that the FOS is frantically seeking its own legal advice on exactly what it has to do to satisfy this duty and avoid the possibility of a judicial review of this or a similar decision. Does it have to make exactly the same decision as the former scheme would have made? If not, how far can it safely deviate from that decision? This could be a minefield and raises a genuine possibility that FOS discretion could be curbed in pre-2001 cases – watch this space.
On a practical note, firms should now consider asking the FOS to demonstrate how it has complied with its duty to consider what the former scheme would have done in all pre-2001 cases.
The court dismissed this point as having little merit. This is again unsurprising as it was speculative at best. The court paid particular regard to the fact that FOS decisions were subject to judicial review, which goes some way to ensuring the FOS’s independence by providing a means to challenge those decisions.
Although on the surface, this decision changes little, its impact may be fully felt when a further challenge is made against an FOS decision on the merits of a complaint, in this or another pre-2001 case. The door may have been left ajar by this decision – it now needs someone to push harder to open it.