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Muzzle the watchdog

The Financial Ombudsman Service, brought into being by the Financial Services and Markets Act 2000, is very much in its infancy.

The service was heralded as the dawn of a new era of swift, inexpensive and impartial adjudication of complaints made against the financial services industry. But is it truly fulfilling its function and duty to act as an independent tribunal? In particular, is it fair to the financial services industry? I have my doubts.

My personal perception is that the ombudsman service adopts an inherently complainant-friendly approach. I could point to several examples of this. As good as any is the fact that, contrary to basic legal principles, the evidential burden of proof is not upon the complainant to make good his complaint but upon the financial services industry to rebut the complaint.

But there is one particular aspect of the ombudsman service which epitomises what I perceive to be its unfair approach to the resolution of complaints. This relates to the power of the ombudsman to award complainants a monetary sum in respect of any “mental distress” caused by a complainant having received inappropriate financial advice.

The ombudsman service will routinely award a successful complainant damages for mental distress if satisfied that they have suffered a degree of mental anxiety. The evidence which a complainant must provide to justify an award for mental distress is hardly onerous. In the context of the missale of an endowment policy, for example, a simple statement by the complaintant along the lines of “…and I have been worried that my endowment policy will not pay off my mortgage at term…” would appear to suffice.

In monetary terms, awards for mental distress are modest and usually no more than £1,500. However, given the plethora of complaints which are investigated by the FOS against the financial services industry, it seems highly likely that millions upon millions of pounds are being paid to complainants for mental distress each year.

At first blush, I can see why a reader would query why I am suggesting that an award made by the FOS to a complainant for mental distress can be regarded as being unfair if the giving of inappropriate advice has caused them to suffer some form of anxiety, be it mild or acute.

My reasoning is simple – it is unfair of the ombudsman to make awards for mental distress given that, over the past century, the appellate courts have consistently held such awards to have no place in law. Such awards are misconceived. If awards for mental distress are not sanctioned by the courts, it can only be unfair of the ombudsman to effectively take the law into its own hands by continuing to make awards which run contrary to the law of the land.

That an award for mental distress is not recoverable in English law has been settled legal principle since 1909. The principle was upheld by the House of Lords as recently as December 2000.

Why an award for mental distress arising from the giving of inappropriate financial advice is not recoverable in English law was perhaps most eloquently formulated by Lord Justice Bingham in 1991 in the Court of Appeal decision in Watts v Morrow.

Mr and Mrs Watts had purchased a country house for £177,500 in reliance upon a survey produced by Mr Morrow. But Mr Morrow had negligently stated that the property was in good condition whereas, in fact, substantial repairs were required before Mr and Mrs Watts were able to inhabit the property. Over an eight-month period, Mr and Mrs Watts lived in conditions which were akin to a building site. It was accepted that these conditions had caused them to suffer from a degree of mental stress in which respect they sought to recover damages from Mr Morrow.

Lord Justice Bingham, accepting that Mr and Mrs Watts had undoubtedly suffered mental stress, held that damages for mental distress flowing from the inadequate performance of a professional retainer should not be recoverable because the purpose of such retainers is not to provide freedom from distress. Mr & Mrs Watts&#39 claim therefore failed.

Lord Justice Bingham put it in these terms: “…a contract breaker is not in general liable for any distress, anxiety, displeasure, vexation, tension or aggravation which his breach of contract may cause to the innocent party…”

Of course, I accept that although the courts may well not be disposed to making awards for mental distress, that does not of itself preclude the ombudsman from making those awards. In this regard, the rules of the FOS specifically permit for an award for mental distress to be made “whether or not a court would award compensation”.

My bone of contention is that, notwithstanding the powers which the ombudsman has, it simply cannot be fair for awards for mental distress to be made if such awards are not sanctioned by the courts. It does seem to be something of an oddity and unfair to those defending complaints before the ombudsman. My conclusion is that an award for mental distress made by the ombudsman may well be capable of legal challenge.

Certainly, the FOS is under an obligation to exercise its vast powers on an impartial basis – that requirement is laid down by section 228(2) of the Financial Service and Markets Act 2000 pursuant to which the FOS was brought to life. If the making of such awards is inconsistent with basic legal principles and that is unfair, the ombudsman may be acting outside the scope of his power and in breach of his obligation to act fairly. In this way, awards for mental distress might well be capable of being overturned by the courts by way of judicial review.

Moreover, if an award for mental distress is misconceived in law, it must run contrary to the principle of natural justice that the ombudsman is continuing to make such awards. This would appear to be a clear violation of the Human Rights Act 2000 and another basis upon which such awards might be challenged.

It is probably too much to ask that the FOS will, of its own initiative, review its powers to make awards for mental distress. Perhaps it will need a disgruntled IFA to apply to judicially review that power in the courts. We shall see.


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