The Financial Ombudsman Service suffered another bloody nose at the High Court in Bunney v Burns-Anderson and Cahill v Timothy James & Partners on May 25.
The two cases, heard together, decided that the ombudsman’s power to order a firm to take steps cannot be used to require a payment by the firm for the benefit of a complainant in excess of the FOS’s £100,000 jurisdictional limit.
Actually, nobody emerges well from the tale, certainly not the ombudsman, the firms involved, the FSA or even the Treasury, which was responsible for pushing the Financial Services and Markets Act through Parliament. The firms, in particular, are left with some issues regarding treating customers fairly.
In 1992, a Burns-Anderson adviser recommended to Mr Bunney that he transfer out of the TVS pension scheme. Eight years later, Timothy James gave similar transfer advice to Mr Cahill, who had retired from Olivetti due to ill health.
The two ombudsmen dealing with these cases found that the transfers had been unsuitable. Richard Pryor ordered Burns-Anderson to do a pension review loss assessment and, if a loss emerged, to offer redress in accordance with PIA guidance. Any disputes on redress could be referred back to the FOS.
Philip Roberts dealt with Cahill’s case differently because Cahill had already taken income drawdown. He ordered the firm to top up that fund to enable it to provide an annuity of the same amount that Cahill would have received if the transfer had not taken place. He also required payments plus interest for lost annuity amounts that would already have been paid if Cahill had never transferred.
Bunney’s losses exceeded £200,000 and Cahill’s possibly £2m, according to the customer’s assessment. Both sought enforcement of the FOS awards by way of an injunction.
Section 229 of FSMA gives the FOS a choice between a money award and a “direction that the respondent take such steps in relation to the complainant as the ombudsman considers just and appropriate”. The FSA can specify the limit for a monetary award but not the maximum cost of a direction. It recently refused to update the £100,000 limit which insurers have had since 1981 and IFAs since 1995.
Judge Lewison decided unsurprisingly that a firm can resist enforcement of an award if it can show that the FOS did not have jurisdiction.
More controversially, he concluded that any award that requires the payment of money to a complainant for his benefit is subject to the £100,000 limit, even if the sum is to be paid to a third party. The result was that he refused to grant Cahill an injunction to force the firm to make the payment ordered. With Bunney, there was nothing to enforce and the firm had offered £100,000 compensation. An injunction would serve no useful legitimate purpose.
The FSA looks foolish in declining to raise the ombudsman’s jurisdiction limits despite pressure from the FOS to do so. It is essentially operating a scheme which fails to protect people adequately from big losses.
The FOS has now lost three court cases in a year in which it has misapplied the compensation provisions of section 229 of FSMA.
In the Garrison case against the FOS, its refund approach was found to be incoherent when the customer’s loss related to over-concentration in one investment.
The FOS had to agree to annul its own decision when an ombudsman ordered a firm to reinstate an earlier offer while rejecting the complaint on the merits. Its refusal to verify the accuracy of firm compensation calculations and three-year and four-year delays before finishing cases that resulted here suggest an office unable to handle more complicated complaints.
The Treasury has failed to repair two holes in the legislation identified publicly at least two years ago.
First, there is the failure to link the power to direct and the compensation limits.
Second, the customers here cannot accept the awards and then sue for the balance.
The FOS has been a waste of time for Bunney and Cahill.
The judge granted leave to appeal so this case could yet go to the Court of Appeal. It might interpret the legislation in accordance with its natural meaning and give the FOS unlimited powers to order firms to pay money into pensions. Parliament could be assumed to have intended to do this from the clear words of the statute, notably the absence of any reference to the compensation limit.
More likely, the consumers will walk away from the FOS and just sue. Either way, the lawyers win and FSA consumer protection for those with big losses is seen to be wholly inadequate.