However, closer inspection of the judgments suggests that the court may, in fact, have laid the ground for a range of new challenges against the FOS in future cases.
First, Lord Justice Stanley Burnton stated that common law requires consistency. He said the law requires that “like cases are treated alike”.
Bearing in mind that one of the most often heard complaints against the FOS is inconsistency in decision-making, there may be scope for challenges on the ground of inconsistency.
To get such a challenge off the ground, a firm which has been found liable by the FOS must point to another apparently similar case, whether against the same or a different firm, in which the FOS decided the issue the other way.
Second, although the court held that the FOS can find liability where there is no liability at law, it also held that if an ombudsman does this, “he should say so in his decision and explain why”. So it will now be a ground for quashing an FOS award, if the FOS has departed from the law without setting out reasons to justify doing so.
A third ground arises if the FOS takes irrelevant factors into consideration. This is always a ground for judicial review but it was thought not to be of much application against the FOS because the essential criterion for the FOS is fairness, which could include almost anything. Now the court seems to have placed a boundary on what can be taken into account.
Disp 3.8.1 lists matters which the FOS will take into account in deciding what is fair and reasonable. In addition to the law, the list reads “regulations, regulators’ rules and guidance and standards, relevant codes of practice and, where appropriate, what he considers to have been good industry practice at the relevant time”.
The court treated that as a comprehensive list of the only things which are permitted to be taken into account, so taking into account a factor not on that list could be a ground for judicial review.
A fourth ground may be the disregard by the FOS of expert evidence. FOS decisions have sometimes given its view of good industry practice as the justification for its decision but Lord Justice Stanley Burnton’s judgment suggests the FOS should not make awards against firms on the basis of what it thinks was good industry practice if the industry thinks differently.
In other words, the court intended that liability for failure to follow good industry practice should depend on what really is good industry practice. This is proved by expert evidence. The FOS should therefore have regard to an independent expert report produced by a firm and give that report proper weight.
A fifth ground is failing to hold an oral hearing. Lord Justice Stanley Burnton said of HME’s request to have the opportunity to cross-examine the complainant: “If the determination of his complaint involved the resolution of disputes as to what was said in the meetings…or if it could sensibly be argued that if Mr Lodge had received the advice that the ombudsman ultimately held he should have received, he would have acted no differently, the contention that fairness required an oral hearing might have been substantial.”
That statement seems to require a change of behaviour by the FOS. There must be a significant proportion of FOS cases in which there is a dispute as to what was said at a meeting or as to whether correct advice would have made any difference to how a client would have acted, yet it is known that the FOS grants a hearing in one case in 10,000.
Finally, it remains a ground for quashing a FOS award if it is unreasonable, in the sense of being an award which no reasonable ombudsman could have reached.
An example of a successful challenge on this ground is a decision of Mr Justice Sullivan in 2006 concerning Garrison Investment Analysis. The case concerned a client who was willing to accept the risk of investment in equities but who had a valid complaint for being advised to put all his eggs in one basket by investing as much as 40 per cent in one particular investment. The question then was of remedy.
The FOS awarded 1 per cent over base rate on the sum invested. The judge described this as “inexplicable” and “irrational” because the FOS had found that if the client had not been in this particular fund, he would be in some form of equity.
Therefore, the judge held that the remedy should be no more than the difference between the particular investment and the FTSE 100 index. Since the particular fund had done no worse than the index, this meant there was nil compensation to pay.
Despite the wide range of grounds for challenging an FOS award, the possibility of judicial review in the High Court is sometimes regarded as largely theoretical owing to the risk of costs if a firm loses. It is therefore of interest that recent decisions suggest avenues other than judicial review in such challenges.
One such avenue is to wait until the complainant sues to enforce the award. In those enforcement proceedings, a firm can rely for its defence on all grounds which would justify judicial review. This was decided last year by Mr Justice Lewison in the case of Bunney versus Burns Anderson. In that case, the FOS had directed two firms to carry out loss assessments and if a loss was shown, to pay the amount of the loss. Those assessments showed losses well in excess of the FOS jurisdiction limit of £100,000. There was thus no ceiling on the payments which the FOS ordered.
The judge held that the FOS exceeded its jurisdiction in so far as it directed payment over £100,000 and that although the firms had not sought judicial review of the awards when issued, they could rely on the excess of jurisdiction as a defence in the enforcement action.
In some cases, an unpaid complainant may choose not to sue but to complain to the FSA instead. The FSA’s policy appears to be to cancel the firm’s permission. A firm can always refer an FSA decision to the Financial Services and Markets Tribunal. The FSA’s decision is then suspended until the end of the tribunal.
A tribunal decision in June involving HME suggests the tribunal would be prepared to consider an argument that an FOS award is unlawful which is the consequence in law if any ground for judicial review can be demonstrated. So the tribunal may emerge as a third forum for any of the above challenges. If the firm loses before the tribunal, it is likely to be granted extra time to pay, so long as its argument for non-payment is bona fide. Unless the firm has been unreasonable, it will not be ordered to pay the other side’s costs.
With at least six potential grounds and three different potential forums, there are 18 possible routes of challenge to an FOS award.
Peter Hamilton is a barrister at 4 Pump Court