UK: FOS: Court Of Appeal Decisions

Last Updated: 2 July 2008
Article by Simon Morris and Sarah Redlich

Recent Court of Appeal Judicial Review and Appeal decisions confirm FOS procedures are lawful and reasonable

Introduction

The Court of Appeal has recently confirmed in Judicial Review Proceedings before it that the Financial Ombudsman Service ("FOS") fair and reasonable jurisdiction does not require it to follow the law, nor is it obliged to hold a hearing or, as a matter of course, make its decisions public. In an Appeal before the same Court, the Court of Appeal has also held that FOS's case fee system is both lawful and reasonable, it is able to delegate certain aspects of its decision-making process, and that while it must consider the dismissal grounds provided under its procedural rules it has discretion not to apply these in certain circumstances. Overall, the decisions maintain current FOS practice and endorse earlier cases considered by the Courts.

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Recent Court of Appeal Judicial Review and Appeal decisions confirm FOS procedures are lawful and reasonable

Introduction

The Court of Appeal has recently confirmed in Judicial Review Proceedings before it that the Financial Ombudsman Service ("FOS") fair and reasonable jurisdiction does not require it to follow the law, nor is it obliged to hold a hearing or, as a matter of course, make its decisions public. In an Appeal before the same Court, the Court of Appeal has also held that FOS's case fee system is both lawful and reasonable, it is able to delegate certain aspects of its decision-making process, and that while it must consider the dismissal grounds provided under its procedural rules it has discretion not to apply these in certain circumstances. Overall, the decisions maintain current FOS practice and endorse earlier cases considered by the Courts.

Background

1.The Judicial Review proceedings

An IFA, Heather Moor and Edgecomb ("HME"), brought Judicial Review proceedings in respect of a particular complaint and FOS's decision to uphold that complaint and its award for redress, which amounted to more than the statutory cap of £100,000. HME challenged FOS's decision and award on the basis that:

(i) FOS was required to determine complaints in accordance with English law – this was intended so as not to infringe Articles 1 and 6 of the European Convention of Human Rights ("ECHR");

(ii) In this case, FOS had failed to apply English law and, therefore, its decision was irrational and should be quashed;

(iii) Furthermore, the Ombudsman should have held an oral hearing in public and given his decision in public, but wrongly refused to do either.

2. The Appeal case

The FOS brought proceedings against the same IFA to reclaim unpaid case fees in respect of four mortgage endowment complaints which it had investigated but ultimately dismissed. These proceedings were heard at the same time as the Judicial Review proceedings.

HME defended the proceedings on the basis of a number of arguments:

(i) In these cases, FOS did not consider the grounds for dismissal set out in its procedural rules;

(ii) Alternatively, to the extent dismissal was considered in these cases, this decision was delegated, which is not permitted under the Financial Services and Markets Act 2000 ("FSMA") and, therefore, is unlawful;

(iii) FOS has a policy of always investigating mortgage endowment complaints (as a opposed to dismissing them when appropriate), which is unlawful and ultra vires;

(iv) If there had been lawful consideration of the dismissal grounds, the cases would have been dismissed, they would not have become chargeable cases, and the case fees would not have become payable.

At first instance, District Judge Rutherford rejected the contention that FOS has a "policy" not to reject mortgage endowment complaints and was not persuaded that any of the complaints should have been dismissed - given the lack of evidence to determine this either way - but he found for HME on the basis that:

(i) The case fee system is unfair and unreasonable for a number of reasons including that (a) it is unjust that a case fee is charged where cases are investigated and then ultimately dismissed; (b) FOS already receives revenue through an industry-wide levy; (c) the case fees are supposed to only provide 50% of FOS's funding but, in light of the numbers of mortgage endowment complaints, this proportion has been significantly exceeded; and (c) no other professional body charges fees to "innocent" respondents;

(ii) FOS had no power to delegate, from an Ombudsman, the decision as to whether or not to dismiss a complaint (although he said the decision would not have been different if it had not been delegated).

The Court of Appeal decisions

1. The Judicial Review proceedings

The Court of Appeal rejected HME's application, holding that:

(i) While FOS must take account of the law, its fair and reasonable jurisdiction does not require it to follow the law. If the Ombudsman believes a fair and reasonable outcome differs from English law, he is able to make an award on that basis provided it is reasonable in all the circumstances. The decision of R (IFG Financial Service Ltd) v Financial Ombudsman Service [2005] EWHC 1153 (Admin) confirmed;

(ii) FOS had, in this case, done just that; taking account of the common law duty of care and the reasonable standard expected of a reasonable IFA and actually following the law in reaching the view that HME had acted negligently;

(iii) FOS is not under an obligation to hold an oral hearing, provided the Ombudsman considers the need for one; this was done in this case, the Ombudsman correctly concluding that the written evidence carried greater weight than the oral evidence;

Furthermore, the Court considered the need for the hearing to be held in public and confirmed that the right to a public hearing needed to be considered in the context of the whole procedural process, including Judicial Review. The right to apply for Judicial Review, which would provide a public hearing, met this requirement;

(iv) In relation to the contention that the Ombudsman should provide his decision in public, in this case it had, in fact, been done by way of the Judicial Review proceedings. However, in general, in order to comply with Article 6 of the ECHR, decisions or judgements do not, as a matter of course, need to be made public – the Court has flexibility to decide whether this is necessary in the circumstances.

2. The Appeal case

The Court of Appeal reversed District Judge Rutherford's decision finding for FOS and confirming:

(i) The case fee process is lawful and reasonable, principally on the basis that it is not linked to the outcome of the case and, therefore, preserves the Ombudsman's independence and neutrality. The Court said it was a rational response to the need to fund FOS;

(ii) That while, in these cases, it was not clear from the evidence whether dismissal had been considered, if a complaint is thereafter investigated but then rejected, the case fee is properly payable;

(iii) That while FOS is under an obligation to consider the dismissal grounds, it has discretion not to dismiss the complaint even if one or more grounds apply if the Ombudsman considers there is a reasonable possibility that investigation will indicate the complaint is well-founded;

(iv) That FOS may lawfully delegate the exercise of the power to dismiss to a suitably qualified member of staff; while FSMA deliberately excludes the "determination" of a complaint from FOS's delegation powers, it includes "dismissal".

Potential impact/effects of the Court of Appeal's decisions

1. The Judicial Review proceedings have confirmed the operation of FOS's fair and reasonable jurisdiction and its obligation to consider hearing – principles that some of the industry have considered established for some time. In light of this, it seems unlikely that further such challenges will be made in the near future;

2. The Court of Appeal's view that the case fee process is lawful and reasonable makes the likelihood of any change to it more remote. This may mean that firms' recent moves to seek change in the form of non-payment for complaints rejected on the basis of FOS's jurisdiction may be more difficult or not succeed, although the recent Hunt Review of FOS has recommended that the waiver of case fees for complaints outside FOS's jurisdiction is considered;

3. The Judicial Review proceedings has effectively bolstered FOS's practice of adapting to the fluctuating nature and volume of complaints by swelling its lower ranks to carry out the jurisdiction and dismissal reviews of complaints prior to investigation. This must be the appropriate and cost-effective way to run the Scheme for the benefit and in the interests of all its stakeholders but it may mean challenges in relation to the quality of FOS decisions or procedural irregularity may continue;

4. Overall, these cases emphasise once again how important it is for FOS to be able to show its decisions are reasonable and demonstrate its procedure is followed impeccably. It is quite clear from these cases that there are the resources and increasing confidence to bring challenges, whatever their chances of success, if firms and/or complainants believe there is a case to answer.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 30/06/2008.

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