R v Financial Ombudsman Service Ltd ex parte IFG Financial Services Ltd

This is a judicial review of an ombudsman determination under the Financial Services and Markets Act 2000 scheme requiring the claimant firm to pay compensation to complainants for unsuitable investment advice. The court addressed the meaning and effect of sections 225, 228 and 229 of the Act, Part III and paragraph 14 of Schedule 17 and Rule 3.8.1 of the scheme rules.

The key legal principles are: (i) a complaint under the compulsory jurisdiction is to be determined by reference to what the ombudsman considers "fair and reasonable"; (ii) the ombudsman must take into account the relevant law but is not bound to award what a court applying the law would award; and (iii) where the ombudsman reaches a decision that is not perverse or irrational, a court will not substitute its own view by judicial review.

The claimant argued that the ombudsman failed to take into account English law on causation (as summarised in a counsel's opinion relying on South Australia Asset Management Corporation v York Montague Ltd) and therefore wrongly awarded compensation for losses caused by unforeseeable fraud by a fund manager. The judge found that the ombudsman had considered the legal opinion and the relevant legal argument about foreseeability and causation, but concluded that the ombudsman was entitled to depart from the legal result because he considered that, on the facts, denying recovery would be unfair and unreasonable. The application for judicial review was dismissed.

Background and parties:

• The claimant, IFG Financial Services Ltd, was an investment adviser. The interested parties were Mr and Mrs Jenkins who had instructed IFG to invest funds on a medium risk basis.
• The defendant was the Financial Ombudsman Service Ltd (the scheme operator). An ombudsman made a determination under the compulsory jurisdiction requiring IFG to pay compensation to Mr and Mrs Jenkins for unsuitable investments, including sums lost following investments in the FCS Managed Currency Fund, which later suffered loss through the dishonest conduct of its manager.

Nature of the claim and relief sought:

• The claimant sought judicial review of the ombudsman's final determination dated 2 August 2004, contending that the ombudsman had failed to take into account the relevant law (in particular legal principles on causation) and therefore acted unlawfully in awarding compensation for losses caused by unforeseeable fraud.

Issues framed by the court:

1. Whether the ombudsman had taken into account the relevant law as required by Rule 3.8.1(2) and section 228/229 of the Act when deciding whether and how much compensation to award.
2. Whether the ombudsman could lawfully award compensation for loss resulting from unforeseeable fraud by a fund manager where English law (as argued for the claimant) would preclude recovery.
3. Whether the ombudsman's decision was irrational or perverse such as to warrant quashing by judicial review.

Court's reasoning and conclusion:

The judge reviewed the statutory framework (sections 225, 228 and 229, Schedule 17 and the scheme rules) and the factual correspondence and investigation carried out by adjudicators and the ombudsman. The court accepted that the ombudsman was required to take relevant law into account but was not confined to awarding what a court applying the law would award. On the evidence the ombudsman had considered the claimant's counsel's opinion and the argument that the fraud was unforeseeable. The ombudsman expressly accepted that the fraud was unforeseeable but nevertheless concluded that it would not be "fair and reasonable" to leave the complainants to bear the loss caused by an investment that should not have been recommended. The judge held that the ombudsman was entitled to reach that conclusion and that there was no challenge on grounds of irrationality. The application for judicial review was dismissed.

Wider context:

The judgment notes the particular character of the ombudsman scheme which permits determinations based on what the ombudsman considers fair and reasonable, and acknowledges that such determinations may differ from strict legal entitlements; judicial review is limited to conventional public law grounds such as irrationality or failure to take into account mandatory considerations.

The application for judicial review is dismissed. The court held that the ombudsman had taken into account the relevant law (including counsel's opinion on causation) but was entitled under section 228/229 and Rule 3.8.1 to conclude that a different outcome was fair and reasonable in all the circumstances. The ombudsman's departure from the legal result was not irrational and therefore did not merit quashing by judicial review.