Garrison Investment Analysis, R (on the application of) v Financial Ombudsman Service

The court considered a judicial review challenge to a Financial Ombudsman Service decision of 9 January 2006 upholding in part a complaint by Mr and Mrs Bell about investments into NDF Extra Income & Growth Plans 3 and 5. The judgment restated that the Ombudsman must give reasons for his decisions (see section 228(4) of the Financial Services and Markets Act 2000) and that Ombudsman decision letters should be read as a whole and in a common sense way.

The court held that the Ombudsman had given adequate reasons for his conclusion on liability: he was entitled to find that the adviser’s recommendation to increase exposure to the NDF 5 plan was unreasonable in the complainants’ wider circumstances (in particular their age and the disproportionate share placed in a single high-risk product). However, the court found that the redress ordered was irrational because it did not follow logically from the particular error the Ombudsman had identified: the Ombudsman found the error was recommending too large a proportion in one product, not that the complainants wished to reduce risk generally. For that reason the redress award was quashed and the question of appropriate redress was remitted to the Ombudsman.

Background and parties: The application was a judicial review by Garrison Investment Analysis of a decision of the Financial Ombudsman Service dated 9 January 2006. The interested parties, Mr and Mrs Bell, complained about advice to invest in NDF Extra Income & Growth Plans 3 and 5. The Ombudsman had earlier issued provisional decisions and ultimately upheld the complaint in respect of the sale of the NDF 5 product, ordering redress.

Nature of the claim and relief sought: The claimant sought judicial review of the Ombudsman’s final decision on the ground that the Ombudsman’s reasons were unintelligible or inadequate, that material considerations were not taken into account and that the redress ordered was unreasonable.

Procedural posture: The matter reached the Administrative Court at first instance. There had been an initial adjudicator ruling in favour of the claimant, followed by provisional decision one (upholding the complaint), provisional decision two (narrowing the complaint to NDF 5) and the final decision incorporating provisional decision two.

Issues framed by the court:

• Whether the Ombudsman’s reasons for his findings were adequate in the circumstances and capable of intelligible review;
• Whether the Ombudsman had taken into account material considerations;
• Whether the redress ordered was rationally connected to the error the Ombudsman identified.

Court’s reasoning and conclusions: The court emphasised that Ombudsman decision letters must be read as a whole and in a common sense, non-legalistic way, given the scheme’s aim to resolve disputes quickly and informally (see section 225(1) of the Act). On the first issue, the court found the Ombudsman’s reasoning on liability adequate: the Ombudsman reasonably concluded that while the sale of NDF 3 was acceptable, the recommendation to place approximately 40% of the complainants' capital into NDF 5 meant excessive reliance on a single high-risk product and was therefore inappropriate in their wider circumstances. On the second issue, there was no reason to conclude the Ombudsman omitted material considerations.

On the redress issue, the Ombudsman had applied a general methodology (assuming capital would have been intact with a return equivalent to base rate plus 1% compounded) where the counterfactual was uncertain. The court held that in this case, given the Ombudsman’s own findings that the complainants were prepared to accept some equity risk and that the error was limited to excessive concentration rather than recommending high-risk products per se, it was irrational to assume as a counterfactual that they would have chosen to reduce risk. The redress awarded did not therefore achieve the Ombudsman’s stated aim of putting the complainants in the position they would have been in but for the error.

Remedy and costs: The court quashed the redress element of the Ombudsman’s decision and remitted only the matter of appropriate redress to the Ombudsman for reconsideration in light of the Ombudsman’s liability findings. The claimant was awarded 50% of its costs to be subject to detailed assessment, with a payment on account of 7,000 to be paid within 14 days.

The court quashed (in part) the Ombudsman’s decision and remitted the question of redress to the Ombudsman. The court found the Ombudsman gave adequate reasons on liability and did not omit material considerations, but held the redress ordered was irrational because it did not follow logically from the specific error identified (excessive concentration in one high-risk product rather than a mistaken recommendation to take high risk). The redress determination was therefore quashed and remitted for reconsideration.