Williams, R (on the application of) v Financial Ombudsman Service

The claimant, an independent financial adviser, sought judicial review of a Financial Ombudsman Service determination upholding a complaint by a client about advice to invest in a geared portfolio of traded endowment policies (TEPs). The court applied Part XVI of the Financial Services and Markets Act 2000 and the DISP rules in the FSA Handbook, and considered the scope of the ombudsman’s discretion to determine complaints by reference to what is "fair and reasonable" (s.228) and to take account of relevant law and industry practice (DISP 3.8.1). The court held that the ombudsman was entitled to rely on his own knowledge and experience, to adopt an adjudicator’s findings, and to reach a view on contemporaneous industry expectations about endowment returns without pursuing further contemporaneous material, provided his decision was not irrational or perverse. The court concluded the ombudsman’s decision was not irrational, that adequate reasons had been given and that the ombudsman had properly assessed both the likelihood and the consequences of loss to the investor; accordingly no relief was granted and the ombudsman’s decision stood.

The claimant advised Mr Bennett to acquire a geared portfolio of traded endowment policies in May 2002. The arrangement involved loan finance from the Newcastle Building Society to purchase the policies and to fund ongoing premiums. The policies underperformed and the building society ceased further lending in September 2005, leaving Mr Bennett with a substantial loss and an increasing loan balance.

The client complained to the Financial Ombudsman Service. An adjudicator (Mr Daubney) upheld the complaint on the balance of probabilities, and an ombudsman (Mr Tilson) issued a provisional and then a final decision upholding the complaint. The adviser sought judicial review of the ombudsman’s final decision, arguing in particular that traded endowment policies were regarded industry-wide as low or low-to-medium risk in 2002, that the ombudsman had relied improperly on his own knowledge without adequate regard to contemporaneous evidence supplied by the adviser, and that the ombudsman’s reasoning was inadequate.

The central legal issues were (i) whether the ombudsman acted within the statutory scheme in relying on his own knowledge and in adopting the adjudicator’s conclusions, (ii) whether the ombudsman erred by failing properly to take into account contemporaneous industry material produced by the adviser, and (iii) whether the ombudsman had provided adequate reasons and reached a decision that was not irrational or perverse.

The court reviewed the legislative framework (Part XVI FSMA 2000, ss.228 and 231, Schedule 17) and the DISP rules, and applied the guidance in R (Heather Moor & Edgecomb Ltd) v Financial Ombudsman Service Ltd [2008] EWCA Civ 642 and related authority about the ombudsman’s latitude. The judge held that the ombudsman may depart from common law standards if justified, but must give reasons; that he is entitled to take account of his knowledge of industry practice and to adopt an adjudicator’s factual findings; and that the degree to which the ombudsman should seek further contemporaneous material depends on the nature and complexity of the subject and whether rapid or unexpected change made further inquiry necessary. Applying those principles the court found it was rational for the ombudsman to rely on his own knowledge and to adopt the adjudicator’s conclusions about declining returns on with-profits/endowment funds and the unsuitability of the geared TEP package for Mr Bennett. The court emphasised that suitability involves both the probability of adverse outcomes and their consequences for the particular investor. The court refused relief, found the ombudsman had given adequate reasons and awarded costs to the defendant.

The application for judicial review is dismissed. The court held that the Financial Ombudsman acted within the scope of its statutory discretion under Part XVI FSMA 2000 and DISP rules, was entitled to rely on his own knowledge and to adopt the adjudicator’s findings, and had given adequate reasons; the ombudsman’s conclusion that the TEP package was unsuitable for the claimant’s client was not irrational or perverse.