Clydesdale Financial Services Ltd, R (on the application of) v Financial Ombudsman Service Ltd

An ombudsman’s assessment of what is fair and reasonable is reviewable for legal error, irrationality and other ordinary public law flaws, but the court must not substitute its own factual evaluation. FCA Handbook provisions must be interpreted by their language, context, purpose and commercial sense. The pre-2021 wording of CONC 4.5.3R could require disclosure going beyond the bare existence of commission where the arrangement created an acute conflict of interest. CONC 4.5.2G applied to commission rates that varied according to a broker’s choice, and such arrangements required justification by extra work. Regulatory rules do not exhaust the wider FCA Principles. A money award under the Financial Services and Markets Act 2000 must compensate actual financial loss and must not be punitive. Whether loss occurred was a fact-sensitive question for the ombudsman. The broad deemed-agency provisions in section 56 of the Consumer Credit Act 1974 covered finance discussions forming part of the package for the vehicle sale.

Ms Lewis complained to the Financial Ombudsman Service about motor finance arranged by Arnold Clark and provided by Clydesdale in November 2018. Arnold Clark received a fixed commission and a further commission linked to the interest rate it selected within a permitted range.

The Ombudsman found breaches of CONC and FCA Principles, concluded that Clydesdale had not acted fairly and reasonably, treated Arnold Clark as Clydesdale’s deemed agent under section 56 of the Consumer Credit Act 1974, and awarded compensation calculated by reference to the lowest available interest rate.

Clydesdale sought judicial review. Arnold Clark raised additional grounds and sought to adduce expert evidence. The central issues were the interpretation of the FCA Handbook, the lawfulness of the compensation calculation, the procedural fairness of the Ombudsman’s process, and the scope of deemed agency.

1. Judicial review framework. The court reviews the meaning of FCA rules and Principles, but their application to the facts and the assessment of what is fair and reasonable remain matters for the Ombudsman, subject to ordinary public law grounds. The Handbook must be read holistically, purposively and commercially, while its language remains paramount.
2. Disclosure. The 2018 version of CONC 4.5.3R, although referring to disclosure of the existence of commission, was wide enough in an appropriate case to require more than a bare disclosure. The arrangement here involved both fixed commission and commission linked to the broker’s choice of interest rate. The Ombudsman was entitled to find that the disclosures did not adequately reveal the existence of both arrangements or the acute conflict created by the discretionary element. Principles 7 and 8 imposed overlapping and freestanding obligations; compliance with a specific rule would not necessarily exhaust them.
3. Differential commission. CONC 4.5.2G referred to two distinct kinds of commission agreement: differential commission rates and payments based on volume or profitability. A rate that varied according to the broker’s choice was a differential commission rate. The requirement that differential rates be justified by extra work therefore applied. The arrangement was difficult to justify because the broker’s choice of rate involved no material extra work. The finding of breach of Principle 6 was independently open to the Ombudsman.
4. Compensation. A money award under section 229 of the Financial Services and Markets Act 2000 had to compensate financial loss and could not be punitive. The Ombudsman applied the correct counterfactual inquiry: what would probably have happened absent the regulatory breaches, and what financial consequences would follow? He was entitled to consider evidence about the market together with evidence concerning the individual transaction and the parties’ likely conduct. It was open to him to conclude that Ms Lewis would probably have negotiated the interest rate down to 2.68 per cent. The conclusion was not irrational.
5. Deemed agency. Under section 56 of the Consumer Credit Act 1974, antecedent negotiations are broadly defined. Negotiations about finance forming part of the package enabling the purchase of the Audi were negotiations in relation to goods sold or proposed to be sold. Arnold Clark’s conduct was therefore deemed to have been conducted as Clydesdale’s agent. The Ombudsman could also find the relationship unfair under section 140A independently of any regulatory breach.
6. Procedure and disposal. Arnold Clark’s new procedural-fairness ground was not allowed. Its arguments supporting the compensation challenge were allowed, but its application to adduce the Frontier Economics report was refused. Clydesdale received permission on all grounds, but every ground was dismissed.

First-instance judicial review in the Administrative Court. The court granted permission on all grounds, dismissed the claim, refused Arnold Clark’s application to rely on the Frontier Economics report, and declined to entertain Arnold Clark’s procedural-fairness ground.