Linear Investments Limited v Financial Ombudsman Service Limited

An ombudsman may assess whether a regulated firm adequately complied with the requirements for treating a client as an elective professional client. Signed or tick-box answers may be a starting point, but they do not justify reliance where omissions, inconsistencies or missing evidence put the firm on further inquiry. A quantitative assessment requires sufficient information about the relevant market and transaction size. Compensation must have a logical connection with the established complaint and need not assume that the client could have entered an equivalent high-risk strategy elsewhere. For contributory negligence, causation is assessed broadly and consistently for both parties. Concurrent faults remain causative even where the defendant’s earlier misconduct induced the transaction. An ombudsman departing from relevant law must explain the departure.

Linear Investments accepted Professor Leslie Willcocks as an elective professional client and permitted him to invest in a computer-driven strategy involving leveraged CFDs. After substantial losses, the Financial Ombudsman Service required Linear to pay compensation calculated against a diversified FTSE benchmark, with interest. The Ombudsman also declined to reduce the award for Professor Willcocks’ inaccurate statements about his trading experience.

Mrs Justice Stacey dismissed Linear’s judicial review application: [2024] EWHC 1428 (Admin). Linear appealed on liability, the compensation benchmark and contributory negligence. The Court of Appeal considered whether the Ombudsman had lawfully and rationally assessed the client classification, selected the benchmark and addressed the effect of Professor Willcocks’ misrepresentations.

The Court of Appeal, in a unanimous judgment delivered by Snowden LJ, allowed the appeal in part.

1. Regulatory framework. Under section 228(2) of the Financial Services and Markets Act 2000, the Ombudsman had to determine what was fair and reasonable in all the circumstances, taking account of relevant law, regulations, rules, guidance and standards. The Ombudsman was not required to apply the common law as a court would, but had to explain the reasoning sufficiently for judicial review, including any departure from relevant law. The approach in R (Options UK Personal Pensions LLP) v Financial Ombudsman Service Limited [2024] EWCA Civ 541 and R (Heather Moor & Edgecomb Ltd) v Financial Ombudsman Service [2008] EWCA Civ 642 was applied.
2. Elective professional client classification. COBS 3.5.3R required compliance with the qualitative assessment, the applicable quantitative test and the prescribed written procedure. Linear could begin with an assumption that the client would provide truthful answers, but it could not simply rely on general tick-box answers where its own form required an explanation and supporting evidence. Professor Willcocks’ reference to investing in blue-chip stocks, without explaining CFD experience, together with the absence of evidence, raised an obvious question whether he understood the difference between conventional share investment and leveraged CFD trading. The Ombudsman was therefore entitled to find that Linear had not made an adequate qualitative assessment. The reasoning was consistent with Steria v Hutchinson [2006] EWCA Civ 1551 and Wilson v MF Global UK [2011] EWHC 138 (QB).
3. Quantitative test. In alternative reasoning, the court held that the form was also inadequate because it did not identify the relevant market or the size of the lots previously traded. The claimed financial-sector experience likewise required clarification and evidence. This was sufficient to prevent Linear obtaining reasonable assurance that the quantitative criteria were met.
4. Compensation benchmark. The award under section 229 of the Financial Services and Markets Act 2000 had to bear a logical connection to the complaint. Since Linear had failed to establish that Professor Willcocks understood the high risks of the Pembroke strategy, it was rational for the Ombudsman to use a medium-risk FTSE benchmark rather than assume that another firm would have accepted him for a comparable high-risk professional strategy. Ground 2 therefore failed.
5. Contributory negligence. Section 1 of the Law Reform (Contributory Negligence) Act 1945 made causation central. A broad common-sense approach applied equally to the claimant’s and defendant’s faults, and the order in which the faults occurred was immaterial. Professor Willcocks’ misrepresentations were an operative cause of the losses because, without them, he would not have been admitted to the strategy. Linear’s earlier misleading information could also be an operative cause. The Ombudsman’s contrary causation analysis was legally inaccurate.
6. Respondent’s Notice and disposal. Relief could not be refused under section 31(2A) of the Senior Courts Act 1981, because it was not highly likely that the outcome would have been the same absent the error. The Ombudsman had initially contemplated a 25% reduction and changed course after adopting the flawed causation analysis. The decision was quashed insofar as it concerned the quantum of the award and remitted to the Ombudsman to determine a fair and reasonable reduction reflecting Professor Willcocks’ relative fault.

• Court of Appeal (Civil Division): Appeal allowed in part. The decision was quashed insofar as it concerned the quantum of the award, and that issue was remitted to the Ombudsman.
• High Court of Justice, King’s Bench Division, Administrative Court: Mrs Justice Stacey dismissed Linear’s judicial review application: [2024] EWHC 1428 (Admin).