Factual and Procedural Background
This opinion concerns an application for judicial review brought by Company A against a decision made by The Financial Ombudsman Service Limited, specifically by an ombudsman, dated 2nd August 2004. The decision required Company A to pay compensation to a Plaintiff couple in respect of investments made on their behalf by Company A in two investment funds that did not comply with the Plaintiffs' stated medium risk investment requirements.
The Plaintiffs had invested in two high-risk funds, referred to as the FCS investment and the Aspire investment, both involving currencies and derivatives. The FCS investment was managed dishonestly, resulting in significant depletion of assets due to improper charges by a creditor and subsequent litigation in the United States.
Company A did not dispute the ombudsman’s decision regarding the Aspire investment but contested liability for losses related to the FCS investment, arguing that the dishonesty of the fund manager was unforeseeable and outside their responsibility.
The ombudsman’s decision was made under the Financial Services and Markets Act 2000 ("the Act") and its Ombudsman Scheme, which provides for an independent, quick, and informal resolution of disputes. The scheme is compulsory for financial advisers such as Company A and includes a compensation cap of £100,000, within which the Plaintiffs' claim fell.
The procedural history includes initial consideration by adjudicators of The Financial Ombudsman Service, correspondence between the parties addressing legal opinions on recoverability of damages, and the final binding decision by the ombudsman following a provisional decision and further representations.
Legal Issues Presented
- Whether the ombudsman was required to determine the complaint strictly in accordance with English law or could depart from legal principles to decide what was fair and reasonable in all the circumstances under the Ombudsman Scheme.
- Whether Company A was liable to compensate the Plaintiffs for losses resulting from the unforeseeable fraud of the FCS fund manager, despite the legal opinion that such losses would not be recoverable under English law.
- The scope of the ombudsman’s discretion in quantifying compensation and the extent to which relevant law must be taken into account in that process.
Arguments of the Parties
Company A's Arguments
- The losses caused by the dishonesty of the FCS fund manager were unforeseeable and outside the scope of Company A’s legal responsibility.
- According to a legal opinion obtained from Leading Counsel, the Plaintiffs were not entitled under English law to recover damages for losses caused by the unforeseeable fraud, even if the initial investment advice was unsuitable.
- The ombudsman failed to properly take into account the relevant law, treating it as irrelevant to the question of whether compensation should be awarded and its amount.
- Company A contended that the ombudsman’s decision departed from English law without adequate reasoning and that losses caused by unforeseeable events should not be compensable.
The Financial Ombudsman Service's Arguments
- The ombudsman’s role under the scheme is to determine complaints by reference to what is fair and reasonable in all the circumstances, not strictly by legal principles.
- Although the fraud was unforeseeable, the investment was unsuitable for the Plaintiffs’ medium risk profile, and it is fair and reasonable that Company A bears the risk of losses resulting from their unsuitable advice.
- The ombudsman considered the relevant law, including the legal opinion, but concluded that applying strict English law principles would not be fair or reasonable in all the circumstances.
- The decision to award compensation including losses from the fraud was within the ombudsman’s discretion under the scheme and was not irrational or perverse.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 |
Principles relating to recoverability of damages and causation in negligence claims |
The legal opinion relied on this House of Lords decision to conclude that losses due to unforeseeable fraud were not recoverable under English law; the court accepted this as a correct statement of the law. |
Court's Reasoning and Analysis
The court analysed the statutory framework of the Financial Services and Markets Act 2000 and the Ombudsman Scheme, emphasizing that the ombudsman must determine complaints by reference to what is fair and reasonable in all the circumstances, which allows for subjective judgment.
The court noted that the scheme requires the ombudsman to take into account relevant law but does not bind the ombudsman to apply the law strictly if a different outcome is considered fair and reasonable.
The ombudsman had considered the legal opinion from Leading Counsel, acknowledged that the fraud was unforeseeable and that under English law Company A would not be liable for such losses, but nonetheless concluded that fairness and reasonableness required Company A to compensate the Plaintiffs for all losses arising from the unsuitable investment, including those caused by the fraud.
The court found that the ombudsman did take the relevant law into account, even if the final decision departed from it, and that such a departure was within the ombudsman’s discretion under the scheme.
The lack of detailed reasoning for departing from English law was not fatal, as fairness and reasonableness are inherently judgment-based and may not always be fully articulable.
There was no challenge to the rationality of the ombudsman’s decision, and the court held that the decision was binding on Company A and should not be set aside.
Holding and Implications
The application for judicial review is dismissed.
The court upheld the ombudsman’s decision requiring Company A to pay compensation to the Plaintiffs for losses, including those resulting from the unforeseeable fraud of the investment manager. The ruling confirms that under the Ombudsman Scheme, the ombudsman has discretion to depart from strict legal principles if it is fair and reasonable to do so in all the circumstances.
This decision directly affects the parties by affirming the binding nature of the ombudsman’s determinations on financial advisers and clarifies the scope of the ombudsman’s discretion. No new legal precedent beyond the statutory scheme’s interpretation was established.