Factual and Procedural Background
The Appellant seeks judicial review of a decision made by an Ombudsman of the Defendant, the Financial Ombudsman Service Limited ("FOS"), dated 28 March 2022 (the "Decision"). The Ombudsman upheld a complaint made against the Appellant by the First Interested Party, referred to as the Complainant, and determined that the Appellant should compensate the Complainant for losses to his pension fund monies.
The Appellant, previously known as Company A and now renamed Company B, is a regulated self-invested personal pension ("SIPP") provider and administrator. It operates on an "execution-only" basis, processing investment instructions without providing advice. The Complainant was introduced to Company A by an unregulated introducer, Company C, incorporated abroad. The Complainant invested pension monies into an alternative investment product ("Store Pods") through the SIPP operated by Company A.
Company A had conducted some due diligence on the introducer and the investment but failed to identify certain regulatory warnings and risks associated with the introducer and investment. The investment failed, resulting in the loss of the Complainant's pension fund. The Complainant's complaint to Company A was rejected and subsequently upheld by the FOS Ombudsman.
Procedurally, permission to bring the judicial review was initially refused by two High Court Judges but later granted by a Court of Appeal Judge, who retained the claim in the Court of Appeal.
Legal Issues Presented
- Whether the Ombudsman erred in law by failing to identify and explain any departure from legal standards when awarding compensation based on regulatory Principles rather than actionable legal duties.
- Whether the Ombudsman misdirected himself in law by finding that the Appellant owed duties of due diligence to prospective SIPP members regarding unregulated introducers and investments, despite operating on an "execution-only" basis and lacking authority to provide investment advice.
- Whether the Ombudsman's conclusions regarding breaches of duty were irrational or unreasonable, falling outside the range of reasonable responses.
Arguments of the Parties
Appellant's Arguments
- The Ombudsman failed to clarify whether the liability imposed was based on duties recognized by the courts or on non-actionable regulatory Principles, thus lacking adequate reasons for departing from established legal duties.
- The Appellant owed no legal obligation to refuse the Complainant's SIPP application or investment instructions and was not subject to duties to vet introducers or investments beyond minimal checks.
- The due diligence requirement imposed by the Ombudsman created new and unforeseen duties, conflicting with contractual and regulatory obligations, particularly the duty to execute client instructions.
- The Ombudsman's findings were irrational, relying on disputed facts and unreasonable conclusions regarding the adequacy of due diligence and risk assessments.
Defendant's Arguments
- The Ombudsman acted within the statutory jurisdiction to determine what is fair and reasonable, properly taking into account relevant law, regulations, regulatory Principles, guidance, and good industry practice.
- The Principles for Businesses form part of the regulatory framework and can form the basis for findings of liability and compensation, even if not actionable in court.
- The Appellant's due diligence was insufficient, and the Ombudsman correctly concluded that it should have rejected the application and investment based on the risks identified.
- No new duties were created; the Ombudsman applied existing regulatory Principles consistently with relevant case law.
- The Ombudsman's findings were reasonable and supported by the evidence, including regulatory guidance and best practice documents.
Second Interested Party's Arguments
- Endorsed the Defendant's submissions, emphasizing that the Principles are part of the law and that the Ombudsman did not depart from legal standards.
- Argued that the Appellant's challenge was an over-legalistic attack on the merits rather than on legal error.
- Highlighted that due diligence obligations exist irrespective of the Appellant's lack of authority to provide investment advice.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| R (Heather Moor & Edgecomb) v Financial Ombudsman Service [2008] Bus LR 1486 (CA) |
Ombudsman may depart from common law and must explain reasons if so; must determine complaints by what is fair and reasonable under FSMA 2000. |
Confirmed that the Ombudsman can apply regulatory Principles beyond common law duties, must give clear reasons for departures, and decisions are subject to judicial review for irrationality. |
| R (British Bankers Association) v Financial Services Authority [2011] EWHC 999 (Admin) |
Principles for Businesses are part of regulatory framework and must be taken into account; not actionable but create obligations. |
Held that the Ombudsman must consider Principles when deciding what is fair and reasonable; Principles stand over specific rules and cannot be displaced by them. |
| R (Berkeley Burke SIPP Administration Ltd) v Financial Ombudsman Service [2018] EWHC 2878 (Admin) |
Application of Principles in regulatory context; no conflict between Principles and specific COBS rules regarding execution of orders. |
Upheld Ombudsman's approach applying Principles to due diligence and rejection of investments prior to acceptance of instructions. |
| Adams v Options SIPP [2020] EWHC 1229 (Ch) and Adams v Options UK Personal Pensions LLP [2021] EWCA Civ 474 |
Limits of contractual and regulatory duties in execution-only SIPP arrangements; rejection of claims based on COBS 2.1.1R duties post-contract. |
Distinguished by the Ombudsman as addressing different facts and claims; not directly applicable to pre-contractual due diligence obligations considered. |
| R (IFG Financial Service Ltd) v Financial Ombudsman Service Ltd [2006] 1 BCLC 534 |
Ombudsman may form opinion of what is fair and reasonable under FSMA 2000; subjective but reviewable. |
Supported the principle that Ombudsman decisions are opinions subject to judicial review on grounds such as irrationality. |
| Quinn v IG Index Ltd [2018] EWHC 2478 (Ch) |
Interpretation of COBS 2.1.1R; limits on duties imposed on execution-only transactions. |
Used by Appellant to argue limits on duties; court found that COBS 2.1.1R does not impose duty to prevent execution-only transactions. |
| R (Aviva) v Financial Ombudsman Service [2017] EWHC 352 (Admin) |
Requirement for adequate reasons in Ombudsman decisions. |
Held that failure to give adequate reasons can render Ombudsman decisions flawed; cited in context of adequacy of reasoning. |
Court's Reasoning and Analysis
The court began by affirming the statutory framework under FSMA 2000, which empowers the Ombudsman to determine complaints based on what is fair and reasonable in all circumstances, considering relevant law, regulations, guidance, and good industry practice. The court emphasized that the Ombudsman is not confined to common law duties and may depart from them, provided reasons are given.
In addressing the first ground, the court found that the Ombudsman adequately explained his reliance on the Principles for Businesses, regulatory rules, and relevant case law, including the BBA and Berkeley Burke decisions. The court rejected the Appellant's argument that the Ombudsman failed to identify and explain departures from actionable legal duties, noting that the Ombudsman clarified why certain contractual provisions and prior case law (Adams) were distinguished.
Regarding the second ground, the court held that the Ombudsman's finding that the Appellant owed duties of due diligence to prospective SIPP members and introducers was lawful and consistent with regulatory Principles and guidance. The court observed that the due diligence obligation related to whether to accept the application and investment in the first place, not to providing investment advice, which the Appellant was not authorized to give. The court further noted that the Appellant's own documentation and practices reflected an understanding of due diligence obligations, undermining the claim that the duties were novel or unforeseen.
On the third ground, the court found no irrationality in the Ombudsman's conclusions. The court held that the Ombudsman reasonably concluded that the Appellant should have checked regulatory warning lists directly rather than relying solely on a third-party database and that the Appellant failed to adequately assess the risks associated with the introducer and investment. The court rejected the Appellant's criticisms of the Ombudsman's reasoning as insufficient to meet the high threshold for irrationality in public law.
Overall, the court concluded that the Ombudsman's decision was lawful, rational, and supported by adequate reasons, and that the principles applied were part of the regulatory framework that the Appellant was bound to observe.
Holding and Implications
The court DISMISSED the claim for judicial review.
The decision confirms that the Financial Ombudsman Service may apply regulatory Principles, guidance, and good industry practice as part of its fair and reasonable test under FSMA 2000, even where no actionable legal duties exist. It affirms the Ombudsman's discretion to impose due diligence obligations on regulated firms in the pre-contractual stage, particularly in the context of SIPP providers operating on an execution-only basis. The ruling underscores the importance of adequate due diligence on unregulated introducers and investments to prevent consumer detriment.
This decision does not establish new precedent beyond confirming existing regulatory and statutory frameworks but clarifies the application of regulatory Principles in Ombudsman determinations and the limits of judicial review in this context.