How will Court of Appeal decision on the Financial Ombudsman’s wide discretion impact financial institutions?

The Financial Ombudsman Service (FOS) has a statutory discretion to reach a conclusion on complaints which it considers fair and reasonable, even if that conclusion might be considered surprising and unfair by the firm to whom the complaint relates. The Court of Appeal has confirmed the breadth of that discretion in dismissing a judicial review application by a pension provider against a decision made by the FOS (Options UK Personal Pensions LLP v Financial Ombudsman Service [2024]). The Court of Appeal concluded, among other things, that adequate reasons were provided to substantiate its conclusions and that the FOS is not required to determine a complaint in accordance with the common law.

The case provides useful commentary on the requirement of the FOS to consider what is fair and reasonable in any given complaint, while at the same time ensuring that the FOS fulfils the statutory intention of providing a “quick and informal means of resolving certain disputes.”[1] It also confirms the basis on which the FOS can depart from the common law position which might have precedent value in court claims. In this briefing note, Jolyon Connell and Georgia Tetlow explain what this decision means for financial institutions who might be the subject of complaints to FOS.

The case

Options UK Personal Pensions LLP (Options) is a regulated self-invested personal pension (SIPP) provider, which accepted execution-only instructions from customers who had been referred by third parties. In this case, a customer was referred by an unregulated introducer in Spain and the proposed investment turned out to be very unsuccessful and the complainant lost his entire pension fund. The customer complained to the FOS, arguing that Options had failed to carry out due diligence in respect of the introducer and/or the investment scheme, and that had it done so, Options would not (and therefore ought not) to have accepted the referral and allowed the investment to proceed within the SIPP.

The FOS determines complaints based on what is fair and reasonable in all circumstances of the case.[2] This is different from the duties of common law judges: the FOS deals with complaints not legal causes of action. Consequently, in handling complaints, the FOS must consider all relevant factors in reaching a fair and reasonable decision. This includes considering relevant laws and regulations, but it is up to the FOS to determine how much weight to place on these factors in any given complaint.

The FOS upheld the complaint and concluded that it was fair and reasonable to say that Options, upon conducting sufficient due diligence, would not have accepted business from the introducer, thereby preventing the investment from being made and causing no loss to the customer’s pension fund monies. Options launched a judicial review against the FOS, asking the Court to consider and overrule the FOS’ decision. Specifically, Options argued that in deciding to award compensation in circumstances where a court would not, the FOS had erred in its duty and had also failed to give adequate reasons for its decision.

The Court of Appeal rejected Options’ application, reiterating that the FOS was required to determine a complaint by reference to what was (in its opinion) fair and reasonable in all the circumstances of the case and was not confined to the common law. If its decision differed from previous precedents under English law, the FOS could make an award in accordance with that view, assuming it is a reasonable view in all the circumstances. The Court also held that, in this case, the FOS had explained the reasons for its decision adequately.

What this means for financial institutions

What is clear from the Court’s decision is that, provided a decision is fair and reasonable, financial institutions should expect a wide range of possible outcomes. The decision is a nod to the FOS considering a broad variety of factors when reaching a fair and reasonable decision. Those familiar with the FOS and its decisions will know that the discretion of the FOS is broad, and the Court of Appeal has endorsed that breadth once again.

What remains unclear is where the line should be drawn if the FOS departs from common law and well-known precedents, as the Court found that the Ombudsman’s decision had been in line with previous case law. The Court of Appeal has not gone so far as to give the FOS unfettered discretion when making decisions, but the likelihood of FOS decisions which depart from strict legal precedents remains possible. Financial institutions that are the subject of complaints to the FOS may therefore have to accept a degree of uncertainty around what “fair and reasonable in all the circumstances” might mean in any given case.

[1] [2024] EWCA Civ 541.

[2] Section 228, Financial Services and Markets Act 2000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, July 2024