The Court of Appeal on 20 May dismissed Options UK Personal Pensions’ judicial review (JR) of a Financial Ombudsman Service (FOS) decision.
Options challenged a FOS decision upholding a complaint on the basis of inadequate due diligence on an unregulated introducer and unregulated investment. Broadly, Options argued that (1) FOS failed to explain its departure from the law, (2) made an error of law and/or (3) reached an irrational decision.
The Court of Appeal decision in Options v FOS [2024] is of relevance to any FCA regulated entity subject to the jurisdiction of FOS given its impact on FOS decision making, say James Parsons, associate and Rachael Healey, partner at Reynolds Porter Chamberlain LLP.
Background
The JR brought by Options (formerly Carey Pensions) gave the Court of Appeal the opportunity to revisit SIPP operator duties, specifically due diligence obligations and what is expected of SIPP operators when a potential client is introduced by unregulated firms to unregulated investments.
The Court of Appeal previously considered SIPP operator duties in Options v Adams [2021] and found against Options for breach of Section 27 of the Financial Services and Markets Act 2000 (FSMA). We previously reported on that decision here. For the purposes of the JR, it’s relevant to note that Mr Adams’ appeal in relation to the alleged breach of COBS 2.1.1R (the FCA Handbook rule requiring a firm to act honesty, fairly and professionally) was refused, and so the High Court decision which found that there had been no breach of COBS 2.1.1R was left untouched.
The complaint and subsequent FOS decision subject to the JR (the FOS decision) considered broader allegations than those in Adams. The FOS decision concerned alleged breaches of duty by Options for failing to identify and act on various ‘red flags’ with the unregulated introducer, CL&P, and the Store First investment before the complainant opened their SIPP (and to refuse the application and investment as a result). The allegations (and FOS’ findings) of inadequate due diligence were broadly based on a finding that Options had failed to identify various red flags with CL&P when it started accepting introductions in August 2011 (including the fact they were paying incentives to members to invest in Store First and might be advising clients on the SIPP where they did not have relevant regulatory permissions to do so). The interesting part of the FOS decision was that it found a breach of COBS 2.1.1R when the High Court on similar facts had not in Adams. Did this difference matter to FOS’ approach and reasoning?
The issues
The Court of Appeal in the JR had to consider SIPP operator due diligence obligations (which the FOS has routinely found apply to SIPP operators based on the FCA’s thematic reviews in 2009 and 2012 and finalised guidance in 2013). There were three grounds for the JR:
Ground 1 – the FOS decision awarded compensation in circumstances where a court would not have done so, and the FOS decision failed to acknowledge this and give reasons for holding the SIPP operator responsible where a court would not have done so.
Ground 2 – FOS erred in finding that Options owed duties to prospective members of a SIPP to carry our due diligence on introducers and the investments selected.
Ground 3 – FOS’ conclusions in relation to breaches of duty were irrational.
Ground 1 raised a point of wider importance to FCA regulated firms as it goes to whether FOS can make a decision and go on to award redress based on findings of a breach of the FCA Handbook Principles alone (where a court would be unable to do so, as a breach of the Principles cannot form the basis of a cause of action before a court) and whether in doing so FOS can be accused of departing from the relevant law (which FOS is required to consider under the FCA Handbook provision, DISP 3.6.4R) and did FOS in such circumstances have to give reasons for that departure.
The Court of Appeal Decision
The Court of Appeal rejected Options’ challenge on all grounds.
Ground 1
On Ground 1, the Court of Appeal rejected the argument that if FOS finds a firm liable in circumstances where a court could not or would not do so, they should say so in terms and provide reasons for doing so. Options argued that this was an obligation on FOS relying on the judgment in R (Heather Moor & Edgecomb) v FOS [2008] in which the judge confirmed that FOS “is free to depart from the relevant law, but if he does so he should say so in his decision and explain why”.
The Court of Appeal confirmed FOS is not required to consider distinctly whether a firm has breached legally actionable duties and, if not, give reasons for upholding the complaint. Instead, it is sufficient for FOS to determine the complaint having considered the relevant law, regulator’s rules and guidance and (where appropriate) properly supported views of good industry practice. The Court of Appeal noted that the FOS does not need to “determine a complaint in accordance with the common law” (i.e. FOS does not need to apply the law as a court would).
Ground 2
The Court of Appeal found that although Options’ contracts with its customers did not impose due diligence duties, the due diligence obligations referred to in the FOS decision could be derived from the FCA guidance publications (notably the 2009 Thematic Review). In respect of Options’ reliance on the High Court decision in Adams (where the COBS allegation was dismissed), the Court of Appeal distinguished the finding of the High Court on the basis that it involved considering the post-contract position (whereas the FOS decision was based on pre-contract failings).
The Court of Appeal did not express a view on the scope and effect of COBS 2.1.1R (whether it extends to pre-contract due diligence) on the basis “it is better to leave consideration of that matter to a case in which it is of central relevance” (i.e. the court felt it did not need to consider COBS 2.1.1R because it had found FOS had legitimately upheld the complaint based on the Principles).
Ground 3
The Court noted the high bar for establishing irrationality and concluded that FOS was entitled to uphold the complaint insofar as it concerned introducer due diligence on the basis that Options ought to have made a check for Mr Wright directly on the FCA website, rather than relying on World Check for FCA alerts. On investment due diligence, the Court of Appeal accepted that there were some issues with the factors relied on in the FOS decision but did not consider that they reached the threshold of establishing that the FOS decision was irrational.
Implications
For SIPP operators
For SIPP operators, this appears to be the end of the road for challenging FOS on the basis that there are no pre-contract due diligence obligations. It seems that to defend a complaint based on pre-contract due diligence failings (or challenge a FOS uphold on that basis) there will have to be particularly strong evidence to show that there was no breach of the Principles in accepting business from an unregulated firm or allowing a certain investment (for example, if it can be argued there were no red flags or that the red flags were indiscernible at the time).
For FCA regulated firms
The judgment confirms that FOS only has to consider – rather than apply – the relevant law (which has been found to include the FCA Handbook Principles) and give adequate reasons for their decision. So the FOS does not need to approach complaints as a court would and it is likely the FOS will be immune from challenge provided it can show it has broadly considered the relevant law, guidance, and best practice and reached an informed decision based on that (without having to identify a cause of action or find a specific breach on the part of the regulated firm or otherwise explain where it upholds a complaint where a court would not do so). This is unhelpful to firms that find themselves on the wrong side of decisions at FOS.
The Court of Appeal judgment also refers to various authorities on FOS’ jurisdiction which confirm that FOS should be given significant leeway in determining complaints. In rejecting Options’ argument around the need to distinguish between actionable and non-actionable provisions of the FCA Handbook and explain a departure from the law when upholding a complaint based on breach of the latter, the Court of Appeal noted that the FOS regime is a “quick and informal means of resolving certain disputes” and that to preclude the FOS from determining complaints on the Principles “would seriously limit the effect of the Principles”.
The ability to determine complaints in this ‘relaxed’ fashion, coupled with the Court of Appeal’s finding that the Principles are part of the relevant law, may leave firms concerned about where they stand given FOS’ ability to uphold complaints where the firm considers it has complied with what was expected of it (as here) given the high-level nature (/lack of specificity) in the Principles. It raises a question as to whether FOS will ever have to explain a departure from the law given the FOS can uphold a complaint based on a breach of the Principles, where breach is assessed on the FOS’ subjective view of good practice. The Court of Appeal’s endorsement of this approach is particularly concerning to firms in circumstances where FOS compensation limits are now at £430,000 for post-1 April 2019 breaches.
That said, there may still be room for firms to challenge complaints alleging post-contractual breaches of the Principles or COBS and where the contract sets out clearly the scope and limitations on the FCA regulated party, given the Court of Appeal’s apparent reluctance to address the scope of COBS 2.1.1R and whether it extends to pre-contractual services.
