OpinionOct 14 2014

Fos landmark U-turn opens a can of worms

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A recent dramatic decision by the Financial Ombudsman Service to reverse a landmark final ruling and reconsider the case could open a legal can of worms over whether or not it has the authority to enforce a revised decision.

Fos said following the commencement of a judicial review process, it was reviewing a final decision which went against Sipp provider Berkeley Burke.

In the decision, which was published on its online database but was later pulled, Fos ruled that Berkeley Burke failed to carry out adequate due diligence by allowing a consumer to invest nearly £25,000 in an unregulated investment in 2011, whose holding company was placed in administration in 2012.

At the time, Sipp provider Rowanmoor Pensions defended its decision to allow investments into that investment, saying that providers cannot do anything “over and above their due diligence” on the tax position of an investment.

A similar point seemed to be confirmed in a Pensions Ombudsman decision last summer, in which it backed Standard Life in a separate case over an alleged failure to undertake sufficient due diligence in relation to failed Arm life settlements bonds.

Deputy pension ombudsman Jane Irvine said that the limit of Standard Life’s responsibility as administrator is to consider whether or not an investment falls within the list permitted by HMRC so as not to give rise to unauthorised tax charges.

The Fos’s original Berkeley Burke decision therefore has wide ramifications, in that it suggested that Sipps firms would need to perform due diligence that effectively forces to step into the role (and onto the toes) of the individual’s adviser.

Faced with a judicial review by the firm, which was had support from a number of peers, Fos said it is now reviewing the decision.

But this might not be the end of it, because some experts have questioned whether Fos has the legal clout to enable it to essentially scrap its own final decision and issue a new one.

It may depend on whether the consumer has accepted the final decision or not.

The FCA’s Dispute Resolution rulebook says: “If the complainant notifies the ombudsman that he accepts the determination within that time limit, it is final and binding on both parties.”

On the Fos database, it agrees: “The ombudsman’s decision, if accepted by the consumer, is final and binding on the financial business. If necessary, it can be enforced in the courts.”

A Fos spokesperson confirmed to FTAdviser that the decision has been accepted, but that the complainant has given “permission” for the case to be reviewed.

Neil MacGillivray, Amps’ chairman, told FTAdviser: “As far as the Fos is concerned, when the individual makes a determination and the client accepts it, it’s legally binding. I have never heard of Fos changing that.

“The person who won their case agreed to have it reviewed. Why would you agree to do it? What additional benefit is there for them? It’s very surprising.”

It seems more than surprising. It is entirely possible, one might suggest, that if the case were to go the other way second time around, the complainant might simply try to enforce the original ruling in the courts.

Kalvin Chapman, solicitor at the banking and financial regulation team for dispute resolution at law firm Berg, added that the ‘Disp’ rules do not state whether an ombudsman’s final decision can be withdrawn.

He said: “It only becomes final upon the acceptance of the complainant. Consequently, in the absence of a rule saying they cannot re-consider the determination, I think it would go down to public policy.

“It is therefore within public policy that a perverse or unreasonable decision by a public body must be capable of being reviewed in light of information that makes it perverse.”

One landmark ruling and an unprecedented U-turn into this case, we could still be a long time from knowing how it will pan out - and what the broader ramifications might be.

donia.o’loughlin@ft.com