Firms attempting to challenge decisions made by the Financial Ombudsman Service (FOS) will now find doing so very difficult, following a High Court ruling last month, a city lawyer has warned.
Peter Bibby, a partner at law firm DLA Piper Rudnick Gray Cary, says the ruling has clarified the position and powers of the FOS and given a direction to the Ombudsman that is has “quite a wide discretion to act”.
“The case shows that it is not necessary for consumers to prove a legal liability on the part of the IFA firm and that the FOS can look at making an award of compensation even if technically there is no legal position for it to do so,” Bibby says.
The case, involving IFA firm IFG Financial Services and the FOS, involved two customers bringing a complaint against the IFA for bad advice.
The FOS found in favour of the two customers, who had originally complained to the Ombudsman on the grounds their adviser had wrongly advised they invest in a high risk investment fund. Both suffered subsequent loss, not because of the poor performance of the fund but because of the fraudulent actions of a fund manager.
IFG’s professional indemnity insurance (PII) provider then sought a judicial review of the Ombudsman’s decision claiming the IFA could not have known one of the investment fund’s managers would act fraudulently. While the FOS did not dispute the legal opinion, it still decided in favour of IFG’s clients, a decision which the High Court has subsequently upheld.
While the case may not lead to a rush of similar cases it may mean the FOS is willing to be braver in terms of its actions because it has been given what Bibby calls, “quite a large area of comfort”.
But Emma Parker, a spokeswoman for the FOS, says this has already happened as the FOS has been operating in an area where there has been insufficient legal protection for the consumer for some time. "We are to some extent working in a legal vacuum so we can only work in terms of how we expect a court would rule on such a case," she adds.
Donna Bradshaw, a spokeswoman for IFG Financial Services, also says the firm believes the Ombudsman acted in a fair and reasonable manner and that the firm accepts the ruling of the FOS in relation to the case. Despite this, the firm and its PII provider still have the right to appeal the decision of the High Court should either wish to.
Bibby says PII providers now potentially face the prospect the firms they insure may have no legal defence to a claim brought by a former client.
“PII firms across the industry are going to have to take a look at their policies again because of the potential levels of pay out that could now arise,” he warns.
Meanwhile Hilary Wilkins, chief operating officer at PII provider PYV, says it will be studying the implications of the case and that she expects other scheme providers to do so to.
On whether the ruling is likely to cause PII providers to increase their premiums, Wilkins says: “It depends on which broker or insurer an IFA approaches. Each insurer will make their mind up independently but it will depend on how the IFA’s case is presented.”
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