Is the Financial Ombudsman Service allowed to depart from the law?
With the Financial Ombudsman Service (“FOS”) now able to consider substantial disputes of up to £375,000, its lack of predictability continues to draw attention from policyholders and insurers alike. In this article, we revisit the extent to which a party can draw comfort from decisions the Courts might have made on the issues in dispute, and whether the FOS is bound to follow any such precedent.
R (on the application of Aviva Life and Pensions (UK) Ltd) v Financial Ombudsman Service discussed and reaffirmed the position that the Financial Ombudsman Service (“FOS”) may depart from the law when making determinations (so long as clear reasons are provided) but it must make decisions on grounds that are “fair and reasonable in all of the circumstances”.
Mr McCulloch took out a life insurance policy (“the Policy”) with terminal illness benefit with Aviva (“Insurers”). When he applied for the insurance he declared that he was not undergoing any medical investigations, experiencing symptoms or awaiting any test or investigation. However, at the time of the application Mr McCulloch had been referred by his GP for psychiatric assessment and was awaiting a CT scan. Following the CT scan, Mr McCulloch was diagnosed with Fronto-Temporal Dementia, a terminal condition, the effects of which he was suffering from at the time of applying for the Policy.
Mr McCulloch presented a claim to Insurers for terminal illness benefit (“the Claim”), but Insurers declined the Claim on the basis that the illness was pre-existing at the time the Policy was taken out, and subsequently avoided the Policy for misrepresentation. A complaint was then submitted to the FOS (the “Complaint”). The Ombudsman upheld that Complaint. Whilst acknowledging that the psychological referral and scan were treatments that Mr McCulloch should have disclosed, the Ombudsman held the misrepresentation in not doing so was “innocent”, taking into account Mr McCulloch’s condition .
The Ombudsman ordered that Insurers should:
- reinstate the Policy on its original terms; and
- reconsider Mr McCulloch’s Claim.
Insurers applied for judicial review seeking a quashing order on the basis that the Ombudsman’s decision was Wednesbury unreasonable (i.e. that the Ombudsman’s Final Decision was so unreasonable that no reasonable person acting reasonably could have made it). The FOS consented to a quashing order on the grounds that the decision was inadequately reasoned, but denied that it was Wednesbury unreasonable.
It was Insurers’ position that:
- the Ombudsman’s Final Decision was flawed for inadequate reasoning;
- the Ombudsman did not follow relevant law, guidance and practice, and while the Ombudsman was not required to do so, it was incumbent on her to explain why she had not, following the case of Heather Moor & Edgecombe Ltd v Financial Ombudsman Service ;
- the Ombudsman’s Final Decision should be quashed and the Complaint should be re-determined lawfully by the FOS.
Insurers’ allegation of Wednesbury unreasonableness was rejected by the Courts. In doing so, the Court considered the legal framework that applies to the FOS as set out in Part XVI of the Financial Services and Markets Act 2000 (FSMA), and within which Section 228(2) provides that:
“A complaint is to be determined by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case.”
In addition, the Court considered the FCA’s Dispute Resolution Handbook, within which DISP 3.6.4R provides that :
“In considering what is fair and reasonable in all the circumstances of the case, the Ombudsman will take into account:
(a) law and regulations;
(b) regulators' rules, guidance and standards;
(c) codes of practice; and
(2) (where appropriate) what he considers to have been good industry practice at the relevant time.”
The Court also considered the Consumer Insurance (Disclosure and Representations) Act (“CIDRA”) and held that “had these been legal proceedings brought by Mr and Mrs McCulloch against Aviva in the County Court, Aviva's case would have succeeded”.
However, despite that hypothetical position, the Court nevertheless held that s228 FSMA and DISP 3.6.4 were clear that the FOS is to carry out its own assessment of whether a decision was fair and reasonable, and that application of the relevant law (such as CIDRA) was only one factor in that analysis. The Court held that it was open to the FOS, acting rationally, to find that a decision made in accordance with the relevant law was nevertheless not fair and reasonable in all the circumstances and, should it wish to do so, to depart from that relevant law so long as reasons are given for the departure (an omission which the FOS had itself conceded on the facts of this case).
Mr Justice Jay thus found that it was open to the Ombudsman to determine that Aviva had not acted fairly and reasonably despite what might have been the hypothetical view of the County Court on the application of CIDRA to the dispute.
Policyholders should be mindful that when progressing disputes in the FOS’ jurisdiction, there are two separate analyses that the Ombudsman must perform:
- What are the relevant laws, codes of practice and regulatory guidance applicable to the dispute?; and
- Is the proposed outcome fair and reasonable in all of the circumstances?
Those standards are distinct; reaching a view on the first does not automatically generate an answer to the latter, as the above case demonstrates.
This means that, in certain circumstances, the fact that a policyholder may have inadvertently erred so far as the law is concerned (say, breach of an onerous condition precedent which, whilst undeniable, has catastrophic consequences for a policyholder with little identifiable prejudice to the insurer) may be capable of being cured by an Ombudsman through the application of fairness and reasonableness principles (again, so long as any such departure from the law is clearly explained in the Ombudsman’s decision).
As ever, however, the risks of litigation can cut both ways. Much as a policyholder might be saved from their own misfortune by successfully arguing that an outcome is disproportionate and unfair, an insurer may well make the same argument. For example, an insurer may argue that despite the absence of a qualifying breach under CIDRA/the Insurance Act, it has nevertheless (perhaps through no fault of the policyholder, say owing to a technical error arising from a risk bound entirely online) been put in a position where it is covering a risk that its underwriter never intended to cover (or, alternatively, that it has collected far less premium in respect of such a risk than it might have done had circumstances not gone awry). In such circumstances, the insurer may seek to persuade an Ombudsman that, whilst a Court may put it “on the hook” for such errors, fairness and reasonableness requires a different outcome.
Given those nuances, policyholders should ensure that they take appropriate advice on how to frame an argument before the Ombudsman (or how to resist an argument advanced by their insurer, such as that described above), especially where material sums are at stake. Choosing whether to focus upon the application of the law, the application of fairness/reasonableness (and, perhaps, making a concession so far as the legal position is concerned), or both, can be important strategic decisions in seeking to persuade an Ombudsman to support a policyholder’s case.
6 December 2022
 Depending upon when the complaint was brought, and when the wrongful acts alleged took place.
  EWHC 352 (Admin)
 R. (Heather Moor & Edgecomb Ltd) v Financial Ombudsman Service  EWCA Civ 642
 R (on the application of Aviva Life and Pensions (UK) Ltd) v Financial Ombudsman Service, paragraph 39Read more about Insights