High Court sheds light on compulsory jurisdiction of Financial Ombudsman Service
The High Court has provided some clarification of the scope of the compulsory jurisdiction of the Financial Ombudsman Service (FOS). The decision has left the scope of that jurisdiction open to discussion, and appears to suggest that the courts will take a more mechanical approach to reviewing regulatory decisions.
In October 2008, Allied Irish Bank Great Britain (AIB) entered into three loan agreements (the Loan Agreements) with three associated companies (which comprise the claimant). Under the agreement, AIB would lend a total sum of £6.3m to the claimant for terms of 28 to 37 months at a variable interest rate of three month LIBOR plus 1.25 per cent. Each loan agreement included a requirement that the claimant hedged the full amount of each loan unless inappropriate. This was given effect by three further agreements, under which both parties would pay different interest rates on the same sum for the same period (the Interest Rate Swaps). In the immediate aftermath of the financial crisis, those interest rates fell sharply and the claimant ended up paying substantially more than initially projected.
The Financial Services Authority (as it then was) (FSA) entered into an agreement with AIB under which AIB would review its previous sales of interest rate swaps for breaches of regulatory requirements, and provide redress if appropriate. At the request of the claimant, AIB reviewed the Interest Rate Swaps and notified the claimant that they had been sold in a non-compliant way. AIB made an offer, the claimant made a counter offer and AIB withdrew their offer on the basis of a second review which indicated that the claimant would have entered into them irrespective of any regulatory breach.
In January 2015, the claimant referred a formal complaint to FOS over the sale of the Interest Rate Swaps and AIB's decision to withdraw its redress offer. FOS ultimately decided that the review process conducted by AIB was not a regulated activity and therefore not within FOS' jurisdiction. FOS also agreed with AIB that the claimants would have entered into the Interest Rate Swaps irrespective of the regulatory breaches.
The claimant obtained permission to apply for judicial review of FOS' decision on the grounds that FOS had "compulsory jurisdiction" under s226 Financial Services and Markets Act 2000 (FSMA) to consider AIB's review process and that FOS' decision had been "perverse". The crux of the issue was the operation of the compulsory jurisdiction rules. Under these rules, the complaint could only be considered by FOS if the complaint concerned "the provision of or failure to provide a financial service or a redress determination". The complaint about the withdrawal of AIB's offer did not satisfy the narrow criteria of "redress determination", as the offer was not made as part of a formal consumer redress scheme under s404 of FSMA. It was a voluntary decision that is not susceptible to review by the FOS. Therefore the key question was whether the complaint concerned "the provision of or failure to provide a financial service".
The court upheld the decision taken by FOS and the claim was dismissed. The court indicated that a distinction needed to be made between AIB's activity in selling the Interest Rate Swaps and its activity in conducting its past business review (PBR) and resolving the subsequent dispute with the claimant. The compulsory jurisdiction rules only applied to "regulated activities". The sale of the Interest Rate Swaps was such an activity, but that did not necessarily mean that AIB's withdrawal of its offer of redress was a regulated activity. It also did not mean that the withdrawal of the offer was related to a specified activity that would bring it within the compulsory jurisdiction of FOS.
The court concluded that the claimant's complaint concerning AIB's PBR and complaints handling was not related to the provision of financial services. "Financial services" is not a defined term, and the court concluded that the withdrawal of the offer was part of a dispute resolution process. The court decided that dispute resolution was something which might be related to the provision of a financial service, but it was not a provision of a financial service in its own right.
Therefore, the conduct of the redress review by AIB was not a specified activity, so it could not be classified as a regulated activity. As a consequence, it "could not give rise to a freestanding complaint about the manner in which it was conducted". Therefore, the court held that FOS was correct to conclude that it was not entitled to investigate or reach a determination as regards AIB's conduct of the redress review, as it fell outside the parameters of FOS' compulsory jurisdiction.
In broad terms, the decision highlights that the courts will not be afraid to take a proactive approach in determining the scope of FOS' exercise of its jurisdiction. It provides useful guidance on the scope of FOS' compulsory jurisdiction and clarifies (for the moment) that a firm's complaints-handling activity falls outside of that jurisdiction. This case also confirms that the sale of interest rate swaps is an activity which may be subject to FOS adjudication. The court did not consider – presumably because the claimant was a company - the fact that a breach of the FCA's complaints handling rules (DISP), by which firms are bound when conducting a PBR, is itself actionable at the suit of a private person under s138D FSMA.The effect of the court's decision on PBRs in a complaints-handling context is also noteworthy. The judgment suggests that a voluntary PBR by a firm will not be susceptible to FOS review. The recent High Court decision in CGL Group Limited v Royal Bank of Scotland  EWHC 281 (QB) confirmed that a firm conducting a PBR does not owe a duty of care directly to the customer, which appears to be consistent with the position held in Mazarona that a PBR is not a regulated activity. In contrast, FCA guidance on PBRs and customer contact exercises provides that when a firm provides information to a customer indicating that the customer may have been mis-sold, and the customer responds by asking that firm to act, this is likely to be a 'complaint' for the purpose of a firms' complaint handling obligations and time bar rules. Practitioners and FCA supervisors suggest that firms refer customers to their rights to ask FOS to review their case if they are dissatisfied with the outcome of a PBR. This may now change.