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No judicial review for FOS defined benefit transfer case

31 March 2022. Published by Rachael Healey, Partner

The High Court has rejected an application for permission for judicial review in a number of FOS complaints upheld against the adviser who advised on a defined benefit pension transfer. The adviser had advised on the transfer but not the subsequent investments made after the transfer. The adviser was led to believe that UCIS investments would not be made with the transferred funds but in fact UCIS investments were made. The FOS found that the adviser had given unsuitable pension transfer advice partly on the basis that it should have asked more questions about the ultimate investments and it was not enough to have provided for a general spread of investment type. Permission for judicial review was rejected on the basis that there was nothing unlawful in the FOS decisions including the fact that the adviser was held responsible for 100% of the losses despite the involvement of the separate adviser that advised on the investments following the transfer.

The factual background

Although the specific decisions that formed the basis for the application for judicial review are not named in the High Court judgment, the facts referred to reveal the nature of the underlying fact patterns and FOS reasoning (which in searching the FOS decisions includes such decisions as DRN1377152.

  • Portafina LLP (Portal) held permissions to advise on pension transfers and opt-outs.
  • The complainants were introduced to Portal by a third party adviser firm, Cherish Wealth Management Limited (Cherish), during 2014/15.  Cherish was an appointed representative of Shah Wealth Management Limited (Shah).  Cherish and Shah did not hold pension transfer permissions and entered wind up in 2016.
  • Portal conducted due diligence on Cherish before it agreed to engage with it including (1) checking the firm's authorisation and status, (2) searches of the Financial Services Register, Google, press and published FOS decisions and (3) direct enquiries of Shah and Cherish.
  • Portal was to advise on the pension transfer and its advice was confirmed to the complainants in writing in a suitability report.  Portal conducted its own fact-finding procedure as part of the advice process.  Following advice from Portal, the intention was then for Cherish to advise on the investments held within the product the pension funds were transferred to – often a SIPP.  Cherish was to advise after Portal had provided advice on the transfer.
  • Portal was assured that Cherish did not recommend or promote unregulated collective investment schemes (UCIS) and that instead investments would be made in risk-graded cash, equities and bonds.
  • Without Portal's knowledge, all but one of the complainants invested in a high-risk UCIS.

Arguments at FOS

Portal argued before FOS:

  • FSA alerts relied on by FOS had been taken out of context and were aimed at high risk unregulated products marketed by unregulated introducers.  Here there was a regulated firm in Cherish and Cherish recommended investments only after Portal advised on the transfer based on a suggested investment portfolio in line with a complainant's risk profile.
  • It was a fundamental principle of financial services regulation that one regulated firm was reasonably entitled to rely on another and insofar as FOS found that Portal could not rely on the assurances of Cherish that must be wrong.
  • Portal's suitability letter set out an asset allocation table evidencing its expectations as to the type and blend of investments to be recommended by Cherish.  The complainant could have questioned any discrepancy between that allocation and actual recommendations made by Cherish, and it was not for Portal to second guess recommendations yet to be made by Cherish as part of its distinct obligations to the complainant still less to police the investments eventually made.
  • The recommendation to transfer was suitable.
  • Where FOS had also found that Cherish had contributed to a complainant's loss it was inconsistent to hold Portal wholly responsible. 

FOS found against Portal broadly on the grounds that:

  • Portal was not entitled to divorce the giving of advice on the suitability of the transfer from considering the suitability of the underlying investment.  

FSA alerts in 2013 and 2014 made this clear and Portal should have requested information on the intended investment before it advised on the transfer in order to provide suitable advice.  Although Portal could rely on what it was told by Portal the "… difficulty for Portal is that the statement [from Cherish on its intended investments] did not tell it anything meaningful about the intended investment proposition… Portal chose to rely on a general statement given 2 years previously that said recommendations of broad categories of investments with potentially broad gradings of risk, might or might not be made in a given case and that UCIS would not be recommended".  Portal should have checked the position with Cherish on an ongoing basis and should have done more "… to ensure that the two firms worked together to give suitable pension transfer advice to clients…".  Further FOS found that the relationship created a due diligence requirement whereby Portal should have had in place a process to identify and address any patterns of unsuitable or unaligned advice;

  • Portal failed in its primary duty to properly advise on the suitability of the transfer;
  • Although Cherish "may also have separately caused loss", Portal should be responsible for 100% of the losses.

The judicial review

Application for permission for judicial review was made with respect to 16 FOS decisions published and accepted over the period 30 March 2021 to 3 June 2021.  The application for permission for judicial review was initially refused on the papers.  The parties agreed that a hearing should be used to determine permission in a separate judicial review application involving another 11 FOS decisions involving other complainants.  The grounds with respect to the two separate judicial review applications were said to be the same.

The judgment rejected the judicial review application finding that there was not an argument ground for judicial review which had a reasonable prospect of success.  In particular, the judgment rejected the following arguments:

  1. Good industry practice

Portal argued that the FOS had acted irrationally in concluding that industry "Alerts" from the then FSA in 2013 and 2014 represented "good industry practice" and that there was a failure to apply principles to the specific context in which Portal was advising.  The "Alerts" referenced that when advising on a pension transfer the suitability of the underlying investment must form part of the advice given to the customer.  FOS found that it was not fair and reasonable for Portal to rely on the broad categories of investment set out in the initial information provided by Cherish and that it was not fair and reasonable for Portal to rely on another regulated firm or person where it had been given no information on the proposed investments.  The High Court found that FOS' reasoning was a "clear example of the Ombudsmen applying rules and principles and does not disclose any error of law" and that the argument FOS had acted irrationally as Portal was being asked "to underwrite advice provided by a different regulated advisor is not arguable" as FOS found Portal to be in breach of its own obligations.  There was nothing unlawful about the decisions; there was instead a disagreement about the application of the principles to the facts.

2. Application of COBS rules

Portal argued that FOS had failed to take account of COBS 19.1.2R which provides that Portal, when advising on a defined benefit transfer, was required to "… compare the benefits likely (on reasonable assumptions) to be paid on a defined benefits pension scheme with the benefits afforded by a personal pension scheme…", that FOS elevated COBS 19.1.6G (that a firm should start by assuming a transfer is not suitable) over COBS 19.1.2R; in doing so it elevated guidance over a rule and FOS had submitted its own views as to what the assumptions ought to have been.  The judgment rejected this ground on the basis the FOS decisions provided fully reasoned grounds for the conclusion that advice to leave the defined benefit schemes was not suitable.

3. Portal should be 100% liable

Portal argued that before a court it would not be 100% responsible and that FOS is required to consider the law and give reasons for departing from it. The judgment stated "… the answer to the question of whether the Ombudsman could depart from relevant law in this context is in fact in the affirmative subject to the Ombudsman explaining why…" and "… It would be a surprising conclusion that where an Ombudsman has found the advisor to be liable and is considering redress, she is required to conduct an exercise to determine how damages might be apportioned in a notional civil action involving other parties".  It appears that it was argued FSCS payments, presumably made with respect to Cherish, should be taken into account; but this appears to have been rejected.  In any event, the judgment goes on to state that the FOS decisions did fully consider the points made on loss in that it found that had the transfer not taken place the subsequent losses would not have been made on the investments.

The judgment also, as a result of the decision on the merits, did not comment on the "procedural propriety" of seeking permission for judicial review a number of decisions at once despite those decisions having been reached on their own facts.  

What next

The decision could be read as the court looking unkindly upon judicial review applications of FOS decisions.  However, on the other hand, this is not an area where there are previous court judgments so it is more difficult to argue that FOS has failed to take account of the law and give reasons where it has departed from it.  Perhaps the key takeaways from the decision are (1) the FOS can look to FSA/FCA publications when it comes to determining what in its view is good industry practice and (2) FOS does not have to apportion responsibility (and loss) between parties where it can reasonably find that one party is responsible for the entirety of the loss.