Challenging the Financial Ombudsman Service - the fair and reasonable test

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Challenging the Financial Ombudsman Service - the fair and reasonable test

Published 25 May 2017

Early 2017 has seen two judicial review challenges to the Financial Ombudsman Service (FOS).  These cases turn on the FOS's jurisdiction to determine complaints by reference to what is, in the opinion of the Ombudsman, fair and reasonable in all the circumstances of the case.  When determining what is fair and reasonable, the Ombudsman must "take into account" relevant laws and regulations but can depart from them.  In R (Heather Moor and Edgecomb Ltd) v Financial Ombudsman Service [2008] EWCA Civ 642, the Court of Appeal decided that the Ombudsman was "free to depart from the relevant law, but if he does so he should say so in his decision and explain why [he departed from it]."

R (On the application of Aviva) v Financial Ombudsman Service.

The FOS determined a complaint by Mr and Mrs McCulloch concerning a joint life policy issued in 2006 and a single life policy issued in 2013. The joint policy was cancelled in 2013 due to the McCullochs' marriage breaking down and was replaced with a single life policy in Mr McCulloch's name. Mr McCulloch failed to disclose that he was seeking treatment for mental health issues. In fact, Mr McCulloch suffered from a rare, early-onset form of dementia which was an aggressive, terminal condition which entailed irreversible degeneration of the brain cells. In December 2013 Aviva were informed his condition was terminal. Aviva avoided the policy for non-disclosure.

The Ombudsman upheld the McCullochs' complaint, concluding that Mr McCulloch's non-disclosures were innocent and the single life policy should be reinstated. Aviva challenged this decision by way of a judicial review.

The Court allowed Aviva's application. Even though it concluded the decision was not necessarily perverse, because the Ombudsman had failed to give adequate reasons in his decision not to follow the relevant law, as required by Heather Moor, it held that the Ombudsman decision be quashed.

Aviva also obtained a direction from the Court that the Ombudsman's determination that the single life policy be reinstated was tantamount to paying Mr McCulloch a sum in excess of the FOS's jurisdiction to make monetary awards up to, but not exceeding, £150,000. This threshold would be exceeded because he was unfortunately expected to live less than 12 months, and his estate would then receive £500,000 within the policy term. 

R (On the application of Full Circle Asset Management Ltd) v FOS

Full Circle provided a model portfolio discretionary investment service to Mrs King.  She complained first to Full Circle and then to the FOS that the investment advice was unsuitable because the portfolio was more risky than her medium attitude to risk and had caused her a loss of around £90,000.

In support of its contention that Mrs King was only exposed to a medium level of risk, Full Circle obtained an independent assessment of the model portfolio.  This report concluded that the model portfolio  was medium risk and this report was accepted by the FCA.  Notwithstanding this, however, the Ombudsman upheld Mrs King's complaint, finding that Full Circle had given a personal recommendation and that the portfolio recommended was not suitable for a retired woman in her 60s, requiring an income of £1200 pcm.  

Full Circle applied for judicial review of the Ombudsman's decision on the basis that, by departing from the standard approved by the FCA, he was under a duty to explain his reasons for the departure. 

The Judge upheld the Ombudsman's decision and dismissed the judicial review application.  The Ombudsman was entitled to make findings on the issues before him.  Full Circle had personally recommended the investment portfolio to Mrs King and this required a more sophisticated investigation into her circumstances than crudely determining she was a 'medium risk investor'. The Ombudsman had looked at Mrs King's requirements (noting her age and monthly income requirements) and decided that the portfolio was not suitable for her.

The Court was not persuaded that there was a conflict between the Ombudsman's decision and the wider regulatory standards of the FCA.  It also did not accept that the "failure to give reasons" argument was a proper characterisation of the dispute, and dismissed the suggestion that the decision was unfair or breached human rights.     


These two cases highlight the differences between the jurisdictions of the courts and the FOS and some of the difficulties which can arise when the FOS departs from the relevant law in making an award applying the fair and reasonable test. 

There is a requirement under the longstanding Court of Appeal authority of R (On the Application of Heather Moor & Edgecomb) v FOS for an Ombudsman to give clear reasons for why his decision departs from law or regulation and the Aviva decision applied that requirement strictly.  The Full Circle decision however abrogated the Ombudsman from giving reasons for not strictly applying FCA requirements.  In short, whether the Ombudsman has done enough to explain a departure from applying law and regulation in his decision may remain a grey area.

In contrast, the Judge's decision in the Aviva case that the £150,000 jurisdictional limit on FOS awards applies to awards "directing" a particular outcome (as opposed to simply awarding a sum of money), illustrates once again as with the Bluefin decision in 2014 (R (on the application of Bluefin Insurance Services Ltd) v FOS) that challenging jurisdictional points is likely to be more fertile ground for respondent firms.


Nick Hillyard

Nick Hillyard


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Dan Preddy

Dan Preddy


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Richard Highley

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