The recent court case of Lenderink-Woods v Zurich Assurance Ltd could be as simple as one adviser’s error about a client’s domicile status. But after digging into the detail, the case raises serious questions about the role of the Financial Ombudsman Service (FOS) and could encourage many more to pursue advisers in court.
Earlier this month New Model Adviser® brought to light a judgment, made in December from Manchester High Court, which overturned a previous FOS decision not to uphold a complaint of unsuitable advice. The court ordered Zurich to pay £223,000 in damages.
The court decided the FOS had been wrong. So how had the ombudsman come to its decision, in 2014, that Angela Lenderink-Woods had been given fair and reasonable advice when a judge decided not two years later that she was owed hundreds of thousands of pounds from the company that provided that advice?
Joseph Willows, director of Carlisle-based firm Integer Financial Management Limited, the adviser who helped Lenderink-Woods take her claim to the FOS, said Zurich ‘threw everything’ at the adjudicator and ‘bamboozled him with science’.
The FOS case centred around Lenderink-Woods’ domicile. The adviser wrongly took her to be UK-domiciled. On that basis he recommended a gift and loan trust. The FOS recognised that because of her domicile, the gift and loan trust was not necessary for inheritance tax planning, but decided that alone did not make the advice unsuitable.
It should be noted that all this came after Zurich had agreed to compensate the client over £500,000, in July 2012, but then withdrew the offer one month later.
The judge in the case, Justice Norris, contradicted the FOS because he believed the client had received poor advice as a result of the adviser making an error about her domicile. He decided it was this error that led the adviser to go on to recommend unsuitable products and subsequently incur unnecessary fees.
In an earlier decision in this case, Justice Norris described the ombudsman’s conclusions as ‘not promising material out of which to forge an argument that [the adviser’s] recommendation of the loan trust scheme was beyond any realistic challenge’.
In the final hearing the judge concluded: ‘The [FOS] appears to have assumed that the gift and loan trust and the bonds were simply pieces of paper that had to be signed to secure a tax advantage, and that really nothing had changed. Of course, in truth, Mrs Lenderink-Woods had converted her absolute ownership of her share portfolio into an interest-free loan obligation owed by two of her daughters.
‘She did not have “access to her capital”, nor did she receive “income,”’ he said.
If Lenderink-Woods, now a 96-year-old and 80 years old at the time she was given the advice, had to go through the effort and expense of taking the case to the courts to get the result she deserved, it has to be asked whether her first port of call, the ombudsman, was an inferior option. Is going to court the only way for clients, advisers and providers alike to get a fair hearing?
Philippa Hann (pictured above), partner at solicitors Clarke Willmott, said the purpose of the FOS was to be a more informal and simpler alternative to taking a claim to court, and it succeeded in fulfilling that purpose.
However, Hann said she had seen some ‘odd’ decisions from the ombudsman, which become less surprising when you look at the flaws in the system.
‘I have seen some quite odd decisions come out of the FOS and that is in part because they do not have to take account of legal principles,’ said Hann.
‘Inevitably when you have an individual making a decision on what is fair and reasonable there is quite a lot of subjectivity that comes into that process.’
Ordinarily a court case would be based on one or more of three things:
Breach of contract.
Breach of statutory duty or breach of conduct of business sourcebook (Cobs) rules.
Hann said: ‘In comparison, the ombudsman asks the question: “Was it fair and reasonable?” not: “Were the regulatory rules complied with?”’
‘Who is to say what is fair and reasonable?’ said Hann.
The process of going through the FOS means you will first be dealt with by an adjudicator, followed by the ombudsman if you disagree with the decision of the former.
In the Zurich case the adviser helping Lenderink-Woods, Willows, said the adjudicator was leaning towards upholding the complaint.
‘The adjudicator was minded to uphold the complaint,’ he told New Model Adviser®.
‘[Zurich] spun its argument to the ombudsman and succeeded in turning the ombudsman around in its favour.
Hann said it was not unusual for the ombudsman to come to a different decision from the adjudicator.
A FOS spokeswoman said in the majority of those cases the ombudsman reaches the same overall outcome as the adjudicator.
‘Where an ombudsman reaches a different conclusion this is often because new facts or evidence came to light after we gave our initial answer,’ she said.
Richard Lord (pictured above), director of Cardiff-based firm Bartholomew Hawkins, said his experience of the FOS was that it delivered a fair outcome but he commented that there seemed to be an issue with the level of expertise of adjudicators compared with ombudsman.
‘The first case handlers are not usually experienced enough in my view. The people I have spoken to there have never held an adviser role before,’ said Lord.
He said this lack of experience could create issues in terms of how claims are handled.
Peter Hamilton, a barrister at 4 Pump Court, said this was partly why the courts were a better option for complex cases.
‘The FOS provides a useful service for customers in simple and low value cases,’ he said. ‘The service, as you know, is free to the customers.
‘But if the facts or law are at all complicated, the FOS rapidly gets out of its depth, and recourse to the courts is likely to provide a much better answer in the sense that it is likely to get both the facts sorted properly and the law right.’
The FOS disputed its adjudicators lacked experience.
‘The technical, academic and professional qualifications of our adjudicators and ombudsmen are as varied as the work we cover.
‘We have accountants and lawyers working for us as well as former IFAs, insurance and mortgage brokers, bankers, trading standards officers and stockbrokers.
‘Our staff are appointed to settle disputes – and we require the relevant qualifications and experience for the jobs we need to do this. We set high standards of professionalism, providing comprehensive training on core skills and technical knowledge,’ said a FOS spokeswoman.
Hamilton explained the numerous differences between the two systems that make the court system more fool-proof than the ombudsman.
‘The court process requires both sides to disclose all relevant documents and it gets the issues properly defined by requiring statements of each party’s case, and witness statements. Those documents are exchanged by the parties,’ he said.
The barrister noted other processes such as expert evidence, which is available at a trial, and the judge having access to a counsel, which also make the courts a more accurate vehicle for obtaining justice.
The appeals processes also set the FOS and the court apart.
‘The court process provides for a fair appeal,’ said Hamilton. ‘That is not available in relation to FOS cases, which can only be challenged on judicial review, which is a very limited remedy to a firm. Of course, a disappointed complainant to the FOS can reject the decision, and decide to sue. But that depends on the value of the case making that course of action economically viable.’
This brings us to the obvious trap for many clients who believe they cannot get justice from the ombudsman.
‘Litigation is expensive,’ Hamilton pointed out.
For those seeking justice, cost can be a major deterrent to taking a case to court. Lenderink-Woods’ solicitor, Michael Johnson of Bendles Solicitors (pictured above), said his client’s legal fees would have exceeded the compensation she was awarded.
Lessons to learn
It is vitally important the FOS functions well in the first place and does not find itself ‘out of its depth’.
This cuts both ways. Advisers may well feel they are the chief losers when it comes to the FOS not properly getting to grips with complex cases. But even more worryingly, clients will increasingly pursue their adviser through the courts, if they feel the FOS did not do a thorough job. Judgments such as this support that view.
The FOS wanted to make a clear distinction between what it offers compared with the courts.
‘We were set up…to settle complaints quickly and with a minimum of formality. We were not intended to replicate the court process but to offer consumers a free alternative to refer a complaint to and financial businesses access to a dispute resolution service.
‘When considering what is fair and reasonable in all the circumstances we take into account the relevant law and regulations, regulators rules, guidance and standards, codes of practice and where appropriate what we consider was good industry practice at the time.
However it acknowledged it would take on board what had happened with the Lenderink-Woods case.
‘It is very rare for cases that we’ve previously looked at to go to court – and we’ll be looking at the court’s decision carefully.’
The service said it had already made changes to how it deploys expertise to case handling and has sped up the process.
‘We provide ongoing training and support to all staff to help them understand our approach to different types of cases and reach the right answer. More recently we have put our ombudsmen, our most experienced and qualified staff, at the heart of our case-handling.
‘This means that all staff have expert help and advice on hand as soon as they start looking at a case. This additional support means that we can get to the right answer more quickly – and we’re getting very positive feedback from businesses about the benefits they are seeing from these new ways of working,’ said a spokeswoman.
However, the FOS said it would look carefully at why its decision was overturned by the court.
The service drew a clear distinction between what it offered compared with the courts.
‘We were not intended to replicate the court process but to offer consumers a free alternative to refer a complaint to and financial businesses access to a dispute resolution service.’
A Zurich spokesman said the company would accept the decision of the court but mentioned the fact the advice was given a long time ago.
‘Zurich notes the judgment delivered by the Manchester High Court. The events which formed the subject of the claim took place nearly 16 years ago, and Zurich ceased operating a network of advisers over 10 years ago.
‘Zurich accepts the ruling and will comply with it.’
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