The High Court decision in Mazarona Properties Ltd v Financial Ombudsman Service ([2017] EWHC 1135 (Admin)) 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 with three associated companies (which comprise the claimant). Under the agreement, AIB would lend a total sum of £6.3 million to the claimant for terms of 28 to 37 months at a variable interest rate of three-month London Interbank Offered Rate plus 1.25%. Each loan agreement included a requirement that the claimant hedge 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 (ie, 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) 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 its 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 the FOS over the sale of the interest rate swaps and AIB's decision to withdraw its redress offer. The FOS ultimately decided that the review process conducted by AIB was not a regulated activity and therefore not within its jurisdiction. It also agreed with AIB that the claimant would have entered into the interest rate swaps irrespective of the regulatory breaches.
The claimant obtained permission to apply for judicial review of the decision on the grounds that the FOS had compulsory jurisdiction under Section 226 of the Financial Services and Markets Act 2000 to consider AIB's review process, and that the FOS decision had been "perverse". The crux of the issue was the operation of the compulsory jurisdiction rules. Under these rules, the complaint could be considered by the FOS only if it 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 criterion of "redress determination", as the offer was not made as part of a formal consumer redress scheme under Section 404 of the act. It was a voluntary decision that was 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 FOS decision 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 and resolving the subsequent dispute with the claimant. The compulsory jurisdiction rules applied only 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 withdrawal of the offer related to a specified activity that would bring it within the compulsory jurisdiction of the FOS.
The court concluded that the claimant's complaint concerning AIB's past business review and complaints handling was not related to the provision of financial services. 'Financial services' is not a defined term and the court concluded that withdrawal of the offer was part of a dispute resolution process. The court decided that dispute resolution 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 the FOS had been 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 the 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 the FOS's exercise of its jurisdiction. It provides useful guidance on the scope of the FOS's compulsory jurisdiction and clarifies (for the moment) that a firm's complaints-handling activity falls outside that jurisdiction. The case also confirms that the sale of interest rate swaps 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 Financial Conduct Authority's (FCA) complaints handling rules, by which firms are bound when conducting a past business review, is itself actionable at the suit of a private person under Section 138D of the Financial Services and Markets Act.
The effect of the court's decision on past business reviews in a complaints-handling context is also noteworthy. The judgment suggests that a voluntary past business review by a firm will not be susceptible to FOS review. The recent High Court decision in CGL Group Limited v Royal Bank of Scotland ([2016] EWHC 281 (QB)) confirmed that a firm conducting a past business review does not owe a duty of care directly to the customer, which appears to be consistent with the position held in Mazarona that a past business review is not a regulated activity. In contrast, FCA guidance on past business reviews 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 constitute a complaint for the purpose of a firm's complaint-handling obligations and time bar rules. Practitioners and FCA supervisors suggest that firms refer customers to their rights to ask the FOS to review their case if they are dissatisfied with the outcome of a past business review. This may now change.
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For further information on this topic please contact Matthew Evans or Robbie Constance at RPC by telephone (+44 20 3060 6000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.
