The Financial Ombudsman Services v Heather Moor & Edgecomb Limited
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Four complaints relating to endowment mortgages were brought against a firm of financial advisers. The claims were initially considered by a consumer consultant at the FOS, who decided they should not be summarily dismissed. They were then investigated and determined on their merits by an ombudsman. In each case, the complaint was rejected.
Nevertheless, the FOS sought payment of the standard £360 case fee per claim from the firm. But the firm argued that the rule requiring it to pay a fee in these circumstances was unreasonable and therefore unlawful.
In addition, it maintained that no fee would have been payable had the claims been summarily dismissed. The FOS in this case had failed in its duty to weed out claims that had no real prospect of success. Instead, it had adopted a policy of never dismissing a complaint relating to an endowment mortgage scheme. And the decision had been left to a consumer consultant, not an ombudsman, which was against the scheme rules.
County Court judgment
The District Judge agreed with the firm that the requirement to pay a fee irrespective of outcome was unreasonable and unlawful.
Although he did not find that the FOS had a policy of letting all mortgage endowment claims proceed to full determination and he concluded that none of complaints in this case should have been summarily dismissed, nevertheless, the fee was unjust.
In his decision, he pointed to a body of opinion in the industry aggrieved at the imposition of the fee, particularly because of the high volume of unmeritorious endowment complaints. The intention had been that the FOS would get half its funding from case fees and half from the annual levy. But the increase in the number of mortgage endowment cases in recent years has meant a far greater proportion has come from case fees.
Court of Appeal judgment
The Court of Appeal overturned the decision. The system imposing a flat fee for the services of the ombudsman in investigating and deciding complaints was a perfectly rational response to the need to fund the scheme. The judge's reasoning went to the question whether the rule should be reconsidered, not to the original decision to adopt it.
If a fee were payable only if a complaint were upheld, the amount of the fee would have to go up dramatically. There would also be unsatisfactory grey areas over negotiated settlements or cases where there was no clear winner or loser, or where the complaint was upheld but the award was lower than an earlier offer. And it could provide a financial incentive to the FOS to uphold complaints, so that it would no longer be an independent tribunal.
The decision also confirmed that FOS rules entitle the ombudsman to delegate the initial decision on summary dismissal to a designated member of staff, such as a consumer consultant.
The Court of Appeal brushed aside a suggestion that the requirement to pay the fee was conditional on summary dismissal having been considered. Such a rule would introduce the question whether or not there had been consideration, making the collection of fees a complicated and expensive exercise.
This decision joins a batch of recent cases testing the boundaries of the FOS. The case was heard at the same time as R v FOS, which confirmed the FOS' remit to decide cases on the basis of what the ombudsman considers fair and reasonable in all the circumstances.
Last year, in Bunney v Burns , the High Court confirmed that the FOS did not have the power to make a binding award over the statutory limit of £100,000.