Full Circle Asset Management Ltd v Financial Ombudsman Service Ltd & Ors [2017] EWHC 323 (Admin)

Case No CO/2932/2016[2017] EWHC 323 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 24/02/2017
Before
MR JUSTICE NICOL
Between
Full Circle Asset Management LtdClaimantFinancial Ombudsman Service LtdDefendant(1) Mrs Joanna KingInterested Parties(2) the Financial Conduct AuthorityInterested Party
Rory Phillips QC and Robert Purves (instructed by Reynolds Porter Chamberlain) for ClaimantJames Strachan QC and Stephen Kosmin (instructed by Financial Ombudsman Service Ltd) for DefendantHearing Hearing dates: 8 th and 9 th February 2017
JudgmentMr Justice Nicol :Introduction:
[1]Full Circle Asset Management Ltd (‘FCAM’), the Claimant in this matter, carries on business as an investment manager. Between October 2009 and May 2011 one of its clients was Mrs Joanna King and it provided her with a model portfolio discretionary investment service. She became dissatisfied with FCAM’s service and complained, first to the Claimant itself, and then, on 19th July 2011, to the Financial Ombudsman Service (‘FOS’), the Defendant.[2]The FOS is established by the Financial Services and Markets Act 2000 (‘FSMA’) s.225 and, in circumstances such as this, the FOS has compulsory jurisdiction to consider complaints against investment managers such as the Claimant. The FOS made a determination on 14th June 2013 (‘the first Ombudsman decision’) upholding Mrs King’s complaint. The Claimant challenged the first Ombudsman’s decision in an application for judicial review (CO/13079/2016). On 14th March 2014 Lewis J. granted permission to apply for judicial review. There never was a substantive hearing of the application because, by a consent order of 13th June 2014, the parties agreed that the first Ombudsman’s decision should be quashed and Mrs King’s complaint should be considered again by a different Ombudsman.[3]Raj Varadarajan was appointed to carry out this task. On 18th February 2016 he again upheld Mrs King’s complaint. He also made directions as to how the Claimant should compensate her (‘the second Ombudsman’s decision’). By the present proceedings the Claimant seeks to quash the second Ombudsman’s decision. Permission to apply for judicial review was granted by Martin Chamberlain QC, sitting as a Deputy High Court Judge on 4th August 2016.[4]Mrs King was named as the 1st Interested Party. She has taken no part in these proceedings. At the time when she was the Claimant’s client, the relevant regulator of those providing such services was the Financial Services Authority (‘FSA’). Since 2013 the Financial Conduct Authority (‘FCA’) has taken over the role of the FSA. The parties are agreed that nothing turns on that transfer of responsibility. The FCA is the 2nd Interested Party, but, with one qualification to which I will come, it, too, has taken no part in these proceedings.[5]One of the powers available to the FSA was to require a person or company which it regulated to commission a report into its business or a part of it by a ‘skilled person’ whom the FSA approved – see FSMA s.166. It seems that the FSA visited the Claimant and wrote a report dated 3rd October 2011. Following this visit and report and by a requirement notice dated 18th November 2011, the FSA required the Claimant to commission such a ‘skilled person review’ (‘SPR’). The FSA spelt out in Annex A of the notice that the Claimant had been required to commission this review because of concerns that its main model portfolio was likely to be unsuitable for a significant proportion of its retail customers with balanced or medium risk appetite. The skilled person was to be required to review the main model portfolios over the period 31st July 2008 - 31st July 2011 to see whether the portfolios matched the firm's risk categorisation. In particular the review was to include(a) reviewing any financial promotions describing the nature and risk profile of the model portfolios;(b) reviewing the firm’s definition of risk and risk categories as used within the firm’s processes for assessing a customer’s risk preferences;(c) reviewing the underlying products/investments included in the model portfolio to determine whether the firm had made an adequate and appropriate risk assessment of the risk profile of the investments contained in the model portfolios and of the overall model portfolio;(d) identifying and reviewing the impact of any conflicts of interest (including, but not limited to, any investments made within customers’ portfolios where the firm has or had an actual or potential interest).[6]If the SPR showed that the contents of any of the model portfolios’ risk profiles did not match the firm’s risk categorisation of the model(s) then the skilled person was also (e) to identify all the customers whose portfolios were invested in line with the model portfolio, devise a methodology for determining any loss caused by the firm, calculate the amount of redress such customers would require to compensate them for being provided with an unsuitable discretionary service and (f) recommend how it would supervise the redress exercise. All this was described as ‘Stage 1’ of the SPR. Stage 2 of the SPR would only be triggered if Stage 1 concluded that the risk profile of the contents of the model portfolios matched the firm’s risk categorisation of the models. If Stage 2 was triggered, then the SPR would involve a review of a representative sample of at least 10% of the Claimant’s discretionary retail customers to confirm whether the portfolios were suitable for those customers. Other details of the SPR were set out in the requirement notice. An interim report was required by 25th January 2012 and the final report had to be sent to the FSA by 28th February 2012.[7]The Claimant chose Kinetic Partners LLP to be the Skilled Person for the purpose of this exercise and its choice was approved by the FSA.[8]Apparently, the SPR was sent to the FSA on 20th March 2012 (‘the March 2012 SPR report’). I say ‘apparently’. A full copy of the March 2012 SPR report has not been produced either to the Ombudsman or to the Court. Mr Constance, the Claimant’s solicitor, says that this is ‘for confidentiality reasons’. However, the Claimant asked Kinetic to produce another report. This is dated 25th July 2012. It is entitled ‘Extract from Skilled Person’s Report on Suitability, Systems and Controls dated 20 March 2012’ (‘the July 2012 SPR report’). It includes what is described as an ‘Executive Summary’. It records, in passages on which Mr Phillips QC, on behalf of the Claimant particularly relies, ‘Using the Firm’s scoring methodology we found that with the exception of two occasions in January 2011, the Model Portfolio exhibited on balance, a medium risk profile as per industry convention. We observed that some of the investments in the Model Portfolio would typically be regarded as higher risk, but taking into account the lower risk investments in the Model Portfolio, the average risk is still in the range that we consider to be consistent with medium risk as per industry convention during the relevant period. Our review identified that none of these higher risk investments exposed the Model Portfolio to a higher loss than the cost of acquiring the products. We reviewed the asset allocation of the Model Portfolio against Industry benchmarks. Whilst the Model Portfolio differs in its asset allocation by for instance, having a high concentration invested in commodities (either directly or indirectly), we agree that the arguments put forward by the Firm with regard to risk moving between asset classes are logical and have been soundly applied.’[9]The March 2012 SPR report was sent to the FSA. In October 2012, the Claimant wrote to the FSA and asked whether it accepted Kinetic’s conclusions. On 17th October 2012 the FSA responded to say ‘I can confirm that we accept the findings of the review carried out by Kinetic’.[10]A complaint to the FOS is considered first by an adjudicator. His or her task is to see whether the complaint can be resolved without the need for a full determination. That was not possible in the case of Mrs King’s complaint. The parties made written submissions and the Claimant provided the Ombudsman with the July 2012 SPR report.[11]I have said that the first Ombudsman’s determination (which found in favour of Mrs King) was quashed by consent on 18th June 2014. A ‘Statement of Reasons’ was attached to the Consent Order. These said, ‘2….In determining the complaint, the Ombudsman had to decide whether the Claimant provided investment management services to Mrs King that exposed her to a level of risk that exceeded the medium level of risk to which she was willing to be exposed. 3. In support of its contention that Mrs King was only exposed to a medium level of risk, the Claimant relied upon the fact that the Second Interested Party (‘the FCA’) had accepted a skilled person’s report on the Claimant’s business that had been carried out by Kinetic Partners. That report had been undertaken in accordance with a notice issued by the FCA pursuant to s.166 of the Financial Services and Markets Act 2000. The extract of the report provided to the Ombudsman stated that ‘with the exception of two occasions in January 2011, the Model Portfolio exhibited, on balance, a medium risk profile as per industry convention.’ 4. By its fourth ground of challenge, the Claimant contends that the Ombudsman failed to give any, or any adequate reason for not following the FCA’s acceptance of the report. 5. Without prejudice to the Claimant’s other grounds of challenge, the Defendant accepts that the Ombudsman did not provide adequate reasons to explain why he was departing from the FCA’s acceptance of the report. Accordingly, the Defendant accepts that for this reason the Ombudsman’s decision should be quashed.’[12]Following the quashing of the first Ombudsman’s decision and the appointment of Mr Varadarajan as the fresh Ombudsman, he received written submissions from the Claimant and from Mrs King and her representative. Oral hearings are possible, but not obligatory, and none were held in this case. The next stage is that the Ombudsman can produce a provisional determination. Mr Varadarajan did so on 23rd March 2015. The Claimant and Mrs King had the opportunity to make further submissions in response to this, an opportunity which they both took. Mr Varadarajan then issued his final determination, as I have said, on 18th February 2016.[13]The legal framework within which the Ombudsman operates, begins with FSMA 2000 s.228(2) which provides, ‘A complaint is to be determined by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case.’[14]The legislation refers to the provider of the ombudsman system as the ‘scheme operator’. The Defendant is the, and the only, ‘scheme operator’. By FSMA 2000 Schedule 17 paragraph 3A, the FCA and the scheme operator must take such steps as each considers appropriate to co-operate with each other. The scheme operator has also to make rules which, among other things, must specify matters which are to be taken into account in determining whether an act or omission was fair and reasonable – see FSMA 2000 Schedule 17 paragraph 14. The Rules have to be approved by the FCA – ibid paragraph 14(7). The Defendant has made Rules which have been approved by the FCA and which are published in the FCA’s Handbook. DISP 3.6.4R ‘DISP’ is used to refer to matters which concern disputes. ‘R’ indicates a Rule rather than guidance. says, ‘In considering what is fair and reasonable in all the circumstances of the case, the Ombudsman will take into account:(1) relevant (a) law and regulations; (b) regulators’ rules, guidance and standards; (c) codes of practice; and(2) (where appropriate) what he considers to have been good industry practice at the relevant time.’

The Ombudsman’s final determination

[15]Mr Varadarajan’s final determination is 27 pages of single space typing long. That is not a complaint, but to underline that what follows is necessarily no more than a summary. Paragraph numbers have helpfully been added to the determination and I include reference to these where appropriate.[16]He said that her complaint ‘in summary’ is that FCAM provided Mrs King ‘with a portfolio of investments that was too risky for her. She says that the investments were short term, speculative in nature and have caused her financial loss. She also says that FCAM did not understand what the risk level for her should be.’ [1][17]He noted that she was in her early 60s and retired. She had previously had some money on deposit with Firm A. She required an income of £1,200 per month. It was recorded that she was an ‘average’ risk taker. [3][18]After meeting with Mrs King, the Claimant had made a formal recommendation to her in a suitability letter, proposing that she should open an investment account which it would manage along the lines of its model portfolio. It said her long term aim was capital growth and that investments would be set with that aim. It said the recommended plan matched her risk. [4][19]She had been asked to complete documents which included an ‘attitude to risk and loss’ document. This recorded that she was a ‘medium risk investor’ [5]. In total Mrs King had transferred about £450,000 to the Claimant.[20]By April 2011 her accounts with the Claimant were valued at about £360,000 and so she had lost some £90,000 over 15 months [8]. She complained, first to the firm and then to the Ombudsman. The Ombudsman recorded at [14] that the Claimant had provided him with an independent assessment of the model portfolio (what I have called the ‘July 2012 SPR report’) which the FCA had accepted. In brief, the Claimant’s response to Mrs King’s complaint was that she had been prepared to accept a ‘medium’ risk; the portfolio was ‘medium’ risk; and the complaint should therefore be dismissed [16]. The Claimant had argued that it had not made a ‘personal recommendation’ to invest in a product, rather it had provided a discretionary investment management service. [17][21]I can pass over the summary of the submissions which both parties had made in response to the provisional determination, an argument relating to jurisdiction (not relevant to the present challenge) and an argument that the complaint should be dismissed in view of the Claimant’s offer to settle (again, irrelevant to the present proceedings).[22]The Ombudsman reminded himself of the FCA’s Principles for Businesses which included as Principle 9, ‘A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.’[23]In addition, the FCA had adopted Conduct of Business Sourcebook Rules (‘COBS’). The Ombudsman recalled that COBS 9.2.1R said, ‘(1) A firm must take reasonable steps to ensure that a personal recommendation, or a decision to trade, is suitable for its client; … (3) When making the personal recommendation or managing his investments, the firm must obtain the necessary information regarding the client’s…(c) investment objectives so as to enable the firm to make the recommendation, or take the decision, which is suitable for him.’[24]COBS 9.2.2R said, ‘(1) A firm must obtain from the client such information as is necessary for the firm to understand the essential facts about him and have a reasonable basis for believing, giving due consideration to the nature and extent of the service provided, that the specific transaction to be recommended or entered into in the course of managing:(a) meets his investment objectives;(b) is such that he is able financially to bear any related investment risks consistent with his investment objectives; and(c) is such that he has the necessary experience and knowledge in order to understand the risks involved in the transaction or in the management of his portfolio.’[25]COBS 9.3.1G So this was Guidance rather than a Rule said, ‘(1) A transaction may be unsuitable for a client because of the risks of the designated investments involved, the type of transaction, the characteristics of the order or the frequency of the trading. (2) In the case of managing investments, a transaction might also be unsuitable if it would result in an unsuitable portfolio.’[26]If a firm had a ‘suitability report’ COBS 9.4.7R provided that it must at least, ‘(1) specify the client’s demands and needs; (2) explain why the firm has concluded that the recommended transaction is suitable for the client having regard to the information provided by the client; and (3) explain any possible disadvantages of the transaction for the client.’[27]The Ombudsman recognised that it was the Claimant’s case that it made no personal recommendation to Mrs King, but only provided a discretionary management service. The Ombudsman explained why he did not accept the Claimant’s argument [81]–[90]. On the contrary, he found that, ‘FCAM did provide a personal recommendation to Mrs K. Certainly, based on the way it set out its recommendations to Mrs K she could reasonably expect that it provided for her a personal recommendation.’ [90][28]In response to the Ombudsman’s provisional determination the Claimant had again argued that it had made no personal recommendation. The Ombudsman responded by saying, ‘I have carefully considered what FCAM have said but I remain of the view that FCAM provided personal recommendation to Mrs K. So I consider it appropriate to include within my review whether or not that recommendation was suitable for Mrs K.’ [93][29]The Ombudsman then noted that the Claimant had complained that he had re-characterised the complaint of Mrs King and turned it from a challenge to the riskiness of the Model Portfolio into one into the suitability of its offer to provide a discretionary investment service [94]. The Ombudsman denied that he had re-characterised her complaint, but went on to say that the Claimant would have seen from his provisional determination the approach he intended to take. He added ‘it had ample opportunity since the provisional decision to make its submissions. Indeed, I note that when responding to the provisional decision, FCAM did seek to refute some of the factors I took into account in concluding that the portfolio was not suitable for Mrs K (for example the income requirement and the need to have less cash balance).’ [100][30]The Ombudsman then turned to the argument from the Claimant that he had failed to give proper weight to the SPR’s conclusions and the FCA’s acceptance of the fact that the model portfolio was in fact medium risk. [100][31]The Ombudsman responded by saying that he had given due regard to the review, but it was just one of the factors he had to take into account [103]-[104]. Mrs King’s complaint was that the portfolio recommended for her by the Claimant had been unsuitable for her [105]. That meant the Ombudsman had to consider what her specific circumstances were so far as they were known to the Claimant [106]. He noted that risk assessment was not a precise science [107] – [115]. He noted as well that the July 2012 SPR report, with which he had been provided, said expressly, ‘The FOS must not rely on the contents of the [July 2012 SPR Report] and should make its own inquiries and exercise its own judgment obtaining and taking into account appropriate professional advice regarding any potential implications the contents of the [July 2012 SPR report] may have on its findings.’[32]At [120] he turned to the FCA’s endorsement of the SPR and said, ‘As regards the response from the FCA to the skilled person’s review, the FCA has also, on different occasions, said that the ombudsman service decides each case on its own merits and that should not be seen as “surprising”. For example, in its Finalised Guidance on retail investment advice recently published, the FCA stated; “4.20 The fact that the Financial Ombudsman Service may arrive at different outcomes on separate cases should not be seen as surprising. It is not a question of inconsistency, but a matter of the Financial Ombudsman Service looking at each complaint individually and making a decision on what it believes is fair and reasonable in the circumstances of that particular case. There may be surface similarities between some complaints. But when looked at in detail, the Financial Ombudsman Service generally finds that very different facts and issues are involved. This reflects the reality that everyone’s personal and financial circumstances will be different.”’[33]The Ombudsman concluded this section of his determination by saying, ‘So the question I need to resolve is whether or not the specific portfolio that was recommended and provided to Mrs K, taking into account her individual circumstances, was suitable for her’. [124][34]The Ombudsman then reviewed what the Claimant knew of Mrs King’s personal circumstances. He noted that she had complained to the Claimant that her previous financial adviser had left a large proportion of her capital in cash. From this the Ombudsman concluded that she preferred her portfolio to be more fully invested and did not prefer sizeable cash holdings. [130]-[135][35]He noted that she said she was in her sixties and recently retired. She was not in a position to replace any capital that was lost. The sums she wished to invest were evidently a considerable proportion of her investible assets. FCAM should have taken these factors into account in deciding what was suitable for her. [136]-[139][36]After the first meeting with Mrs King, the Claimant had recorded her as an ‘average risk investor’, but there was no definition of what this term meant and the Claimant should have given a more detailed explanation of its understanding of her risk attitude and how the portfolio which it was recommending was suitable for her. The firm’s suitability letter had been accompanied by an ‘Attitude to Risk and Loss’ form. This described Mrs King as a ‘medium risk investor’ but that expression, too, was undefined and not further explained. [140]-[144][37]Following further submissions made by the Claimant in response to the provisional determination which the Ombudsman summarised, he added at [159], ‘I consider it reasonable for Mrs K to expect from these statements that, whilst she agreed to take a “medium” level of risk, within that level of risk of the portfolio would be controlled, there would be diversification of risk and that she would not unduly be exposed to higher risk investments. I believe that this is reflected in her statement that she joined FCAM because she “agreed with FCAM’s cautious approach which involved stop losses and the main aim of not losing client’s money.” I find her representations about what she took from this to be plausible.’[38]The Ombudsman then looked at the contemporary documentation for evidence as to Mrs King’s need for an income from her investments [160]-[164]. Responding to his provisional decision, the Claimant had said that Mrs King had sufficient cash balance to meet her income needs [165]. The Ombudsman then said, ‘Having considered the arguments and evidence on both sides, I think it is more likely than not that [Mrs King] needed to take income from the portfolio and mentioned that to FCAM. Also, FCAM were aware that Mrs K was making this withdrawal and so, if it expected her, going forward to meet her income needs from the cash deposits it should have made that clear to her. There is no evidence that it did.’ [166][39]In [167] he summarised Mrs King’s requirements as:
‘- As fully invested portfolio as possible; not to have sizeable cash holdings - Invest in a relatively cautious manner within her stated risk profile considering her age and her large dependence on the portfolio - Invest for the long term - Diversify the risk - Provide for capital growth as well as some income.’
[40]The Ombudsman then turned to consider whether the portfolio which was provided for Mrs King was suitable for these requirements. He recognised that the Claimant had submitted that its strategy was to invest across a range of asset classes with no restriction on the amount in any particular class. Nonetheless, the Ombudsman said, the ‘key consideration however is that FCAM needed to make sure that the portfolio was suitable at all times to Mrs K.’ [170][41]He looked at the composition of the portfolio as at 31st March 2010. He noted that nearly 42% was then in cash, about 45% of the holdings were high risk and 60% were, in the Claimant’s risk score, of 8 or 9. 35% of the portfolio were in short term investments. About 20% of the investments were in just 2 markets (UK and China). Any hedging was inadequate. The portfolio was not geared to produce adequate natural income to meet Mrs King’s requirement. The proportion of high risk investments was excessive. In conclusion, he said, the portfolio contained an excessive proportion of higher risk investments given the circumstances. [171]-[189][42]The Ombudsman concluded that: i). The portfolio provided to Mrs King was not suitable to her circumstances. ii). If the inherent risks had been clear to her she would not have proceeded with the investment. iii). He accepted that Mrs King was aware that the business could invest in different asset classes at its discretion and there was no pre-agreed asset model as such, but the Newsletter and other material which the Claimant provided to her was too technical and she did not have the investment expertise to understand it fully. Nor had she understood the risks inherent in the various complex investments that were included in the portfolio. iv). The portfolio was not suitable for Mrs King. [190]-[196][43]The Ombudsman considered that Mrs King was entitled to be compensated by the Claimant. He proposed that the Claimant should calculate how her assets would have performed by reference to the FTSE WMA Stock Market income Total Return Index compared with the actual performance of the funds managed by the Claimant. The FSMA 2000 capped the award which he could make to £100,000 and he said that if the calculation that he proposed should lead to a sum up to £100,000 then the Claimant should pay that amount. Above that amount he could recommend that the Claimant pay the balance, and he did so.

The Claimant’s central challenge

[44]At the heart of Mr Phillips’ challenge to the Ombudsman’s decision is this reasoning: i) Mrs King was a medium risk investor. ii) The Claimant provided a discretionary management investment service. iii) Overall the portfolio which the Claimant put together had to be medium risk. iv) If overall the investments in the portfolio were properly to be characterised as medium risk, no objection could be taken to the individual elements of the portfolio. This portfolio did not have any prescribed classes of assets or any prescribed proportion between them. v) The SPR had confirmed that (with minor exceptions for a brief period) the portfolio was properly described as medium risk. vi) The FCA had confirmed that it accepted the SPR report. That set a regulator’s standard for the purposes of DISP 3.6.4R 12(1)(b). vii) Although the Ombudsman was not bound to accept the SPR’s and the FCA’s views, if he was going to depart from them, he had to explain why. viii) The Ombudsman had departed from those views but he had not explained why. ix) The result is that the Claimant is faced with conflicting decisions: the FCA which did accept that the portfolio was medium risk; the Ombudsman which upheld Mrs King’s complaint. x) By so departing from the regulator's standard without justification the Ombudsman erred in law and his decision should be quashed.[45]The problems with this chain of reasoning begin with stage (i). Part of the Ombudsman’s findings, as I have shown, was that the term ‘medium risk investor’ was too vague. It was, the Ombudsman found, incumbent on the Claimant to investigate more closely what Mrs King’s requirements were. It was necessary for the Ombudsman to do that, but it had also been necessary for the Claimant to do that if it was to discharge its responsibilities to her before making a personal recommendation to her. There had been an issue between the Claimant and Mrs King as to whether the Claimant had made a personal recommendation to her. The Ombudsman made a finding of fact that the Claimant had made a personal recommendation to her. The present proceedings are not an appeal on the facts. The Claimant could only impugn that finding if it was infected with legal error. The Claimant does not suggest it was. That being so, the claim for judicial review must proceed on the premise that the Ombudsman was entitled to make that finding.[46]What Mrs King wanted would only be of relevance if the Claimant knew or ought to have known of her requirements. The Ombudsman appreciated this and he supported each of his findings as to what her requirements had been by reference to contemporaneous documentation. There is, and can be, no complaint that the Ombudsman was entitled to find that the Claimant had these requirements and that they either had been known to the Claimant or ought to have been known to it. Once again, these are unchallenged findings of fact by the Ombudsman.[47]The SPR review concluded that overall the portfolio was medium risk. The Ombudsman did not disagree. But that was not dispositive of Mrs King’s complaint. Having analysed her requirements, his conclusions were that the portfolio was not suitable for her. Since the Ombudsman was not departing from what Mr Phillips called the standard approved by the FCA, there was no obligation on the Ombudsman to explain why he differed from the standard which the FCA had approved. That simply did not arise.[48]The Ombudsman had said in his provisional determination and repeated in the final determination at [98] ‘My aim is not to risk rate FCAM’s Model Portfolio, but to consider the suitability of the Portfolio for Mrs King’s individual circumstances’. It is right that he referred to the disclaimer by Kinetic at [116] of his Final Report, although it is hard to see why that was improper. He acknowledged the endorsement of Kinetic’s views by the FCA at [120] but, at [124] reminded himself that he was investigating whether the portfolio which the Claimant had recommended for Mrs King was suitable for her.[49]Mr Phillips stressed the importance of the regulatory regime under which firms, such as the Claimant had to operate being coherent and not inconsistent. I agree. He showed me a Memorandum of Understanding dated 18th December 2015 between the FCA and the Defendant. This said at paragraph 6(c), ‘The FCA discharges its objectives by setting standards that regulated firms must meet and taking action where such firms may be breaching those standards. The FCA does not investigate individuals’ complaints against the firms it regulates – this is the role of the Financial Ombudsman Service.’ That is precisely the model which was followed in the present case. Even if it be the case (as the Claimant suspected) that the SPR notice issued by the FSA in November 2011 had its genesis in Mrs King’s complaint, the purpose of the SPR was not to address that complaint. That course would have trespassed on the role of the Defendant. It was for the Defendant to investigate and determine her complaint.[50]It follows that I do not accept that this central chain of reasoning is sustainable.[51]Mr Phillips submitted that the Ombudsman’s characterisation of Mrs King’s complaint differed from: i) The way in which her complaint had been summarised in the statement of reasons which accompanied the consent order quashing the first Ombudsman’s determination (see paragraph 11 above). ii) The way in which Mrs King had begun her answer in the ‘complaint form’ where she had said that ‘The investment was made into funds that were too risky for a retail client. In addition, the Firm did not understand the risks inherent in the investments made and the suitability of these for any retail client.’ So Mr Phillips submitted, she was simply saying the investments made by this portfolio were excessively risky ‘for any retail client’. iii) The way in which he summarised her complaint in paragraph 1 of his final determination.[52]I am not persuaded by these arguments. Paragraph 1 of the consent order quashed the first determination. Paragraph 2 of the Consent Order provided that ‘The complaint of the First Interested Party [i.e. Mrs King] be remitted to the Defendant to be determined afresh by a different Ombudsman.’ That is precisely what has happened by Mr. Varadarajan. Mr Phillips did not argue that the Statement of Reasons operated to estop Mr Varadarajan from analysing her complaint in any different way. I agree with Mr Phillips that the Statement of Reasons did not have that effect. He did argue that if Mrs King’s complaint was truly as Mr Varadarajan interpreted it, then there was no reason why the first Ombudsman’s decision had to be quashed. That’s as may be. It is not my task to investigate whether the consent order was necessary or not. Indeed, while passing mention has been made of the first Ombudsman's determination, it has not been necessary for me to examine it and certainly not with the care which I must pay to the second determination.[53]It was, in my view, a necessary part of Mr Varadarajan’s function to determine the nature of Mrs King’s complaint. After all, as the Court of Appeal said in R (Heather Moor and Edgecomb Ltd) v Financial Ombudsman Service [2008] EWCA Civ 642 at [80] the Ombudsman ‘is dealing with complaints, and not legal causes of action’ and, as Irwin J. said in R (Keith Williams) v Financial Ombudsman Service [2008] EWHC 2142 (Admin) at [26] ‘His jurisdiction is inquisitorial not adversarial.’[54]Mr Phillips referred me to the beginning of the box on the complaint form answering the question, ‘Please tell us what your complaint is about’, but after the passage which I have quoted above, it continued, ‘The documentation of the suitability letter stated that the objective was long term capital growth. The investments had nothing to do with long term capital growth. These were all short term speculations and achieved no growth whatsoever.’ More importantly, though, the Ombudsman was not confined to what appeared in this box on the form in deciding the nature of Mrs King’s complaint. He was entitled, as he did, to look more widely at the correspondence which she and her adviser had written to the Claimant and to him.[55]Paragraph 1 of the determination was no more than a summary and introduction to the determination; it set no limits on what the Ombudsman could properly do.[56]I have looked at the substance of Mr Phillips’ arguments on the question of how the Ombudsman characterised Mrs King’s complaint. However, Mr Strachan QC, on the Defendant’s behalf, noted that the Claimant’s grounds for seeking judicial review did not allege legal error in the Ombudsman's characterisation of Mrs King's complaint.[57]Of course, the Ombudsman was obliged to treat the Claimant and Mrs King fairly. The inquisitorial character of his function did not absolve him of that duty. However, so far as the Claimant’s complaint is of unfairness, it has no force. If not earlier, the Claimant was alerted to the approach which Mr Varadarajan was minded to take to Mrs King’s complaint by his provisional determination. As the Ombudsman recorded in his final determination, both parties took the opportunity to make further submissions as a result. He took those into account. The Claimant has not therefore been taken by surprise by the manner in which the Ombudsman characterises Mrs King’s complaint. There has been no unfairness.[58]Mr Phillips invited me to ask myself ‘So what?’ in response to the Ombudsman’s criticisms of the Claimant. By this I understood him to mean that Mrs King had been a medium risk investor and the Model Portfolio was a medium risk investment (see Kinetic’s conclusion). Those two propositions were and should have been sufficient to dispose of her complaint and lead to its dismissal. But I reject this approach. The Ombudsman found that the Claimant had personally recommended the Model Portfolio to Mrs King. Before doing so, it should have assessed whether it was suitable for her. That required a more sophisticated investigation than crudely determining she was a ‘medium risk investor’. The Claimant had not done that. The Ombudsman looked at what her requirements in fact were and then decided that the Model Portfolio was not suitable for those requirements. The answer to Mr Phillips’ ‘So what?’ question was given in [191] where the Ombudsman said ‘I am not persuaded, on balance, that had the inherent risks as seen above been made clear to Mrs K, she would have accepted to proceed with the investment.’

The Claimant’s other grounds

[59]In the course of his oral submissions, Mr Phillips appeared to accept that the Claimant’s case turned on ground 1 of his challenge (which I have sought to put into my own words above). He recognised that the other grounds were, in a sense, parasitic on ground 1. I agree. In view of this, I can deal with them briefly.[60]Ground 2 alleged that the Ombudsman had failed to account for wider implications. By this I understood Mr Phillips to be referring to what I have summarised in [44] (ix) above. However, for the reasons which I have given, I do not accept that there is a conflict between the Ombudsman’s determination of Mrs King’s complaint and the wider regulatory role or standards of the FCA. The wider implications to which ground 2 refers do not therefore arise.[61]Ground 3 alleged procedural and substantive unfairness. This is another way of expressing the same complaint as grounds 1 and 2. The unfairness is said to arise because the Claimant, having had its Model Portfolios approved as medium risk by the FCA, is confronted with an Ombudsman’s decision which criticises it for using one of those Portfolios for a medium risk investor. It is said that the Ombudsman has departed from the industry standard set by the FCA, but given no reasons for doing so. It is sufficient for me to say that I do not accept that this is a proper characterisation of the Ombudsman’s decision. There is no unfairness and there is no breach of the European Convention on Human Rights.[62]Ground 4 alleged a failure to give adequate reasons for ignoring or giving no weight to the regulatory standard approved by the FCA and by improperly relying on the provisional determination which itself was flawed. I reject this criticism. I have already addressed its first aspect. I have looked closely at the final determination. Far from this ground of challenge having merit, I would pay tribute to the Ombudsman for dealing comprehensively with the evidence and arguments which had been addressed to him. He explains his reasons fully.[63]Ground 5 alleged that the determination had been re-interpreted by the Defendant in pre-action correspondence and made the decision unsupportable. Mr Phillips accepted that the Claimant had to mount its challenge to the final determination itself. If that was legally flawed, the Claimant would succeed whatever the subsequent correspondence said. If the final determination was not legally flawed, it could not become so because of something the Defendant had written later. Both propositions may, in some circumstances, need to be qualified, but there was nothing in Mr Phillips’ oral or written submissions which suggested that any such qualification arguably applied in the present circumstances.

The March 2012 SPR report

[64]The Claim Form in the present proceedings was accompanied by the 1st witness statement of Robert Constance, a partner in the Claimant’s solicitors and dated 18th May 2016. Mr Constance referred to the notice from the FSA under FSMA 2000 s.166 requiring the Claimant to commission a Skilled Person’s Report. He said that the report was produced by Kinetic Partners LLP dated 20th March 2012. As I have already mentioned, he said that this was not disclosed for ‘confidentiality reasons’. Mr Constance’s statement continued, ’15. By agreement with the Claimant, Kinetic Partners LLP produced a condensed version of the s.166 Report entitled “Extract from Skilled Person’s Report on Suitability, Systems and Controls” dated 25 July 2012 (“the Second Kinetic Report”) … This report was disclosed to the Defendant. 16. The FSA acknowledged its acceptance of the Second Kinetic Report’s findings by email dated 17 October 2012.’[65]As I have already noted, the FCA (as the successor regulator to the FSA) was served with the proceedings as an Interested Party. On 7th September 2016 it wrote to Mr Constance and the Defendant to draw attention to a factual inaccuracy in Mr Constance’s 1st witness statement. It said, ‘When the FSA responded to the Claimant’s email request of 16 October 2012 and confirmed in writing that “accepted the findings of the review carried out by Kinetic”, this was a reference to the First and not the Second Report.’ It enclosed the Executive Summary of the First Report.[66]The Executive Summary of the First Report (what I have referred to elsewhere as the March 2012 SPR report) is not to be confused with the Executive Summary included in the July 2012 SPR report (what the FCA and Mr Constance called the ‘Second Kinetic Report’ and Kinetic called ‘the supplementary report’).[67]The Executive Summary of March 2012 SPR included the following:
‘Background 2.5 The Firm provides discretionary investment service toretail clients only. The Firm’s philosophy is that its model portfolios (the “Models”) are medium risk and accordingly, FCAM will only take on clients with a medium appetite to risk (“ATR”). FCAM’s stated approach is to restrict the clients that are on-boarded to those who share the Firm’s investment philosophy and whose ATR matches that of the Models. In our view this is not a common approach but not unreasonable as a business model, so long as FCAM is able to continually verify that its clients meet the risk profile of the Models (although under typical circumstances a firm would be required to ensure that a client’s ATR is satisfied by the risk profile of its portfolios). 2.6 FCAM restricts its client base to those individuals whose ATR matches the risk profile of the Models through a series of interviews of increasing depth, aimed at turning away those prospective clients for whom the Models would not be suitable. Suitability of the Model Portfolios 2.7 In order to determine if an investment is suitable for any client, a firm needs to clearly communicate with clients and agree a mutual understanding of risk profiles with them, operate a robust system whereby it can assess and document the client’s ATR and record how the investment under consideration matches the risk appetite of the client, including why it is preferable to other investment opportunities. 2.8 A firm needs clear definitions of its understanding of risk categories. FCAM’s Attitude to Risk and Loss document (“ARL”) conveys a limited definition as to what the Firm deems to be conventional medium risk and lists examples of such investments. The Firm should offer clients a document which describes an array of risk appetites and allows the client to select the one they feel best describes their risk preferences. We reviewed the ARL document, including how it describes the Firm’s interpretation of risk and found there to be material deficiencies. The ARL is not fit for purpose. Unless a firm clearly articulates its understanding of risk, it cannot reconcile this definition of risk to its clients’ circumstances and risk preference. 2.9 A firm will be required to collect sufficient information from each client to assess a client’s financial circumstances (which includes, but is not limited to, assets, liabilities, income, expenditure and ability to bear loss) and determine whether client’s ATR is reasonable taking into account the financial circumstances. We reviewed the documentation on a sample of client files and, in addition to the deficiency noted above in communicating the Firm’s definition of risk, found that FCAM does not collect sufficient information from its clients to evidence that it has adequately assessed their ATR. In some files (refer to Section 5F for further details) we found evidence of limited Know Your Client (“KYC”) information indicating that the Firm is in breach of COBS 9.2.6R. 2.10 It has not been possible at this stage, with the controls currently in place at FCAM, to assess the suitability of the discretionary service offered to clients as the Firm has not conveyed its understanding of risk, nor has it collected sufficient documentary evidence as to clients’
ATR. Given these identified failings, in our view all files reviewed are unclear. We have not been able to assess whether or not the Models are unsuitable or suitable for any or all of FCAM’s clients. As a result of these failings we recommend that the Firm addresses these issues as a matter of urgency. We are aware that the Firm has introduced a risk assessment questionnaire and has committed to review the ARL in order to address the deficiency in its communication of its interpretation of medium risk… 2.21 In our view, the Firm’s main shortcomings include a lack of understanding, knowledge and awareness of current regulatory requirements and inadequate documentation to evidence sound systems and suitability…’ [emphasis added][68]On 20th September 2016 Mr Constance made his 2nd witness statement. He said, ‘3. It has been drawn to my attention that paragraph 16 of my 1st witness statement contains an error, which arises as follows:3.1 As set out in paragraphs 13 and 14 of my 1st witness statement Kinetic set out the findings of its s.166 review in a report dated 20 March 2012 (”the s.166 Report”);3.2 As explained in paragraphs 21 and 22 of the Claimant’s Statements of Facts and Grounds, the FSA told the Claimant that the FSA accepted the findings of the s.166 Report and confirmed that acceptance by email dated 17 October 2012…;3.3 As set out in paragraph 15 of my 1st witness statement, the Second Kinetic Report is a condensed version of the s.166 report, prepared specifically for disclosure to the Defendant. 4. It follows that paragraph 16 of my 1st witness statement was incorrect to suggest that the FSA had accepted the findings in the Second Kinetic Report. I should simply have said that the FCA accepted the findings in the s.166 Report. I apologise for any confusion caused by my inadvertent error.’[69]It is noteworthy that Mr Constance did not exhibit the letter from the FCA of 7th September 2016, nor did he exhibit the Executive Summary of the March 2012 SPR report which was attached to that letter. A reader of Mr Constance’s 1st and 2nd witness statements would not have been aware that the March 2012 SPR report included the criticisms in the Executive Summary which I have quoted above.[70]On 25th October 2016 Georgina Surry, a solicitor employed by the Defendant made a witness statement which did exhibit the FCA’s letter of 7th September 2016 and the Executive Summary of the March 2012 SPR report.[71]At about the same time, the Defendant applied to amend its Detailed Grounds of Resistance to the Claim to rely on the March 2012 SPR report Executive Summary. It argued that the criticisms made by Kinetic were consistent with the findings of the Ombudsman and that there was no conflict between the Ombudsman’s final determination and the views of Kinetic as adopted by the FCA.[72]On 2nd February 2017 Mr Constance made his 3rd witness statement. He gave some further information about the work which Kinetic had done. He said that Stage 2 of the SPR was a review of a sample of case files. 17 had been chosen, but they were all files of people who were still clients of the Claimant at the time, so that did not include Mrs King’s file.[73]As the Executive Summary of the March 2012 SPR report had shown, Kinetic could not reach a conclusion on suitability because the Claimant’s documentation had been inadequate. That had led Kinetic to conduct what Mr Constance referred to as a ‘re-papering exercise’. Mr Constance said that had been completed in late July 2012. Kinetic had issued a follow-up report dated 7th August 2012 which was provided to the FSA. He said in summary, Kinetic had concluded: ’14.1 based on its previous assessment that the Claimant’s Model Portfolios were in line with a conventional industry medium risk profile, it was Kinetic’s view that (as to 11 of the 13 extant clients whose files it had originally reviewed) “the investment services provided by the Firm to these clients was suitable”; and 14.2 as to the remaining two clients, the Claimant had(1) amended the client’s portfolio appropriately given that the re-papering showed that the client’s risk tolerance had changed, or(2) invested the client in the most suitable portfolio, given the client’s specific wish to remain in the Model Portfolio. 15 The Claimant then completed, with the assistance of its compliance consultants and reported to the FSA, a re-papering and review exercise covering its extant clients who were not included in Kinetic’s follow-up review. No suitability issues were identified in that review. The FSA (and subsequently the FCA) had not found it necessary to take any further action or raise any further issues regarding the suitability of the Claimant’s Model Portfolios for its customers.’[74]I have set out this aspect of the evidence before me, although I have borne well in mind that the Executive Summary to the March 2012 SPR report was not before the Ombudsman and neither, so far as I am aware, was Mr Constance’s account of the ‘re-papering’ exercise. However, it seems to me that there is force in the observations of Mr Strachan that: i) The criticisms made by the Ombudsman of the Claimant’s inadequate identification of Mrs King’s requirements, have a marked echo in the criticisms which Kinetic made of the Claimant’s systems for identifying its clients’ requirements and its processes for deciding whether the model portfolios which it offered were suitable for those clients. Quite apart from the points which I have already made, this synergy between the Ombudsman’s report and the Kinetic report which the FCA approved, undermines the Claimant’s complaint that they have been faced with conflicting views of the FCA on the one hand and the Ombudsman on the other. ii) Given the emphasis which the Claimant has placed on the views of Kinetic and the endorsement of those views by the FSA/FCA it is surprising that the Claimant did not make the Ombudsman aware of the criticisms which Kinetic had made of its systems. The Claimant may have thought that the Ombudsman’s focus was to be on whether the Model Portfolio was accurately characterised as ‘medium risk’, but, by the time it received the provisional determination (at the very latest), it would have realised that the Ombudsman characterised Mrs King’s complaint in different terms.

Conclusion

[75]For all of the reasons I have given, this application for judicial review is dismissed.

Cited in 3 later judgments