Final decisions of the Financial Ombudsman Service (FOS) made on the basis of its opinion as to what is fair in all the circumstances are rarely reviewable by the courts, even if it makes errors in the decision-making process.
In Paterson Securities Ltd v Financial Ombudsman Service Ltd [2015] WASC 321 the Court dismissed a contractual challenge to a determination made by a FOS panel to award compensation to a complainant for damage suffered by the improper investment of her funds by a stockbroker. The funds were invested adopting a high-risk strategy, when the contract called for a more conservative approach to be implemented. The claim was dismissed notwithstanding that the panel had made an error in misconstruing one element of the claimed loss as “direct loss” when it was at law, “indirect loss.” As the parties had agreed by contract that FOS’s decisions were to be made, not on the basis of law, but rather on the basis of FOS’s opinion of the compensation that was fair in all the circumstances, as long as FOS’s opinion was not irrational, dishonest or made for an improper purpose, an error made in the scope of the decision making process did not render the decision bad.
The panel formed the opinion that fair compensation required that the client was to be put in the position she would have been in had the strategy contracted for been adopted. Had that been done, instead of incurring a loss when the investments were unwound, her funds would have significantly increased in value.
Under the contract constituted by FOS’s terms of reference, FOS had power to compensate for “direct loss” up to a given amount, but its power to compensate for “indirect loss” was capped at $3,000.
The key issue was whether, in addition to awarding the losses incurred, the panel could make an award for the increase in value that the funds would have earned had the contracted strategy been adopted (amounting in this case to well in excess of $100,000). To put it differently, was that part of the award limited by the $3,000 cap for indirect loss?
Mitchell J held that the award for gains that would have been earned was “direct loss” and therefore was within FOS’ power: [147]-[150].
However, he also found that objectively and at law, one element of the award was “indirect loss” (which exceeded the $3,000 cap), but that having regard to the proper construction of FOS’s terms of reference, the erroneous characterisation of that element of the award by the panel did not vitiate the decision.
The key criterion for FOS to apply in determining what compensation an FSP should make to a complainant, is what in its opinion is fair and appropriate to compensate the complainant for direct financial loss or damage: [91]-[92].
Having regard to prior authorities, principally Mickovski v Financial Ombudsman Service Ltd [2012] VSCA 185; (2012) 36 VR 456 (Mickovski)? and Cromwell Property Securities Ltd v Financial Ombudsman Service Ltd [2014] VSCA 179; (2014) 288 FLR 374, Mitchell J construed the decision making power held by FOS as follows.
“However, it is for FOS to decide whether direct financial loss or damage has occurred and the amount of the payment which is fair and appropriate to compensate for that loss and damage. FOS’s decision is not open to challenge on the ground that direct loss or damage has not in fact been sustained or because the payment required exceeds that which a court of law would award as compensation for the loss or damage.” [93]
“In my view, FOS will not breach the contract merely by allowing compensation for loss which has not in fact occurred, is not of the value assessed by the panel or which the panel has mischaracterised as direct loss. Those questions are committed to FOS for its final determination. FOS’s contractual obligation is relevantly to form an opinion as to whether it is fair and appropriate in all the circumstances to require that a specified amount be paid to compensate for direct loss. So long as it decides the dispute and remedy by reference to such an opinion, FOS will fulfill its contractual function. It will not breach the contract by requiring payment of compensation in an amount exceeding what the court assesses as the value of direct loss, unless it acts dishonestly, for an improper purpose or unreasonably in valuing that loss.” [106]
“In this context, the question for the court in assessing that complaint is whether it was open to FOS, acting honestly and rationally, to decide that in all the circumstances it was fair to require [the stockbroker] to pay the specified sums of money to compensate [the complainant] for direct financial loss. If it was open to FOS to decide the dispute in that manner then FOS will not be in breach of the contract, even if the court is of the view that some of the financial losses are properly characterised as consequential.” [110]
This is because the error is within the ambit of the decision-making power that the parties have contractually bound themselves to accept.
Mitchell J also observed:
“That FOS is to do what in its opinion is fair means that its decisions will rarely be open to successful curial challenge on their merits. The standard applied in determining what is fair is not exclusively legal. As the decision in Mickovski illustrates by reference to the former terms of reference, even errors of construction of the terms of the contract going to the ‘jurisdiction’ of FOS need not be reviewable.” [94]