Full Circle Asset Management Ltd v Financial Ombudsman Service Ltd Mrs Joanna King and Another (Interested Parties)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Nicol |
| Judgment Date | 24 February 2017 |
| Neutral Citation | [2017] EWHC 323 (Admin) |
| Court | Queen's Bench Division (Administrative Court) |
| Date | 24 February 2017 |
| Docket Number | Case No: CO/2932/2016 |
[2017] EWHC 323 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Nicol
Case No: CO/2932/2016
and
Rory Phillips QC and Robert Purves (instructed by Reynolds Porter Chamberlain) for the Claimant
James Strachan QC and Stephen Kosmin (instructed by Financial Ombudsman Service Ltd) for the Defendant
Hearing dates: 8 th and 9 th February 2017
Approved Judgment
Introduction:
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 19 th July 2011, to the Financial Ombudsman Service ('FOS'), the Defendant.
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 14 th 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 14 th 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 13 th 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.
Raj Varadarajan was appointed to carry out this task. On 18 th 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 4 th August 2016.
Mrs King was named as the 1 st 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 2 nd Interested Party, but, with one qualification to which I will come, it, too, has taken no part in these proceedings.
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 3 rd October 2011. Following this visit and report and by a requirement notice dated 18 th 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).
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 25 th January 2012 and the final report had to be sent to the FSA by 28 th February 2012.
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.
Apparently, the SPR was sent to the FSA on 20 th 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 25 th 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.'
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 17 th October 2012 the FSA responded to say
'I can confirm that we accept the findings of the review carried out by Kinetic'.
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.
I have said that the first Ombudsman's determination (which found in favour of Mrs King) was quashed by consent on 18 th 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...
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