The King -on the application of- Shawbrook Bank Ltd v Financial Ombudsman Service Ltd
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Collins Rice |
| Judgment Date | 05 May 2023 |
| Neutral Citation | [2023] EWHC 1069 (Admin) |
| Docket Number | Case Nos: CO/506/2022 & CO/4312/2021 |
| Court | Queen's Bench Division (Administrative Court) |
[2023] EWHC 1069 (Admin)
THE HONOURABLE Mrs Justice Collins Rice
Case Nos: CO/506/2022 & CO/4312/2021
IN THE HIGH COURT OF JUSTICE
KING'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Javan Herberg KC & Mr Daniel Cashman (instructed by Linklaters LLP) for Shawbrook Bank Ltd, the Claimant in the first case
Mr Ben Jaffey KC & Mr Rayan Fakhoury (instructed by Hogan Lovells International LLP) for Clydesdale Financial Services Ltd, the Claimant in the second case
Mr James Strachan KC & Mr Gethin Thomas (instructed by the Financial Ombudsman Service) for the Financial Ombudsman Service, the Defendant in both cases
Mr Jonathan Kirk KC & Mr Lee Finch (instructed by Hamlins LLP) for Diamond Resorts (Europe) Ltd and CLC Resort Developments Ltd, Second Interested Party in each case respectively
Ms Catherine Callaghan KC & Mr Simon Pritchard (instructed by Shoosmiths LLP) for Mitsubishi HC Capital UK PLC, Third Interested Party in the first case
Ms Fenella Morris KC (instructed by Michelmores) for Mr Hopwood, First Interested Party in the second case
Hearing dates: 14 th – 16 th March 2023
Approved Judgment
This judgment was handed down remotely at 10.30am on 5 th May 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
THE HONOURABLE Mrs Justice Collins Rice
SECTION A
Preliminary
(a) Introduction
These judicial review proceedings have to do with how the holiday timeshare sector is regulated by law.
The concept of a holiday timeshare is familiar. Consumers can buy, for a lump sum outlay, an entitlement to stay in resort accommodation – either a single venue, or one or more from a portfolio of venues – for given periods each year, over a number of years. They will expect to pay annual management fees to maintain membership of the scheme, and may be asked to contribute to the expenses of resort dilapidations. It is a contractual arrangement, and comes in a variety of package forms, usually with a ‘club membership’ flavour and involving fringe benefits. Sometimes timeshare club membership includes a feature that, at a given future date, the property or portfolio of properties where the consumer can stay will be sold, and the net proceeds of sale distributed among the members (‘asset-backed’ timeshares). Sometimes there are arrangements, if a member does not intend to use all their annual holiday entitlement, whereby they can opt for the scheme to ‘rent out’ their unused entitlement in return for money back.
Prospective timeshare customers are routinely given the option of loan and repayment arrangements to spread the cost of the lump sum element of buying a timeshare package. That typically involves a commercial relationship between the timeshare company and a bank or other finance provider.
This litigation features a particular type of asset-backed timeshare package, known in the industry as a ‘fractional ownership timeshare’. As well as the standard sort of timeshare accommodation arrangements, it involves consumers buying, for their lump sum outlay, a ‘share’ in the ‘ownership’ of a single identified property in an accommodation portfolio. It does not confer any rights to stay in that particular property. But it holds out the prospect that the property will be sold at the end of the timeshare period and the net proceeds distributed pro-rata among the fractional owners. The freehold in the property is vested in a trustee for the benefit of the fractional owners. It is the trustee's responsibility to preserve the property, and in due course market it for sale, and distribute the proceeds. So the consumers' ‘fractional ownership’ is an interest under a trust for deferred sale.
The Financial Ombudsman Service Limited (‘FOS’) is in receipt of hundreds of consumer complaints about fractional ownership timeshare selling. Many are facilitated, if not stimulated, on a bulk basis by claims management companies. The FOS decided to select two lead cases for detailed consideration, and after a lengthy inquisitorial procedure lasting several years and including receiving industry submissions at sequential stages, two extensive final ombudsman decisions were issued in these cases at the end of 2021. In each case, the ombudsman decided the package had been mis-sold and the contractual arrangement, including the associated loan, should be unwound. Each decision is put on a number of alternative bases, and is intended by way of a comprehensive application of the potentially relevant legal and regulatory principles. As well as applying them to the facts of the individual lead cases, the FOS no doubt has a view to the efficient future disposal of the bulk of the other outstanding cases.
These judicial review proceedings are brought to challenge the ombudsmen's articulation and application of the principles in the two cases in question, including with a view to their potential application more generally. The challenges are themselves made on a number of grounds, but they focus on error of law, and thus put the spotlight on a correct understanding of the legal and regulatory framework.
The claimant in each case – Shawbrook Bank Ltd (‘Shawbrook’) and Barclays Partner Finance (‘BPF’) respectively – is the financial services provider that financed the loans the consumers took out to cover their lump sum purchases. A further finance company, Mitsubishi HC Capital (‘Mitsubishi’), also provides that facility by arrangement with timeshare companies, not in the present cases but in other pending FOS cases; it is an interested party. The timeshare companies that sold the packages – Diamond Resorts (‘Diamond’) and CLC Resort Developments (‘CLC’) respectively – are also involved as interested parties, as are the individual consumers/complainants themselves.
The claimants, and the commercial interested parties, acknowledge the extent to which the two ombudsmen's decisions, placed on a range of alternative bases, present a complex and multi-faceted target for their challenges. They seek declaratory judgment on an issue by issue basis, as well as the quashing of the individual decisions and their remission to be re-taken on a different basis. The FOS defends the decisions, both on the basis that some or all of the challenges made are not truly allegations of error of law in the first place, and also, to the extent that they are, that no error of law in any event appears.
(b) Judicial review of financial ombudsman decisions: legal framework and principles
The FOS was set up as part of a statutory scheme ‘ under which certain disputes may be resolved quickly and with minimum formality by an independent person’ (section 225(1) Financial Services and Markets Act 2000 – ‘ FSMA’). It is designed to provide independent, informal complaint resolution for the financial services industry without the need for litigation. Jurisdictional and procedural rules for doing so are set out, as part of the statutory scheme, in the Financial Conduct Authority's Handbook's section Dispute Resolution: Complaints (‘DISP’). Its remit is inquisitorial not adversarial ( R (Williams) v Financial Ombudsman Service [2008] EWHC 2142 at [26]).
The present complaints engaged the FOS's ‘compulsory jurisdiction’ set out at section 226 of FSMA. As such, they were to be ‘ determined by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case’ ( section 228(2) FSMA). DISP 3.6.4R provides:
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 caselaw underlines that the ‘fair and reasonable’ test is a subjective one for an ombudsman (see R (IFG Financial Services Ltd) v Financial Ombudsman Service [2005] EWHC 1153 (Admin), at [13]). The combination of a subjective approach and a duty to ‘take into account’ the law raises an obvious question about how far an ombudsman is or is not constrained by the law. The question was considered by the Court of Appeal in R (Heather Moor & Edgecomb) v Financial Ombudsman Service [2008] EWCA Civ 642. From that case (see in particular [49], [80] and [89]) the following principles can be distilled.
Ombudsmen are dealing with complaints, not legal causes of action. They are not (conclusively) determining legal rights and duties. They are not bound to apply the common law. As an efficient, cost-effective and relatively informal type of alternative dispute resolution, ombudsmen ‘ should not be stifled by the imposition of legal doctrine’. A determination reached by an ombudsman may properly differ from the conclusion that a court would reach. They have a statutorily protected discretion in the ‘fair and reasonable’ jurisdiction and are not susceptible to legal appeal.
On the other hand, they are creatures of statute with jurisdiction circumscribed by law. They have a legal obligation to take relevant law into account. They must direct themselves correctly as to what the relevant law is. They are ‘ free to depart from the...
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