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High court clarifies the Standard of Review of Financial Service Ombudsman Procedure

AUTHOR(S): Joe Beashel
PRACTICE AREA GROUP: Regulatory Risk Management and Compliance, Financial Regulation
DATE: 20.09.2011

The High Court (the “Court”) has reiterated that an appeal against a decision of the Financial Services Ombudsman (the “FSO”) is not a new hearing of a complaint but rather involves a review of the FSO’s decision making procedure. In the recent case of John Caffrey v the Financial Services Ombudsman (Hedigan J., 12 July 2011) (the “Caffrey Case”), the Court followed an established line of case-law holding that the decision of the FSO will only be overruled in the case of a serious and significant error relating to the procedure adopted. Once the FSO’s procedure is reasonable, the Court will not intervene to examine the merits of the decision.

The office of the FSO was established under the Central Bank and Financial Services Authority of Ireland Act 2004 which amended the Central Bank Act 1942. Section 57CL of the Act provides either party with a right of appeal to the High Court against a finding of the FSO within 21 days of the finding or such further period as the High Court may allow. An appeal taken under this procedure is separate from Judicial Review proceedings. As set out in Section 57CM of the Act, the High Court has a broad discretion in terms of the orders it can make in such an appeal including, inter alia, affirming the finding of the FSO with or without modification, setting aside the finding of the FSO or remitting the finding to the FSO for further review. 

Facts of the Caffrey Case

The Caffrey Case involved an appeal by John Caffrey (the “Appellant”) against an FSO decision relating to a complaint he made against Bloxham Stockbrokers (the “Stockbroker”). The case involved an investment made by the Appellant in the “Dresdner Bond” (the “Investment”) which the Appellant read about in the Bloxham Equity Research Quarterly Newsletter (the “Newsletter”). The Newsletter listed the Investment as paying a premium of 6.25% per annum for the first five years and 4 x (10 year Euribor – 2 year Euribor) thereafter with a maturity date of 2031. The Newsletter also described the Investment’s credit rating as “A”.

The Investment was in fact a note issued by Saturn Investments Europe plc (“Saturn”), the proceeds of which were used by Saturn to purchase the actual Dresdner Bond, which was denominated in US Dollars. In order to remove currency risk and provide a Euro return, Saturn entered into a swap agreement with Morgan Stanley whereby it swapped its dollar income received from the Dresdner Bond for a fixed Euro amount of 6.25% for the first five years and the floating rate thereafter as reflected in the terms of the Investment.

The Appellant contacted the Stockbroker by telephone in early 2005 to enquire about the Investment. The conversation lasted only a few minutes and at the end of the conversation the Appellant decided to invest. A contract note issued on 15 April 2005 recorded the Appellant’s investment of €50,000. An accompanying letter stated that for administrative reasons the stock description in the contract note referenced Saturn but that this was merely a brand name and did not affect the terms of the “Bonds” purchased by the Appellant. 

On 29 June 2009, the Stockbroker wrote to the Appellant informing him that Morgan Stanley had terminated the swap agreement with Saturn and, as a result, he would receive only three cents for every euro originally invested. The Appellant then complained to the FSO that at no time during his telephone conversation with the Stockbroker was the true nature of the Investment or the associated risks explained to him. The Appellant further claimed that he was given the impression that Dresdner Bank AG guaranteed the return of any monies invested. The Stockbroker disputed these claims, stating that the Appellant was an experienced investor and that he had been told during the telephone conversation with the Stockbroker that a total loss was possible, but unlikely.

The FSO accepted the Stockbroker’s version of events without holding an oral hearing in relation to the contested telephone conversation. The Appellant appealed the procedural decision not to hold an oral hearing, claiming that the conflict of written evidence between the parties made it imperative that the FSO hold an oral hearing, and the failure to do so amounted to a serious and significant error in law and in fact, which vitiated the FSO’s decision.

Review of FSO Procedure

In considering the appeal, the Court noted that, pursuant to Ulster Bank Investment Funds Limited v the Financial Services Ombudsman ([2006] IEHC 323), “… the plaintiff must show as a matter of probability that, taking the adjudicative process as a whole, the decision was vitiated by a serious and significant error or series of such errors.” The Court further noted that the FSO enjoys a broad discretion as to whether or not to hold an oral hearing.

The Court considered that it was reasonable for the FSO to decide that an oral hearing would have added nothing to the complaint, as the parties would be unlikely to be able to give an accurate and detailed description of the contents of a short telephone conversation which occurred five years earlier.

The Court also considered that it was reasonable for the FSO to refuse to make an order requiring the Stockbroker to produce a recording of the disputed telephone conversation. The Stockbroker had indicated that the recording was destroyed at least three years before the FSO’s consideration of the dispute, and, accordingly, such an order would have been futile.

Finally the Court concluded that it was reasonable for the FSO to describe the Appellant as an “experienced investor” given the length of time that the Appellant had been investing with the Stockbroker and the fact that he held an account with the Stockbroker for trading Contracts for Difference.

The decision in Caffrey is instructive as the Court has once again stressed that an appeal to the Court against a decision of the FSO will not take the form of a re-examination of the merits of the FSO’s decision. The Court will respect the FSO’s procedural decisions, provided that such decisions are reasonable. Accordingly, parties wishing to appeal against FSO decisions in relation to complaints must ensure they can point to clear procedural defects which render the decision unreasonable if they are to have any hope in succeeding in their appeal.

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