The Financial Ombudsman Service has been accused of being a law unto itself when it comes to holding FCA-regulated networks responsible for advice given by their appointed representatives.
On 16 July 2015, the ombudsman rejected a complaint against a firm after one of its agents advised a client to invest in Harlequin Property, which was not on the firm’s list of approved products.
The Fos decision stated: “It follows that the firm is not responsible for any advice about Harlequin that might have been given to Mr and Mrs M.”
According to Regulatory Legal Solicitors, Fos also decided to throw out a similar complaint the following day, on the grounds the AR was not authorised by the firm to give advice on investment products outside of the scope of the contract.
The ombudsman concluded the firm was therefore not responsible for the suitability of the advice.
The Fos annual review of 2014 to 2015 reads: “The complex relationships between businesses and their representatives can raise difficult jurisdictional questions for us.
“In some situations only after substantial and lengthy investigations does it emerge that the nature of the particular arrangement means we are ultimately unable to help.”
Tobias Haynes, trainee solicitor from Regulatory Legal, however argued: “It appears to us that this approach cannot be correct, and ultimately is not, and could not be, what the law intended.”
He pointed to Section 39 of the Financial Services and Markets Act (FSMA), which states that “the principal of an appointed representative, is responsible to the same extent, as if he had permitted it”.
Despite the Fos rejecting complaints against firms due to private agreements, in a number of earlier cases, the ombudsman decided a breach of agreement did not give grounds for a complaint to be rejected
In a case dated 3 April 2012 the ombudsman said: “If [the firm] believes that its position has been adversely affected if the adviser acted outside the terms of the appointed representative agreement, I consider this is an issue that [the firm] should address directly with the appointed representative.
“I do not consider this prevents this service from proceeding to investigate the merits of the complaint.”
In a case example dated 26 March 2014, the ombudsman even noted Section 39 of the FSMA, stating the principal was responsible for “anything done” [by the agent], which would cover all aspects of advice.
Fos also decided to uphold a complaint on 4 December 2014 where an agent used a regulated firm’s email address, despite trying to engage the consumer in unregulated activities to take the consumer outside of the scope of regulation.
In another example, dated 2 June 2015, the principal held no record of a recommendation given by a registered individual of the firm for a consumer to invest in the product, which meant the entire transaction had taken place outside of the principal’s knowledge.
Despite this, the Fos adjudicator concluded: “As [Mr N] was an AR of [the firm] at the time of advice, I consider [the firm] to have been responsible for the advice.”
Mr Haynes said this is the stance that the Fos should be taking and argued that consumers should not be penalised or take the risk of pursuing action against an agent.
Martyn James, head of media for the ombudsman, said it was not possible to apply ‘black and white’ logic to a range of individual situations with a considerable number of variables.
“Our decisions don’t represent precedents,” he said. “There are a number of factors that can have an impact on whether the ombudsman is able to consider a complaint with similar circumstances, like the nature of the agreement between the appointed representative and the adviser, for example.
“This may vary from firm to firm and can even include different wording and agreements over different time periods. Each of these cases can involve different principals/ARs, different agreements, and different investments made in different ways.
“So it doesn’t follow that just because we concluded in two sets of circumstances that a firm was not responsible for advice, that a precedent has been set or we have ‘changed our approach’.
“Ultimately though, we can reassure advisers that we will look in to all the evidence in every case when deciding if a ‘principal’ firm is responsible for the advice given by an appointed (or tied) representative.”
Chris Hannant, the Apfa director general, said: “We think the Fos should apply the law and the FCA rules.
“We think Fos decision-making would be improved by having a genuinely independent appeals process; at present it’s done in-house in a slightly opague fashion.
“It is also normal standard practice in any judicial process that a separate independent body reviews the decision.”