Financial Ombudsman Service legal challenge sets precedent
A recently dismissed legal claim challenging the Financial Ombudsman Service (FOS) terms of reference in the Supreme Court of Western Australia sets a significant precedent for future challenges, particularly relating to frozen and unlisted asset disputes, according to Mark Halsey, Legal Counsel for Licensee Solutions.
Boutique West Australian licensee Utopia Financial Services challenged a FOS determination that Utopia must reimburse clients who had lost money in frozen unlisted property trusts and capital-protected investments that had decreased in value.
FOS upheld the client complaints, finding that Utopia did not have a reasonable basis for the advice provided.
Utopia argued that because the losses had not been realised - and if the clients continued to make loan repayments on the capital-protected investments they would eventually have the capital on those investments returned - that FOS was acting outside its terms of reference in directing Utopia to reimburse the clients.
FOS determined the losses on the two $100,000 investments as $139,000 - the $200,000 investment plus loan interest, minus the current value of the capital-protected investment as well as income received and tax benefits.
Halsey said this was one of the most important cases concerning Australian Securities and Investments Commission-approved external dispute resolution (EDR) schemes, as it set a significant precedent.
"The Utopia judgement provides much-needed legal clarification in respect of some of the key principles and mechanisms of the EDR process," he said.
Crucially, the case deals with how FOS determines and quantifies a client's loss for investments where there is no market, and hence no pricing mechanism (in this case the frozen unlisted mortgage investments), Halsey said.
The court found FOS's discretion in deciding a remedy is very wide, and FOS's terms of reference should not be narrowly construed to empower FOS to make decisions that could only be made at common law or equity.
Halsey said the case was also significant in that it upheld FOS's assessment in calculating losses on capital-protected products, and whether the court can force a licensee to pay a FOS award through "specific performance".
The specific performance finding arose due to a FOS counterclaim requiring Utopia to pay the clients the determined amount as required by its contract with FOS as a member.
FOS said the judgement in this case "does not set any new ground, short of confirming that FOS may seek to enforce its judgments through proceedings seeking specific performance of the contract between FOS and its members".
"Given the contractual nature of FOS's authority, this was always taken as the basis on which FOS could implement its decisions, and this has now been confirmed by the courts in this matter."
FOS said that under its previous guise as the Financial Industry Complaints Service (FICS) it had used the same process of quantifying losses in unlisted and frozen assets since the 2006 collapse of Westpoint, but this was the first time the method has been challenged in court.
This case reinforces the support of the courts for alternate dispute resolution processes and confirms that FOS's approach to achieving a resolution to the dispute in this matter was legally valid, FOS stated.
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