UK: FOS had no jurisdiction to deal with D&O complaint as director was not a "consumer" for the purposes of the DISP rules

In R (on the application of Bluefin Insurance Services Ltd) v Financial Ombudsman Service Ltd, the Administrative Court ruled on a judicial review that the Financial Ombudsman Service ("FOS") had no jurisdiction to entertain a company director's complaint against an insurance broker who had obtained a directors' and officers' ("D&O") insurance policy in respect of the company.  Wilkie J held that the director was not a "consumer" for the purposes of the DISP rules: he had incurred the liability in his capacity as a director and this was in the course of his trade, business or profession.

Background

In 2007, Bluefin Insurance Services Ltd ("Bluefin") acted as a broker for a D&O insurance policy taken out by Betbroker Ltd, a company of which Mr Lochner was a director.  Mr Lochner benefited from the policy as an “insured person” (as did his spouse).

In 2011, the D&O insurers rejected cover for Mr Lochner (now no longer a director, as Betbroker had gone into administration in 2008) in respect of a potential legal claim alleging wrongful acts by him in his capacity as director of Betbroker.  Mr Lochner's claim on the policy was declined on the grounds that insurers had not been notified of the potential claim prior to the expiration of the D&O policy.

Mr Lochner subsequently made a complaint to the FOS that prior to the expiry of the policy in 2008, he had notified Bluefin of the potential claim and they had failed to pass this information on to the D&O insurers. Bluefin sought judicial review of the FOS's decision that it had jurisdiction to entertain Mr Lochner's complaint.

Pursuant to section 226 of the Financial Services and Markets Act 2000 (FSMA), the FOS would have had jurisdiction to entertain the complaint if Mr Lochner was an “eligible complainant”.  The FOS found that Mr Lochner was a "consumer" which was a relevant category of “eligible complainant" (as defined by rule 2.7.3 of the Dispute Resolution Complaints (DISP) section of the FCA Handbook).  The term “consumer” is defined in the FCA Handbook as “any natural person acting for purposes outside his trade, business, or profession”.

As a preliminary point the FOS contended that the question of a complainant's eligibility under the DISP rules was a question for it alone to determine and that the Court could only intervene if the FOS's determination was "Wednesbury unreasonable" (in other words, so unreasonable that no reasonable decision-maker could have come to that decision) or a misdirection in law.

Decision

On judicial review to the Administrative Court on the single issue of whether the FOS had jurisdiction to hear Mr Lochner's complaint, Wilkie J quashed the FOS's decision.  He held that the issue of whether Mr Lochner was an "eligible complainant" was a precedent/jurisdictional fact as it required "a hard-edged finding of an objective fact", and upon being challenged in judicial review, was a decision which the Court had to take.  Even if his was wrong on the question of precedent fact, Wilkie J considered that if the FOS had been wrong on the question of whether Mr Lochner was a "consumer", it would necessarily have involved a misdirection in law so as to render the FOS's decision challengeable by way of judicial review.

In determining whether Mr Lochner was a "consumer" there were two questions which the Court had to address.

First, what was the point in time by reference to which the assessment of eligibility was to be made?  On this point, Wilkie J concurred with the FOS and held that it was clear from s226(2) FSMA that a complainant had to be an "eligible complainant" at the time the complaint was made to the FOS (rather than at the time the D&O policy was taken out or when the act or omission complained about had occurred).

Second, had the FOS incorrectly concluded that Mr Lochner was a "consumer" at the time he had complained to the FOS? On this point, Wilkie J disagreed with the FOS and held that Mr Lochner was not a "consumer" at the time he had complained to the FOS.  The claim against Mr Lochner was in respect of his allegedly wrongful acts when acting as a director of Betbroker.  The policy benefited him as an insured person in relation to his acting in the capacity of a company director.  Those acts were therefore in the course of his trade, business or profession.  There had been no proper basis on which the FOS could have concluded that Mr Lochner's purposes were outside his trade, business or profession.  The fact that he made his complaint to the FOS in his personal capacity, in respect of his personal loss, was not sufficient to cause him to fall within the definition of a "consumer".

Wilkie J rejected the FOS's argument that a D&O policy, being a group protection policy, should be regarded in the same way as other group protection policies which may be entered into for the benefit of the workforce, for example a private health insurance policy. Wilkie J held that the point of those policies is to provide protection in respect of the private interests of the members of the scheme in having a particular level of healthcare or a particular level of income in the event of ill-health. Hence, those policies may well be such that a complaint made by a beneficiary in respect of a failure properly to manage the policy, thereby causing loss, could be made as a "consumer".  Nor did Wilkie J think that it was of any significance that Mr Lochner's spouse might, in similar circumstances, have been able to make a complaint to FOS as a "consumer" for any loss sustained by her in respect of the claim against her husband (indeed, Bluefin had acknowledged that Mr Lochner's spouse would be an "eligible complainant").

Wilkie J thus concluded that as a matter of precedent fact, Mr Lochner was not an "eligible complainant" and did not fall within the compulsory jurisdiction of the FOS.  In the alternative, the FOS had misdirected itself in law. Consequently, the FOS's decision to entertain the complaint was quashed.

Comment

The case provides useful guidance on the Court's approach to the meaning of "consumer" for the purposes of the DISP rules and is likely to be of broader relevance to other regulated entities.

There are good reasons why a complainant may prefer to use the FOS scheme rather than seek redress in the Courts:

• While the firm complained against is bound by an adverse decision by the FOS, the complainant's legal rights remain unaffected even if his complaint is rejected – a "no lose" situation for the complainant.
• There are no fees to pay by the complainant. In investigating a complaint, the FOS works on the complainant's behalf in investigating the case. The scheme is funded by the industry to maintain and enhance its reputation for fair dealing.
• There is no threat of costs awards if the complaint is unsuccessful.
• The Ombudsman determines the case based only on what they consider to be ‘fair and reasonable’ on the facts, whereas the same claim may fail before a court applying strict legal principles. 

The judgment will likely be welcome to D&O insurers and brokers as affirming that D&O insurance, which is plainly a coverage purchased in a business and not personal context, does not allow individual director and officer insured persons to engage the FOS's jurisdiction.

If you would like to discuss this further, please contact the authors,  Alexander Oddy and William Changuangyu.