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Written Consent Is Not Enough – Investment Firm Fails To Challenge The Financial Ombudsman’s Compulsory Jurisdiction

In R. (on the application of Linear Investments Ltd) v Financial Ombudsman Service Ltd [2024] EWHC 1428 (Admin), the Administrative Court dismissed a judicial review case brought by Linear Investments Ltd (“Linear”) against the Financial Ombudsman Service (the “FOS”) and Professor Leslie Willcocks (“Willcocks”) (an interested party) (the “Judgment”).

The Judgment, handed down on 13 June 2024, demonstrates the important distinction between consumers and professional clients in financial services; specifically in the context of the compulsory jurisdiction of the FOS.

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Published 6 November 2024

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In R. (on the application of Linear Investments Ltd) v Financial Ombudsman Service Ltd [2024] EWHC 1428 (Admin), the Administrative Court dismissed a judicial review case brought by Linear Investments Ltd (“Linear”) against the Financial Ombudsman Service (the “FOS”) and Professor Leslie Willcocks (“Willcocks”) (an interested party) (the “Judgment”).

The Judgment, handed down on 13 June 2024, demonstrates the important distinction between consumers and professional clients in financial services; specifically in the context of the compulsory jurisdiction of the FOS.

BACKGROUND

The FOS provides independent complaint resolution services to the financial services industry. Firms that are “authorised persons” pursuant to section 31 of the Financial Services and Markets Act 2000 (“FSMA”) must submit to the FOS’ compulsory jurisdiction and can only challenge its decisions by applying for judicial review.

Linear, an investment service provider that is regulated by the FCA, sought judicial review of a decision made by the FOS in respect of a complaint brought by Willcocks. Willcocks was a former client of Linear who provided him with discretionary management services. Between February 2018 and 2019 Willcocks invested in Linear’s “Pembroke Strategy” where Linear made trades in Contracts for Difference (i.e. Willcocks would be paid the difference between the value of a financial product when the contract is first opened and the value when it is closed).

On 24 May 2019, Willcocks complained to Linear that, among other things, he had been misled into investing in the Pembroke Strategy because of Linear’s alleged misleading terms and conditions, misleading performance information, and their failure to manage risk appropriately.

Following Linear’s rejection of his complaint, Willcocks then escalated his dissatisfaction to the FOS on 26 November 2019 (the “FOS Complaint”). However, section 226 of FSMA provides that the FOS only has compulsory jurisdiction over such complaints if 1) the complainant is eligible 2) the respondent is an authorised person and 3) the compulsory jurisdiction rules apply to the activity in question. As such, one of the key issues the FOS had to consider was whether Willcocks was an “eligible complainant” for the purposes of bringing the FOS Complaint.

REGULATORY FRAMEWORK

An “eligible complainant” is one who is a “consumer” as defined in rule 2.7.1 of the FCA’s Dispute Resolution Complaints Handbook. This provision defines a consumer as an individual acting for purposes which are wholly or mainly outside that individual’s trade, business, craft, or profession. Crucially, a consumer is not a professional client (i.e. someone with experience working in the financial sector, who has a large investment portfolio, and who has trading experience).

In this case, Linear had classed Willcocks as an “elective” professional client, because (amongst other reasons) he had, by written consent, chosen to be treated as one. This led Linear to conclude that Willcocks was not an eligible complainant and therefore any complaint he brought did not fall under the FOS’ compulsory jurisdiction.

Rule 3.5.3 of the FCA’s Conduct of Business rules (“COBS”) sets out the statutory tests that a firm must satisfy before it can treat a client as an “elective professional client”. The first test, known as the qualitative test, requires a firm to assess the expertise, experience, and knowledge of a client to ensure that they are capable of making investment decisions and understand the risks involved. The second test, known as the quantitative test, is dependent upon the client’s experience in the financial market including the size of their financial instruments’ portfolio. There is also a stringent procedure that must be followed, which includes the client’s written consent to be treated as a professional client.

THE FINANCIAL OMBUDSMAN’S DECISION AND SUBSEQUENT JUDICIAL REVIEW PROCEEDINGS

The FOS made its final decision (the “FOS Decision”) on 29 April 2022 and concluded that Linear had incorrectly categorised Willcocks as an elective professional client on the basis that it had failed to comply with the provisions in rule 3.5.3 of COBS. For example, as part of their qualitative assessment, Linear had utilised a ‘tick box’ questionnaire that required Willcocks to self-certify his own investment experience. The FOS asserted that this was an inadequate mode of categorising an individual as an elective professional client, not least because Willcocks’ responses were inconsistent and contradictory. Further, the quantitative test had not been satisfied as he had not worked in the financial sector for at least one year in a professional position. As such, Willcocks was a consumer and therefore eligible to bring the FOS Complaint which the FOS upheld on the basis that he had been misled into investing in the Pembroke Strategy. Linear were ordered to pay Willcocks compensation for his losses, together with interest.

Linear then issued judicial review proceedings challenging the FOS Decision that, Willcocks was an eligible complainant. Linear relied on Willcocks’ written consent to be treated as an elective professional client so that he could invest in the Pembroke Strategy. Further, it was argued that Willcocks’ assets and academic standing demonstrated that he was a sophisticated investor and not the type of vulnerable investor that FSMA intended to protect. Indeed, even when bringing the FOS Complaint, Willcocks had not challenged his status as an elective professional client.

However, the Court agreed with the FOS that Willcocks was a consumer and therefore an eligible complainant on the basis that Linear had failed to satisfy the qualitative and quantitative tests set out in rule 3.5.3 of COBS. The court noted that an individual’s intelligence and vulnerability were irrelevant to the definition of an eligible complainant.

The court therefore dismissed Linear’s claim for judicial review and upheld the FOS Decision.

KEY TAKEAWAYS

The Administrative Court’s Judgment serves as a useful reminder to firms to heed caution before classifying investors as elective professional clients. It is not enough that a client appears to be sophisticated and provides written consent of their preferred treatment. Firms must satisfy themselves that they have the relevant evidence to demonstrate that the statutory qualitative and quantitative tests set out in rule 3.5.3 of COBS have been met.

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Longer Reads

Written Consent Is Not Enough – Investment Firm Fails To Challenge The Financial Ombudsman’s Compulsory Jurisdiction

In R. (on the application of Linear Investments Ltd) v Financial Ombudsman Service Ltd [2024] EWHC 1428 (Admin), the Administrative Court dismissed a judicial review case brought by Linear Investments Ltd (“Linear”) against the Financial Ombudsman Service (the “FOS”) and Professor Leslie Willcocks (“Willcocks”) (an interested party) (the “Judgment”).

The Judgment, handed down on 13 June 2024, demonstrates the important distinction between consumers and professional clients in financial services; specifically in the context of the compulsory jurisdiction of the FOS.

Published 6 November 2024

Associated sectors / services

  • Banking & financial disputes
  • Financial services

Authors

In R. (on the application of Linear Investments Ltd) v Financial Ombudsman Service Ltd [2024] EWHC 1428 (Admin), the Administrative Court dismissed a judicial review case brought by Linear Investments Ltd (“Linear”) against the Financial Ombudsman Service (the “FOS”) and Professor Leslie Willcocks (“Willcocks”) (an interested party) (the “Judgment”).

The Judgment, handed down on 13 June 2024, demonstrates the important distinction between consumers and professional clients in financial services; specifically in the context of the compulsory jurisdiction of the FOS.

BACKGROUND

The FOS provides independent complaint resolution services to the financial services industry. Firms that are “authorised persons” pursuant to section 31 of the Financial Services and Markets Act 2000 (“FSMA”) must submit to the FOS’ compulsory jurisdiction and can only challenge its decisions by applying for judicial review.

Linear, an investment service provider that is regulated by the FCA, sought judicial review of a decision made by the FOS in respect of a complaint brought by Willcocks. Willcocks was a former client of Linear who provided him with discretionary management services. Between February 2018 and 2019 Willcocks invested in Linear’s “Pembroke Strategy” where Linear made trades in Contracts for Difference (i.e. Willcocks would be paid the difference between the value of a financial product when the contract is first opened and the value when it is closed).

On 24 May 2019, Willcocks complained to Linear that, among other things, he had been misled into investing in the Pembroke Strategy because of Linear’s alleged misleading terms and conditions, misleading performance information, and their failure to manage risk appropriately.

Following Linear’s rejection of his complaint, Willcocks then escalated his dissatisfaction to the FOS on 26 November 2019 (the “FOS Complaint”). However, section 226 of FSMA provides that the FOS only has compulsory jurisdiction over such complaints if 1) the complainant is eligible 2) the respondent is an authorised person and 3) the compulsory jurisdiction rules apply to the activity in question. As such, one of the key issues the FOS had to consider was whether Willcocks was an “eligible complainant” for the purposes of bringing the FOS Complaint.

REGULATORY FRAMEWORK

An “eligible complainant” is one who is a “consumer” as defined in rule 2.7.1 of the FCA’s Dispute Resolution Complaints Handbook. This provision defines a consumer as an individual acting for purposes which are wholly or mainly outside that individual’s trade, business, craft, or profession. Crucially, a consumer is not a professional client (i.e. someone with experience working in the financial sector, who has a large investment portfolio, and who has trading experience).

In this case, Linear had classed Willcocks as an “elective” professional client, because (amongst other reasons) he had, by written consent, chosen to be treated as one. This led Linear to conclude that Willcocks was not an eligible complainant and therefore any complaint he brought did not fall under the FOS’ compulsory jurisdiction.

Rule 3.5.3 of the FCA’s Conduct of Business rules (“COBS”) sets out the statutory tests that a firm must satisfy before it can treat a client as an “elective professional client”. The first test, known as the qualitative test, requires a firm to assess the expertise, experience, and knowledge of a client to ensure that they are capable of making investment decisions and understand the risks involved. The second test, known as the quantitative test, is dependent upon the client’s experience in the financial market including the size of their financial instruments’ portfolio. There is also a stringent procedure that must be followed, which includes the client’s written consent to be treated as a professional client.

THE FINANCIAL OMBUDSMAN’S DECISION AND SUBSEQUENT JUDICIAL REVIEW PROCEEDINGS

The FOS made its final decision (the “FOS Decision”) on 29 April 2022 and concluded that Linear had incorrectly categorised Willcocks as an elective professional client on the basis that it had failed to comply with the provisions in rule 3.5.3 of COBS. For example, as part of their qualitative assessment, Linear had utilised a ‘tick box’ questionnaire that required Willcocks to self-certify his own investment experience. The FOS asserted that this was an inadequate mode of categorising an individual as an elective professional client, not least because Willcocks’ responses were inconsistent and contradictory. Further, the quantitative test had not been satisfied as he had not worked in the financial sector for at least one year in a professional position. As such, Willcocks was a consumer and therefore eligible to bring the FOS Complaint which the FOS upheld on the basis that he had been misled into investing in the Pembroke Strategy. Linear were ordered to pay Willcocks compensation for his losses, together with interest.

Linear then issued judicial review proceedings challenging the FOS Decision that, Willcocks was an eligible complainant. Linear relied on Willcocks’ written consent to be treated as an elective professional client so that he could invest in the Pembroke Strategy. Further, it was argued that Willcocks’ assets and academic standing demonstrated that he was a sophisticated investor and not the type of vulnerable investor that FSMA intended to protect. Indeed, even when bringing the FOS Complaint, Willcocks had not challenged his status as an elective professional client.

However, the Court agreed with the FOS that Willcocks was a consumer and therefore an eligible complainant on the basis that Linear had failed to satisfy the qualitative and quantitative tests set out in rule 3.5.3 of COBS. The court noted that an individual’s intelligence and vulnerability were irrelevant to the definition of an eligible complainant.

The court therefore dismissed Linear’s claim for judicial review and upheld the FOS Decision.

KEY TAKEAWAYS

The Administrative Court’s Judgment serves as a useful reminder to firms to heed caution before classifying investors as elective professional clients. It is not enough that a client appears to be sophisticated and provides written consent of their preferred treatment. Firms must satisfy themselves that they have the relevant evidence to demonstrate that the statutory qualitative and quantitative tests set out in rule 3.5.3 of COBS have been met.

Associated sectors / services

  • Banking & financial disputes
  • Financial services

Authors

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