No judicial control for the case of transfer of defined benefits FOS

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The High Court has dismissed an application for leave for judicial review in a number of FOS complaints brought against the adviser who advised a defined benefit pension transfer. The adviser had given advice on the transfer, but not on subsequent investments made after the transfer. The adviser was led to believe that mutual fund investments would not be made with the transferred funds, but in fact mutual fund investments were made. The FOS found that the adviser had given inappropriate pension transfer advice partly on the grounds that he should have asked more questions about the final investments and that it was not sufficient to have provided a general distribution of the types of investment. Leave for judicial review was denied on the basis that there was nothing illegal about the FOS’s decisions, including that the adviser was held liable for 100% of the losses despite the involvement of the separate adviser who advised the investments after the transfer.

The factual context

Although the specific decisions which formed the basis of the application for judicial review are not named in the High Court judgment, the facts mentioned reveal the nature of the underlying facts and the reasoning of the FOS (which, in the research decisions of the FOS, includes decisions such as DRN1377152.

  • Portafina LLP (Portal) held authorizations to advise on pension transfers and opt-outs.
  • The complainants were introduced to Portal by a third-party advisory firm, Cherish Wealth Management Limited (Cherish), in 2014/15. Cherish was an appointed representative of Shah Wealth Management Limited (Shah). Cherish and Shah did not hold pension transfer authorizations and entered into liquidation in 2016.
  • Portal performed due diligence on Cherish prior to agreeing to engage with him, including (1) verification of business authorization and status, (2) financial services registry searches, Google, press and FOS published decisions and (3) direct requests from Shah and Cherir.
  • Portal was to give his opinion on the pension transfer and his opinion was confirmed in writing to the plaintiffs in a fitness report. Portal conducted its own investigative process as part of the counseling process. Following advice from Portal, the intention then was for Cherish to advise on the investments held in the product to which the pension funds were transferred – often an SIPP. Cherish was to advise after Portal provided transfer advice.
  • Portal has been assured that Cherish does not recommend or promote unregulated collective investment schemes (OPC) and that instead, investments would be made in risky cash, stocks and bonds.
  • Unbeknownst to Portal, all but one of the plaintiffs invested in a high-risk mutual fund.

Arguments to FOS

Portal argued before FOS:

  • The FSA alerts on which the FOS relied had been taken out of context and targeted high-risk unregulated products marketed by unregulated introducers. Here there was a regulated company in Cherish and Cherish only recommended investments after Portal advised the transfer based on a suggested investment portfolio consistent with a complainant’s risk profile.
  • It was a fundamental principle of financial services regulation that one regulated firm was reasonably entitled to rely on another and to the extent that FOS concluded that Portal could not rely on Cherish’s assurances, it had to be false.
  • Portal’s suitability letter set out an asset allocation chart demonstrating its expectations of the type and mix of investments to be recommended by Cherish. The plaintiff could have questioned any discrepancy between this breakdown and the actual recommendations made by Cherish, and it was not for Portal to second guess what recommendations had not yet been made by Cherish as part of its separate obligations to the complainant even less to control the investments finally made. .
  • The transfer recommendation was appropriate.
  • When FOS also found that Cherish contributed to the loss of a plaintiff, it was inconsistent to hold Portal fully liable.

FOS came out against Portal generally on the grounds that:

  • Portal had no right to separate the provision of advice on the suitability of the transfer from the consideration of the suitability of the underlying investment.

FSA alerts in 2013 and 2014 made this clear and Portal should have requested information on the intended investment before giving its opinion on the transfer in order to provide proper advice. Although Portal can trust what he said, the “… difficulty for Portal is that the declaration [from Cherish on its intended investments] told him nothing material about the intended investment proposal…Portal chose to rely on a general statement given 2 years prior that said recommendations of broad categories of investments with potentially broad risk rankings, could or not be made in a given case and that UCIS would not be recommended“. Portal should have checked the position with Cherish on an ongoing basis and should have done more “…to ensure that the two companies were working together to provide appropriate pension transfer advice to clients…”. found that the relationship created a due diligence requirement that Portal should have put in place a process to identify and address any inappropriate or misaligned advice models;

  • Portal failed in its primary duty to provide proper advice on the suitability of the transfer;
  • Although Cherish “may also have caused losses separately”, Portal should be responsible for 100% of the losses.

Judicial control

A request for leave for judicial review was filed regarding 16 FOS decisions published and accepted during the period from March 30, 2021 to June 3, 2021. The request for leave for judicial review was initially denied on paper. The parties agreed that a hearing should be used to determine leave in a separate application for judicial review involving 11 other FOS decisions involving other plaintiffs. The grounds for the two separate applications for judicial review would be the same.

The judgment dismissed the application for judicial review concluding that there was no argument justifying judicial review with a reasonable chance of success. In particular, the judgment rejected the following arguments:

  1. Good industry practice

Portal argued that the FOS acted irrationally in concluding that the then FSA’s industry “alerts” in 2013 and 2014 represented “good industry practice” and that it did not there had been no application of the principles to the specific context in which Portal was advising. The ‘alerts’ referred to the fact that, when advising on a pension transfer, the suitability of the underlying investment should be part of the advice given to the client. FOS concluded that it was not fair and reasonable for Portal to rely on the broad investment categories set out in the initial disclosures provided by Cherish and that it was not fair and reasonable for Portal to press another company or regulated person where it had been given no information about the proposed investments. The High Court found that FOS’s reasoning was a “clear example of the application of rules and principles by mediators and does not reveal any error of law“and that the FOS argument acted irrationally while Portal was interrogated”subscribing to advice provided by another regulated adviser is not questionablebecause FOS concluded that Portal had breached its own obligations. There was nothing illegal about the decisions; rather, there was disagreement about the application of principles to facts.

2. Application of COBS rules

Portal argued that the FOS failed to consider COBS 19.1.2R which provides that Portal, when advising a defined benefit transfer, was required to “… compare the benefits likely (under reasonable assumptions) to be paid under a defined benefit pension plan with the benefits offered by a personal pension plan…”, that FOS elevated COBS 19.1.6G (which a company should start by assuming a transfer is not appropriate) over COBS 19.1.2R; in doing so, it elevated the guidance above d ‘a rule and FOS had submitted its own view of what transfer The judgment rejected that ground on the grounds that the FOS decisions provided fully reasoned grounds for concluding that the advice to leave defined benefit plans was not not appropriate.

3. The portal must be 100% responsible

Portal argued that in court he would not be 100% liable and that the FOS is required to review the law and give reasons for deviating from it. The judgment stated “… the answer to the question whether the Ombudsman could deviate from the relevant law in this context is in fact yes provided that the Ombudsman explains why…” and “… It would be surprising to conclude that when an ombudsman has concluded that the adviser is liable and is considering a remedy, he must conduct an exercise to determine how the damages could be apportioned in a sham civil action involving other parties.“. It appears to have been argued that the FSCS payments, presumably made in respect of Cherish, should be taken into account; but this appears to have been rejected. In any event, the judgment goes on to state that the FOS’s decisions fully addressed the points raised on the loss in that it concluded that had the transfer not occurred, subsequent losses would not have been made on the investments.

Nor did the judgment, following the decision on the merits, comment on the “procedural propriety” of seeking authorization for judicial review of a number of decisions at the same time, although these decisions were taken on the basis of their own facts.

After that

The decision could be interpreted as the court looking suspiciously at requests for judicial review of FOS decisions. However, on the other hand, this is not an area where there are previous court rulings, so it is more difficult to argue that the FOS disregarded the law and to give the reasons why he left it. Perhaps the main takeaways from the decision are (1) the FOS can look to FSA/FCA publications when determining what it believes is good corporate practice. industry and (2) the FOS does not have to allocate liability (and loss) between the parties. when it can reasonably conclude that one party is liable for the entire loss.

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