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| Financial Law Update | Back to article summary. |
The High Court clarifies the jurisdiction of the Financial Services Ombudsman |
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| The recent High Court decision of Mr Justice McMahon in the case of Square Capital Limited supported a finding of the Ombudsman which related to an investment in property in the UK and will have implications for firms which have in past or currently provide, a mixture of regulated financial services and what would normally be understood to be unregulated, property related services writes Joe Beashel | ||
| Case Note on: Square Capital Limited (“Appellant”) and the Financial Services Ombudsman (“Ombudsman”) and Mary Gallagher (“Notice Party”) Background The recent High Court decision of Mr Justice McMahon in the case of Square Capital Limited supported a finding of the Ombudsman which related to an investment in property in the UK and will have implications for firms which have in past or currently provide, a mixture of regulated financial services and what would normally be understood to be unregulated, property related services.
The Notice Party had contacted the Appellant indicating to it that having benefitted from an inheritance, she had a sum of money to invest and sought advice. Following a number of meetings with a director of the Appellant, the Notice Party purchased two properties in Darlington in the United Kingdom in 2004 with the intention of quickly selling one and renting the other. Unfortunately the Notice Party was disappointed in her investment, the sale of one apartment did not go ahead and there was difficulty in renting the other. The Notice Party subsequently made a number of written enquiries of the Appellant to discover whether it had any proprietary interests in the properties at the time of sale. Failure to receive a satisfactory response to this question led her to complain to the Ombudsman. The Ombudsman received an admission from the Appellant that it was the owner of the properties which it had sold to the Notice Party. In total the Notice Party made six complaints to the Ombudsman although only one was upheld. The Deputy Ombudsman accepted that the Appellant should have disclosed to the Notice Party that it owned the properties which the Notice Party eventually purchased. In this regard the Deputy Ombudsman concluded that the Appellant’s lack of transparency breached the duty of care it owed to the Notice Party and awarded her €25,000 (the report refers both to a figure of STG25,000 and later €25,000 so it is not clear which amount was awarded but we presume it was the euro amount). These findings were confirmed by the Ombudsman. High Court Appeal This decision was appealed to the High Court where it was argued that the transaction should not have been investigated by the Ombudsman in the first place as it was purely a property deal and it did not involve the provision of a regulated financial service. It was argued that the Appellant’s role was akin to that of an estate agent, and thus did not fall within the Ombudsman’s remit and further that the Notice Party was aware that the Appellant was the vendor as this was disclosed on the contract for sale which was signed by the Notice Party. The Appellant’s argument that the Ombudsman lacked jurisdiction was not accepted. Mr Justice McMahon discussed the statutory basis of the office of the Ombudsman and noted that the “..functions of the Ombudsman are different from that of the ordinary courts of the land in that, not only is he able to investigate and adjudicate, but he has also power to mediate. Moreover, complaints have to be dealt with in an informal and expeditious manner…” He went on to note that an appeal was not a full rehearing of the case, the court must bear in mind the nature and functions of the Ombudsman. Mr Justice McMahon approved the standard to be applied which was set by Mr Justice Finnegan in a previous case where he found that “…To succeed on this appeal the plaintiff must establish as a matter of probability that, taking the adjudicative process as a whole, the decision reached was vitiated by a serious and significant error or a series of such errors.” Having regard the broad remit and informal nature of the office of the Ombudsman the court will therefore give a broad latitude to the Ombudsman when assessing any of his decisions. In this case, the Deputy Ombudsman found that financial advice was provided. It seems the Appellant’s notepaper on several occasions was used in connection with the property purchase and in one letter the Appellant wrote that “…as her financial advisers we will monitor the progress of this sale through to completion”. At other times the notepaper of a related property company was used. Also advice was provided on obtaining a Euro mortgage after the properties got into difficulties. Mr Justice McMahon observed that “Where the appellant company is providing a variety of services and operating in different capacities, it would seem reasonable to assume that it should clearly identify which hat it was wearing at any given time to ensure that the client does not labour under any misconception. Failure to do so clearly invites the conclusion in this case that the Notice Party’s version of event is to be preferred and justifies the Deputy Ombudsman’s conclusion to that effect” He added that “…it is not surprising that the Deputy Ombudsman came to the conclusion that what was involved was not a mere sale of property but rather something more akin to providing a financial service.” In summary it was found that, for the purposes of considering the jurisdiction of the Ombudsman, a service provider cannot artificially divide a transaction up into parts that did not involve financial advice and parts that did in circumstances where the evidence suggests that it was the same continuing relationship between the parties at all times. Turing to the second ground for appeal, the Appellant argued that the Notice Party would have been plainly aware from a perusal of the contracts for sale that it was the owner of the properties. However the Deputy Ombudsman had determined that the Appellant should have been “upfront and explicit” about it’s proprietary interests in the properties. The judge noted that the Ombudsman has a role to ensure that best practice is maintained among financial service providers. The judge concluded that the Deputy Ombudsman and the Ombudsman were entitled to express their disapproval at the Appellant’s failure to adhere to best practice in this regard. The judge affirmed the decision of the Deputy Ombudsman (as confirmed by the Ombudsman) to award the Notice Party a sum of €25,000 in compensation. This award reflected the fact that the Notice Party had suffered considerable inconvenience by reason of the failure of the Appellant to disclose it’s interest in the properties before the sale, or within a reasonable time period after being requested to do so by the notice party. Conclusion With the financial crisis and the destruction of wealth that has resulted, there has been a marked increase in complaints to the Ombudsman in respect of investments made over the last number of years. Many of these complaints relate to property transactions which are normally unregulated transactions and one would expect are outside the jurisdiction of the Ombudsman. In several case studies reported by the Ombudsman, he has sought to demonstrate that he will have jurisdiction where a financial service is sought from a regulated financial services provider even if the ultimate product purchased is an unregulated one. He has looked at the transaction from the perspective of the consumer, that is the consumer went to a regulated firm for a financial service. He does not look at the transaction from the perspective of the firm which would argue that if the product purchased was an unregulated one, such as a property, then no financial service could have been provided. This case firmly endorses the position taken by the Ombudsman. Although the facts of each case will differ, firms can no longer assume that for example, all property related transactions are out of the scope of the Ombudsman. For future business it may be advisable for firms to look again at their business models and to conduct unregulated activity through a separate unregulated firm in addition to devising a process that makes it very clear to clients which service is being offered by which firm and on what basis. |
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Joe Beashel is a partner in the Asset Management and Investment Funds Group and Head of the Regulatory Risk Management and Compliance Group at Matheson Ormsby Prentice and can be contacted on +353 1 232 2000 or by email: joe.beashel@mop.ie Further information on Matheson Ormsby Prentice is available at www.mop.ie |
