Mazarona Properties Ltd v Financial Ombudsman Service

MR JUSTICE MITTING: By three loan agreements signed by the three claimants, who are associated companies, on 9th October 2008, Allied Irish Bank Great Britain ("AIB") agreed to lend a total of £6.3955 million to them for terms of 28 to 37 months at a variable interest rate of three month Libor plus 1.25 per cent. Each agreement contained a "hedging requirement" - a requirement that the claimants hedged the full amount of each loan unless, following consultation with a member of staff, it was deemed inappropriate. The stated purpose of this was to guard against the effect of rising interest rates.

Effect was given to this obligation by three further agreements signed by the claimants on 10th November 2008 under which AIB agreed to pay interest of three months Libor on £6.3955 million for two years from 24th October 2008 and the claimants agreed to pay AIB interest on the same sum for the same period at 4.66 per cent. This was a so-called interest rate swap.

Interest rates then fell sharply and remained low throughout the duration of the swap. The claimants paid substantially more under the two sets of agreements than they would have done under the loan agreements alone. Indeed, on proper analysis as far as they were concerned the agreement was for a loan for two years at 5.91 per cent, that is to say 4.66 per cent plus the margin over Libor which they paid but AIB did not agree to pay to them under the swap.

The widespread sale by banks of interest rate swaps became of concern to the Financial Services Authority (“FSA”), the statutory predecessor to the Financial Conduct Authority and the Prudential Regulation Authority.

On 10th July 2012 the FSA entered into an agreement with AIB under which AIB agreed to review the sale of interest rate hedging products to customers who did not meet certain criteria identifying them as sophisticated customers and to ask them if they wanted their sale to be reviewed. Interest rate hedging products include a product such as the swap made between the claimants and AIB. If they did want their sale to be reviewed, AIB agreed to carry out a review and, if a breach of regulatory requirements occurred, to provide appropriate redress to their customers, including the claimants.

By a supplemental agreement between the FSA and AIB dated 12th February 2013, AIB agreed to modifications in the criteria for and methodology of the reviews. One of the modifications concerned the redress which was to be offered to a customer to whom the interest rate hedging product had been sold in circumstances in which a breach of regulatory requirements had occurred.

Two basic types of redress were identified: the refund of all payments made under the interest rate hedging product to a customer who would not have selected any such product known as "full tear up"; and a refund of the difference between the payments made under the product actually sold and an alternative product which the customer would have selected if there had been no regulatory breach, so-called "alternative product".

The agreement between the FSA and AIB provided for the appointment of a skilled person to review and report on the review to the FSA. The agreement stated that it was made pursuant to the FSA's powers under section 166 of the Financial Services and Markets Act 2000, powers which permitted the FSA to collect information about regulated activities.

The claimants were not sophisticated customers. By a statement dated 3rd March 2014 they asked AIB to review the sale of the interest rate swap to them. The redress sought was a refund of the payments made under the swap totalling £384,242.28, and recompense for the loss of the ability to use the money elsewhere, claimed at 20 per cent of the total. The total claim was £461,090.40. AIB conducted a review. On 11th April 2014 it notified the claimants that the swap was sold to them in a non-compliant way. AIB offered redress on the basis that the claimants would have bought an alternative interest rate hedging product, a so-called "cap". After allowing for the cost of the cap, but adding simple interest of 8 per cent per annum on the net difference, the sum offered totalled £387,615.22.

By a letter of 28th April 2014, the claimant's solicitors rejected AIB's offer and made a counter offer for redress of £461,090 plus interest at 8 per cent for two years of £74,280 - a total of £535,370. The basis for the rejection of the offer was that the claimants would not have entered into the swap, in part because AIB had not previously required them to enter into an interest rate hedging agreement under prior lending arrangements.

AIB conducted a review of the redress which it had offered. It did so under the oversight of the skilled person paid by it but appointed by the FSA.

On 9th December 2014, AIB withdrew its offer on the basis that it was satisfied that the claimants would have entered into the swap actually executed even if there had been no regulatory breaches.

On 29th January 2015 the claimant's solicitors made formal complaint to the Financial Ombudsman Service(“FOS”). The basis of the complaint was set out in the formal document:

On 22nd April 2015, an FOS adjudicator determined that AIB were entitled in their own commercial interests to stipulate in the loan agreements that 100% of the debt was to be hedged, that they had done so effectively and that the three claimantS had, by signing the agreements, accepted that term. Further, that term was not unfair or unreasonable. But, the adjudicator concluded, AIB had dealt with the "appeal" (in other words the redress review) "harshly and unreasonably" and if the claimants had appreciated that when signing the loan agreements AIB would, in the view of the adjudicator, legitimately have insisted that 100% of the debt was to be hedged, would have opted for the cap. Therefore, it would be fair and reasonable to require the offer of settlement which had been withdrawn to be re-made.

The three claimants accepted the adjudicator's decision. AIB did not and requested the FOS to reconsider. The FOS did so.

By three identically worded decisions dated 15th February 2016, she declined to uphold the three complaints on two grounds: (1) the review process conducted by AIB was not "a regulated activity or an ancillary activity connected with a regulatory activity. I therefore cannot consider what happened as part of it"; (2) the three claimants would have entered into the swaps even if there had been no regulatory breach.

The claimants have permission to apply for judicial review of the decision on one ground only. They sought permission on two grounds, the second of which, for which permission was refused, was that the FOS's decision on the substantive merits was perverse. No renewed application has been made for permission to advance this ground. The sole issue is whether the Ombudsman was right to conclude that she could not consider what had happened in AIB's review in her determination. The challenge proceeds on the basis that AIB were right or at least entitled to conclude that the claimants would have entered into the swaps in any event.

There is a detailed and complex statutory background to this challenge which needs to be set out and analysed. The foundation is section 226 of the Financial Services and Markets Act 2000 which provides:

Regulated activities were specified by the Treasury in the Financial Services And Markets Act 2000 (Regulated Activities) Order 2001, 2001 No 544. That contains a detailed, specific and comprehensive definition of the activities which are regulated. They include in Article 14 dealing in investments as a principal, which includes:

Section 226(1) limits the compulsory jurisdiction of the Financial Ombudsman Service to a complaint "which relates to an act or omission of a person in carrying on an activity to which compulsory jurisdiction rules apply." Those rules are identified and defined in subsection (3). They are the rules made by the FCA for the purposes of the section and they must specify the activities to which they apply, which, under subsection (4) can only be those which are or could be defined as regulated activities in section 22.

While it therefore follows, as is conceded, that the sale of the swaps was a specified regulated activity in respect of which the compulsory jurisdiction of the FOS exists, it is contentious that the activity about which this complaint was made (namely the withdrawal of the offer by AIB) either was or was related to a specified activity in respect of which compulsory jurisdiction rules applied.

To complete the regulatory picture it is necessary to refer to the FSA/FCA rules. They are now to be found in two documents published by the FCA: General Provisions and Dispute Resolution Complaints (“DISP”). General Provisions contains a Glossary. Paragraph 2.2.7 of General Provisions, which has the letter "r" next to it signifying that it is a rule, provides:

The Glossary contains the following relevant definitions:

Paragraph 2.3.1 of DISP, which is a rule laid down by the FCA, states:

Mr McIlroy for the claimants makes an attractive and superficially simple proposition. Given that the sale of the swaps was both a regulated and specified activity and given that the claimants are a person entitled to make a complaint to the FOS, their complaint about the manner in which their complaint was handled by AIB was a complaint which related to an act or omission of AIB, in respect of which there was compulsory jurisdiction under section 226. He submits that any financial institution selling swaps on its own account is obliged both by reason of market pressures and regulatory requirements to have a complaints resolution procedure. Accordingly, he submits, if that complaints resolution procedure, whatever it may be, is conducted in a manner which itself gives rise to a complaint then the claimants can complain to the FOS about it and the FOS has jurisdiction to entertain that complaint and to order the redress sought, namely the reinstatement of the withdrawn offer.

Mr Catsambis for the FOS and Mr Temple for AIB submit that that contention does not give effect to a number of the statutory provisions and those which have statutory force, which I have cited. In summary their submission is that the claimant's complaint is about something that is outwith the statutory scheme. It is about the manner in which a scheme administered under an agreement between the FSA and AIB was conducted. The conduct of the review and the redress review by AIB was not a specified activity, therefore it could not be a regulated activity and in consequence could not give rise to a freestanding complaint about the manner in which it was conducted.

The rival propositions are relatively easy to state but their resolution depends upon a careful analysis of the statutory scheme and that part of the scheme which although not statutory has the force of statute.

The key to the conundrum is the statutory definition of "compulsory jurisdiction rules" in subsection 226(3) and the proviso to that in subsection (4). The Ombudsman can only consider a complaint as defined in the Glossary. The complaint must be about "the provision of or failure to provide a financial service or a redressdetermination" within the meaning of that latter phrase as defined in the Glossary. The claimant's complaint about the withdrawal of the offer was not a complaint about a redress determination because it was not about a redress determination conducted under section 404 of the Act. It can therefore only succeed if it is about "the provision of or failure to provide a financial service". "Financial service" is not defined in the 2000 Act. Mr Catsambis and Mr Temple submit that dispute resolution is not on any view "a financial service". What happened on the facts, they submit, as will have happened in many other cases, is that a bank has determined pursuant to an agreement with the FSA/FCA what redress, if any, it should provide to a customer to whom it has sold a relevant product.

Mr McIlroy's answer to that is that dispute resolution, because it forms part and parcel of a bank's activity in selling a swap, necessarily amounts to "a financial service". I do not accept that argument. It is something which may arise as a result of the provision of a financial service. In ordinary speech it may relate to it, but it is not itself a financial service.

In his closing submission, Mr McIlroy submitted that making a payment by way of redress was a financial service and so, freestanding, was itself a regulated activity and one to which the compulsory jurisdiction rules therefore applied. Again, I do not accept that submission. It seems to me that the FSA/FCA have deliberately provided for redress determination under section 404 to be included within the remit of the FOS but not any other form of redress determination. It is, with respect to his submission, a misuse of language to say that the provision of recompense for a wrong is itself a financial service. A financial service is commonly and rightly understood to mean the provision of a service of a financial nature to a customer in connection with his or her personal or business affairs not the payment of compensation for the manner in which that service was provided.

It follows therefore that as a matter of ordinary language the complaint made by the claimants to the FOS about the handling of their complaint by AIB was not a complaint about the provision or failure to provide a financial service. Further, on the facts, which again I emphasise will apply widely, the review by AIB of the redress, if any, which it should offer in respect of the swaps made with the claimants did not fall within the compulsory jurisdiction rules both for the reasons I have given and also because the activity of dispute resolution was not itself an activity specified in the 2001 Order. It was therefore, by dint of subsection (4) of section 266, outside the remit of the FOS.

For those reasons, I have concluded that the Ombudsman's conclusion that she was not entitled to investigate or reach a determination upon the conduct of the review was right. It follows that the single ground upon which permission to apply for judicial review has been granted fails and I dismiss this claim.

MR CATSAMBIS: My Lord, I am grateful. The defendant seek their costs of the hearing in the ordinary way. I have given a statement of costs to my learned friend.

MR JUSTICE MITTING: Indeed you have. Two questions. First as regards principle do you have any objection?

MR McILROY: No objection to principle.

MR JUSTICE MITTING: As regards quantum?

MR TEMPLE: My Lord, I do not know if it makes a difference but on behalf of the interested party I would also apply --

MR JUSTICE MITTING: You are not going to get your costs.

MR TEMPLE: Thank you.

MR McILROY: In relation to the Ombudsman's costs, I have no objections on quantum.

MR JUSTICE MITTING: I have been given a document. That is £45,925.51?

MR CATSAMBIS: My Lord, no, that is the interested party. Ours are £23,005.

MR JUSTICE MITTING: I do not think I have yours. I have claimant and interested party but not defendant.

MR CATSAMBIS: £23,005 including VAT.

MR JUSTICE MITTING: For the avoidance of doubt that is an agreed sum?

MR CATSAMBIS: My Lord, yes.

MR McILROY: Yes, my Lord.

MR JUSTICE MITTING: Very well. The order that I make by way of costs is that the claimants will pay the defendant's costs which I assess in the sum of £23,005. I make no order in respect of the interested party's costs.

MR McILROY: My Lord, I wonder if you would hear me on permission to appeal.

MR JUSTICE MITTING: Of course.

MR McILROY: My Lord, the point is simply this. Your Lordship has construed section 226 as if the material and operative controlling passages are subsection (3) and subsection (4). What I would seek to argue in another place is that it is section 226(1) which is the gateway that enables the claimants to fall within the compulsory jurisdiction and that, my Lord, I submit is something which meets the test in rule 52.61 which is a real prospect of success or else because of the importance of construing these provisions is something has a compelling reason to be heard.

MR JUSTICE MITTING: For the FOS, do you have any submission to make in reply?

MR CATSAMBIS: May I take instructions?

MR JUSTICE MITTING: Yes.

MR CATSAMBIS: My Lord, we simply would submit that there should not be leave to appeal. This matter has been resolved conclusively in your Lordship's judgment.

MR JUSTICE MITTING: As far as AIB is concerned, this is a one-off case and there is no greater public interest?

MR TEMPLE: As far as I am concerned, yes.

MR JUSTICE MITTING: I refuse permission to appeal. You must apply to the Court of Appeal if you wish to have the issue ventilated there.