Berkeley Burke Sipp Administration Ltd v Financial Ombudsman Service Limited

The background to Mr. Charlton’s investment was that SA offered investments based on jatropha trees grown in Cambodia. The investments involved the investors leasing plots of land, along with the trees planted on them, and receiving a return either as annual income payments or additional land plots.

On 8 September 2011, Mr. Charlton met up with Mr. Stones of Big Pebble Ltd., which acted as an introducer of business to BBSAL. Mr. Charlton signed a standard form document for an investment with an Investment Name “Capital Builder” and Investment Type “Green Oil”. The document provided:

“I, WAYNE [Charlton] being the prospective member/ member of the above Scheme write to instruct Berkeley Burke SIPP Administration Limited acting on behalf of Berkeley Burke Trustee Company Limited to Purchase for a consideration of £ 24,195 on my behalf for the above Scheme.

I

confirm that I have considered the information prospectus provided by the product provider and I am fully aware that this is investment is High Risk and/or Speculative, may be illiquid and/or difficult to value or sell and confirm that I wish to proceed.

I acknowledge that I have been recommended to seek professional advice from a suitably qualified and authorised adviser however has chosen not to seek advice for this transaction.

I am fully aware that Berkeley Burke SIPP Administration Limited act on an Execution Only Basis as directed by me as scheme member and that Berkeley Burke SIPP Administration Limited has not provided any advice whatsoever in respect of this investment or the SIPP.

On the same day, Mr. Charlton completed BBSAL’s SIPP Application form. This identified that his SIPP funds would be invested, in the amount of £ 24,000, in the “Capital Builder” investment, and it identified his Financial Adviser as Edward Stones of Big Pebble. It was signed in three places on the final page. Mr. Charlton thereby stated:

“I require my SIPP to purchase and sell investments and/or accept transfers in of other pension policies into the SIPP, within the 30-day cooling off notice period.

I

confirm that I understand that by signing this section I have waived my rights to the 30 day cooling off notice

…

I understand that I should seek advice regarding the setting up of a self invested personal pension plan and that I do not require and do not seek advice in this respect from Berkeley Burke”.

Mr. Charlton also completed BBSAL’s Asset Purchase Form, identifying the asset to be purchased as “Capital Builder” and the amount of £ 24,000. This included the following relevant passages:

“… you accept that the investment may be illiquid and that Berkeley Burke SIPP Administration take no responsibility for the suitability of the investment to your personal circumstances and we strongly suggest that you take investment advice before proceeding.”

You can ask us to proceed immediately by waiving the ‘waiting period’, however, you will be liable for any costs incurred in connection with the purchase, should you decide not to go ahead.

Do you wish to waiver the waiting period of seven days?

On 26 September 2011, Mr. Charlton received a letter from BBSAL welcoming him to the “Berkeley Burke SIPP”. The letter stated.

On 10 October 2011, Mr. Charlton signed the letter which provided at its foot:

On 28 October 2011, Mr. Charlton signed a “Capital Builder Programme Application Form and Lease Agreement”. The other signatories to this document were: BBSAL as SIPP Trustee; SA; and Citadel Trustees CC Ltd defined in the Agreement as “the Trustee”. The shape of the investment was that Mr. Charlton purchased 4 “Capital Builder” plots of land, including all the trees planted on the land, for a total purchase price of £ 24,195. The agreement specified how the land was to be held and how Mr. Charlton’s interest in the land was to be evidenced.

BBSAL had conducted little or no investigation into the SA investment. It had commissioned and received two documents. The first was a short two-page report from a company called Enhance Support Solutions Limited dated 8 September 2010. This was focused on whether the investment would attract tax relief when placed into the SIPP; i.e. whether it was “SIPPable”. The document concluded:

“This document has been completed as part of a due diligence process on a proposed investment within a member-directed pension arrangement. The process undertaken by Enhance Support Solutions Limited seeks to identify whether the investment is likely to be acceptable based on HMRC rules as set by the Finance Act 2004 and subsequent amendments. The commentary provided is for information purposes only. This process does not comment on the suitability of the investment for meeting the scheme member’s investment objectives and should not be constituted as advice”.

The second was a 3-page document, also from Enhance Support Solutions Limited, and dated July 2011. This repeated the paragraph quoted immediately above. It also gave a broad description of the investment and the parties involved. It included a description of the Client Money flow and stated that:

“A valuation will not routinely be provided, instead the value is more likely to be determined by the income generated. An annual report will be provided to confirm the underlying crop strategy plus Citadel will report the financials”.

BBSAL accepted that these were the only documents in relation to the scheme which it considered at the time. It did not carry out an investigation into whether, for example, the plots had actually been planted with jatropha trees, or whether SA had good title to the land. BBSAL’s case before the Ombudsman was, in essence, that it was not required to do so. BBSAL was acting as an administrator. It was not providing advice on the investment, as the various documents signed by Mr. Charlton made clear. In due course, the substance of this case was rejected by the Ombudsman.

As I have said, Mr. Charlton was the victim of a scam. In early 2012, SA was put into receivership. On 27 April 2012, the receiver of SA sent investors a letter which stated:

On 20 September 2012, Mr. Charlton referred his Complaint to the Ombudsman Service. The complaint form summarised his complaint as follows:

“Complainant is unhappy with the business as they invested his pension money into a company that went into administration. He has lost a large amount of his pension, and feels that the business should recover this for him.”

The resolution of Mr. Charlton’s Complaint has a protracted history, with a number of Ombudsmen involved. But it is not necessary to describe this in detail. The consideration of Mr. Charlton’s Complaint was ultimately transferred to Mr. Colin Brown. Mr. Brown issued his Provisional Decision on 10 November 2016, in which he indicated that he was minded to uphold the complaint but providing a further opportunity for representations. After representations, he upheld the Complaint in his Final Decision dated 2 February 2017. The Ombudsman decided that the Claimant did not act fairly and reasonably in its dealings with Mr. Charlton.

The Ombudsman’s principal fact-findings and reasoning were contained in the Provisional Decision, which was subsequently incorporated in his Final Decision. The Provisional Decision ran to 31 pages, with headings and sub-headings rather than paragraph numbers. Bracketed numbers in this judgment refer to the page numbers of that decision. At page (4) he identified the critical question:

He then set out the background to Mr. Charlton’s investment and the parties’ submissions, and continued (11) – (13):

Pages (13) – (18) contain the Ombudsman’s discussion of “relevant considerations”.

Having quoted from the decision of Ouseley J. in BBA, the Ombudsman continued:

The Ombudsman then set out extracts from the FSA and FCA documents referred to above, and concluded the “relevant considerations” of his Provisional Decision as follows:

At pages (17) – (18), he said:

He then considered at (18) – (23) the due diligence which BBSAL had actually carried out, and then set out his views as to what BBSAL should have done, and what BBSAL ought reasonably to have concluded if it had carried out sufficient due diligence. In the context of what BBSAL should have done, he said:

His conclusion at the end of this section of his Provisional Decision (22) -(23) was:

At pages (23) – (25) he considered the question of whether BBSAL acted fairly and reasonably in proceeding with Mr. Charlton’s instructions. In that context he considered arguments advanced by BBSAL as to the effect of COBS 11. His conclusion was that:

He then addressed a number of matters under the heading “other issues”, including the question of good industry practice at (26):

He then expressed his provisional conclusions as follows:

In his Final Decision, the Ombudsman addressed various arguments advanced following his Provisional Decision, but his decision was not to depart from his provisional findings. He concluded by setting out the basis upon which BBSAL should compensate Mr. Charlton.

Permission to apply for judicial review was granted by Yip J. The permission application contended that there were two grounds (subsequently referred to as Ground 1 and Ground 2) on which it was alleged that the Ombudsman had erred in law:

The permission application identified two questions of law arising from the Ombudsman’s decision, namely:

The arguments advanced by BBSAL in relation to the first ground were ultimately somewhat expanded, in particular with a focus on the lack of consultation in relation to the duty which the Ombudsman had found to exist. However, there was no objection to the expansion of the arguments and it is therefore appropriate that I should deal with all points advanced on their merits.

In summary, BBSAL contended that the Ombudsman found that a SIPP administrator had a specific duty to investigate whether a foreign high-risk investment was suitable for a SIPP. Although he accepted that an administrator had no duty to advise on the merits of an investment, the Ombudsman found that there was a duty to investigate to determine whether the investment was “acceptable for inclusion in a SIPP”. This begged the question, what is the purpose of such an investigation? The purpose can only be to determine whether a product is unlikely to yield a return and therefore a bad investment for a SIPP. It was therefore to dress up a duty to advise as due diligence.

The scope of the duty that the Ombudsman found was extensive. He had suggested that a SIPP administrator ought to have investigated and verified the foreign title in the underlying land asset. It should have travelled to the foreign jurisdiction to verify that the land was being used for its stated purpose. It should have obtained legal opinions to ensure the scheme complied with foreign law and regulations. It should have ascertained the method by which the business enterprise might be valued and realised. It should have investigated the general viability of that type of investment in crops. The administrator ought to have scrutinised the company accounts to determine whether the certified auditor (PwC) had included disadvantageous caveats. In short, the duty of a SIPP administrator was effectively to become an overseas fraud investigator.

The Ombudsman derived that duty from the FSA Principles rather than rules. The Ombudsman made a material error of law by creating such a duty. In the course of his submissions, Mr. Kirk refined his argument to four basic propositions. These began with the correct proposition that it was not suggested that the Claimant had breached any express rule or guidance that had been consulted upon, save for Principles 2 and 6. Against that background, the Claimant made four submissions.

(1) The Consultation Argument. BBSAL submitted that the Principles were important, but they remain a part of secondary legislation. Secondary legislation cannot be used to undermine a primary statutory requirement for there to be consultation on rules or guidance.

The effect of an Ombudsman creating novel duties from general Principles was to undermine the statutory protection against rule-making without consultation. The relevant part of FSMA (Part X at the material time) conferred substantial powers on the financial regulators to make both general and specific rules affecting the provision of financial services without direct Parliamentary oversight. The rationale for this rule-making independence is the complexity of financial services and the potential

The Ombudsman’s approach therefore bypassed important statutory safeguards relating to rule-making, namely

In short, the Principles cannot become a rule-making power. The moment they become a rule-making power to create new obligations, the statutory obligation to consult about rules and guidance has been undermined.

(2) The Augmentation Argument. BBSAL submitted that where there is an existing regulatory framework in which a business operates, the Principles should be used to augment, clarify or enlarge existing duties, rather than to create new unexpected duties (BBSAL’s emphasis) that have not been the subject of consultation.

Thus, BBSAL accepted that the Principles could be used to augment the FSA Rules. However, they submitted that in a sector that had been subject to specific duties, they should not be used to create new and surprising or unexpected duties. Whilst it was permissible to augment a rule by amplifying an existing duty, it was not permissible to create a new rule, by using the Principles, which does not amplify an existing duty. To do so would mean that businesses that operated under an existing set of duties would suddenly without consultation have a new duty.

Here, there were express, specific FSA rules that required certain categories of regulated person to assess the suitability and appropriateness of an investment. Those duties did not apply to a SIPP administrator without permission to advise retail clients on the merits of an investment. Having expressly declared that certain types of business were included in the duty to assess whether a product is likely to achieve a return, it was wrong to then retrospectively imply a rule that other administrators also had that duty. It was common ground that BBSAL did not have the duty of a financial advisor or portfolio manager to assess the suitability or appropriateness of specific investments, and that the applicable rules in that regard (in particular COBS 9 and 10) did not apply to BBSAL, an administrator with permission only to establish and operate pension schemes.

A reasonable construction to place on COBS 9 and 10, taken in conjunction with COBS 11 (described below) was that since there was no duty to advise the client on suitability or assess appropriateness, and since there was a duty to execute a transaction instructed by the client, there was (contrary to the Ombudsman’s conclusion) no duty to assess whether or not a particular product was acceptable for a SIPP.

BBSAL also submitted that the potential effect of any individual Ombudsman being permitted to create duties from the Principles is inconsistency in decision-making. The result of that is unfairness to respondents. The Ombudsman’s duty to decide on the basis of what is “fair and reasonable” cannot mean that an individual Ombudsman can reach any decision he or she thinks is appropriate on a complaint. If that were permitted, an identical complaint would achieve a different result from the Financial Ombudsman Service than from the Pensions Ombudsman Service. The consequence would be forum-shopping by complainants undermining the system of detailed rules imposed on financial services operators.

BBSAL recognised that certain passages in the decision of Ouseley J. in BBA created difficulties for this line of argument, and Mr. Kirk said that he faced the difficult task of distinguishing it. Nevertheless, he submitted that the case was distinguishable and that, properly read, the principal passages on which FOS and the interested parties relied were obiter. The Ombudsman misunderstood that case, which involved the regulator setting out high level rules in relation to PPI compensation complaints handling that had been the subject of extensive statutory consultation. It was not authority for the proposition that an Ombudsman is entitled to determine a case by deriving specific rules from general principles; particularly when to do so contravenes another expressly stated rule.

(3) The Conflict Argument. BBSAL submitted that in this case, there was a conflicting rule (namely COBS 11.2.19R) that meant that the extensive duty of inquiry was imposed in conflict with a rule that required execution on instruction. A duty to engage in foreign investigation was contrary to the express obligation, set out in the FSA rules, for a SIPP administrator to execute an instruction. The purpose of such an administrative duty to execute is that it must take precedence over consideration of an investment’s merit. The duty is not to execute only those transactions that were believed to be good investments. It is to execute the transaction when instructed.

At the relevant time, the rule at COBS 11.2.19R (1) provided that:

“Whenever there is a specific instruction from the client, the firm must execute the order following the specific instruction.”

Pursuant to COBS 11.2.19R (2), in doing so a firm satisfied its obligation to “take all reasonable steps to obtain the best possible result for a client”. To have undertaken due diligence as contended for by the Ombudsman would have required BBSAL to disregard Mr Charlton’s specific instruction on the ground that the investment was not a good one. Such assessment inevitably goes beyond whether the investment could lawfully be held in a SIPP wrapper under HMRC rules or the criminal law, and where a SIPP operator might not be required to execute a transaction. The Ombudsman’s decision required a value judgment to be made by BBSAL as to the legitimacy and value of the investment. Further detail as to BBSAL’s arguments in this regard is set out in Section G4 below.

At the time when Mr. Kirk submitted his skeleton argument, and made his opening submissions, it had been and appeared to be common ground that the FSA rule in COBS 11.2.19R was applicable to BBSAL’s execution of this transaction. However at the start of the second day of the hearing, Mr. Henshaw for the FCA indicated that he

(4) The Error of Law Argument. BBSAL’s overarching submission was that the Ombudsman’s discretion to (a) consider a wide range of materials and (b) to depart from the common law, did not mean that he did not have to consider the law and get it right.

In summary, the reason that the Ombudsman erred in the present case was that he had used the Principles to find that there was a duty of enquiry or investigation. He had derived that duty from the Principles, but he was wrong to do so. This meant that BBSAL were found to have duties of extensive enquiry, whereas its duty was actually administrative in nature.

In relation to Ground 2, BBSAL submitted that the Ombudsman’s Decision created an inconsistency as to approach between FOS and the Pensions Ombudsman, which had previously repeatedly rejected similar complaints by consumers. BBSAL relied upon three decisions in February 2014, March 2015 and March 2016. The first was a decision of an investigator within the Pensions Ombudsman Service (“POS”), and the latter two were decisions of a Pensions Ombudsman within POS.

BBSAL submitted that consistency was a fundamental principle of public law^,, relying upon Lord Bingham in R (O’Brien) v Independent Assessor [2007] 2 AC 312, at paragraph [30]:

“It is generally desirable that decision-makers, whether administrative or judicial, should act in a broadly consistent manner. If they do, reasonable hopes will not be disappointed.”

BBSAL submitted that the authorities in relation to FOS recognised the crucial importance of consistency in a decision-making process which operates according to what is “fair and reasonable” under section 228(2) of FSMA. In R (Heather Moor & Edgecomb Ltd) v Financial Ombudsman Service [2008] EWCA Civ 642, Stanley Burnton L.J. said at paragraph [49]

“the common law requires consistency: that like cases are treated alike. Arbitrariness on the part of the ombudsman, including an unreasoned and unjustified failure to treat like cases alike, would be a ground for judicial review.”

BBSAL accepted that FOS and POS operated according to different statutory standards, and that it was correct that neither was bound by decisions of the other. However, that cannot affect whether or not a particular duty of care was in fact owed by a SIPP operator to an investor. Here, for example, either BBSAL owed a specific duty to investigate the legitimacy of investments pursuant to Principle 2 or it did not. To conclude otherwise would encourage forum-shopping by consumers and businesses. The consequence would, again, be to undermine the detailed regulatory scheme which applies to SIPP operators in the pensions industry. They would be unable to assess the risk of non-compliance and to structure their day-to-day activities accordingly.

BBSAL’s oral submissions on Ground 2 were made by Mr. Samuels. He submitted that there was a material error of law for the Ombudsman to ignore the overarching principle of consistency. He emphasised that if the Ombudsman wished to make an inconsistent decision, he could only do so if there were cogent reasons. Here, the Ombudsman had provided no such reasons. He had simply said:

Mr. Samuels accepted that the Pensions Ombudsman decides matters according to law, whereas the FOS can decide cases on a “slightly” wider basis. But this was a case which could have been decided either by the POS or the FOS, and indeed the POS and FOS had entered into a memorandum under which they agreed to co-operate with each other and conduct regular exchanges of best practices in relation to (amongst other things) how the ombudsmen independently approach the resolution of similar complaints. Consistency was therefore important between the two organisations, and the reasons given by the Ombudsman for not following the previous decisions of the POS were not sufficient and constituted a material error of law.

In relation to Ground 1, FOS emphasised that the decision as to what was fair and reasonable in all the circumstances was for the Ombudsman, not for the court. On a judicial review application, the Court had to approach the decision on the basis of the facts found by the FOS. There was no challenge in the present case to the decision on the basis that a finding of fact was made on the basis of irrelevant considerations. Nor was there any challenge to the Final Decision on the basis of irrationality.

In upholding Mr. Charlton’s Complaint, the Ombudsman was acting in accordance with his statutory jurisdiction under section 228(2) of FSMA, namely to “determine [the Complaint] by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case”. The Ombudsman’s Final Decision simply reflected the application of the Claimant’s obligations to “conduct its business with due skill, care and diligence” in accordance with Principle 2 of the FCA’s Principles for Businesses, and to act in Mr Charlton’s interests and treat him fairly in accordance with Principle 6 of those Principles. The Final Decision is properly reasoned and is consistent with the application of the Ombudsman’s statutory jurisdiction. BBSAL’s disagreement with the Ombudsman’s assessment of what was fair and reasonable is not a proper basis for challenging that decision.

(1) The Consultation Argument. FOS submitted that the Consultation Argument failed at the outset. The duty of consultation was a duty on the FCA to carry out consultation before making rules or guidance. But the Ombudsman’s task in the present case was to decide what was fair and reasonable in the light of the rules that existed. The Ombudsman applied the Principles, which were rules, and which had been consulted upon. His conclusion was simply that there had been a failure to comply with Principles 2 and 6. There was therefore no error of law.

In summary on the Consultation Argument, the FOS submitted that:

(2) The Augmentation argument. On the augmentation argument, FOS submitted:

(3) The Conflict Argument. The Conflict Argument failed because there was no conflict between the Principles and the relevant rule in COBS 11, as the Ombudsman had correctly recognised. COBS 11.2.19R did not create a duty to execute a transaction, regardless of Principles 2 and 6. The relevant provisions in COBS were concerned with the manner in which a transaction was to be executed, but did not create a duty on the part of a SIPP provider to execute all transactions for which the client gave instructions. A SIPP operator had a discretion, and would not be in breach of COBS 11 if, having ascertained that a particular investment was not acceptable for a SIPP, it declined to execute a transaction.

(4) Error of Law: Overall, FOS submitted that there was no error of law which could be identified in the decision of the Ombudsman. He had identified and applied the correct principles of law. The relevant question was whether there had been a failure to comply, on the facts of the present case, with Principles 2 and 6. The court could and should not interfere with the decision of the Ombudsman as to how those Principles applied on the particular facts of the present case. That decision was a matter for the Ombudsman.

Ground 2. In relation to Ground 2, FOS submitted that:

The FCA’s written submissions principally sought to address the true interpretation of the relevant laws and rules. In particular, the FCA addressed detailed submissions as to the applicability of COBS 11 by reference to the preceding European Directives. In that regard, the FCA submitted that the relevant provisions of the Directives, and COBS 11, were simply concerned with the manner or method of execution of an order once accepted. They had nothing to do with the question of whether or not the order should be accepted in the first place. COBS 11.2 had no bearing on the breaches of the Principles that the Ombudsman found to have occurred. Again, Section G4 below contains further detail as to the submissions of both the FCA and FOS in relation to COBS 11 and the Conflict argument.

Brief submissions were also made by Mr. Howarth on behalf of Mr. Charlton. He largely adopted the arguments advanced by FOS and the FCA. In relation to Ground 2, Mr. Howarth submitted that it was fatal to the challenge that BBSAL now accepted that there were different statutory jurisdictions for the POS and the FOS, and different tests which each was required to apply. Indeed, if the FOS had followed the decision of the POS, this would have created fertile ground for a public law challenge on the basis that he gave too much weight to the law and did not sufficiently exercise his function of deciding what the fair and reasonable result would be. Once the jurisdiction of the FOS was engaged, he had to do his job according to the rubric given by Parliament to act.

The present case is a challenge to the lawfulness of the Ombudsman’s decision. It is not a challenge to his conclusions of fact.

As set out above, Section 228(2) of FSMA 2000 required the Ombudsman to determine the complaint “by reference to what is, in the opinion of the Ombudsman, fair and reasonable in all the circumstances of the case”. DISP 3.6.4R identifies the matters which the Ombudsman should take into account in that regard.

The test under section 228(2) of FSMA 2000 is therefore a subjective one for the ombudsman. It is now well-established that “the words ‘in the opinion of the ombudsman’ themselves make it clear that he may be subjective in arriving at his opinion of what is fair and reasonable in all the circumstances of the case”: see R (IFG Financial Services Ltd) v Financial Ombudsman Service [2005] EWHC 1153 (Admin), at §13 per Stanley Burnton J. There is therefore a wide latitude within which the ombudsman can operate so long as he is fair and reasonable in his approach to the case and the conclusions he reaches are not perverse: R (Williams) v Financial Ombudsman Service [2008] EWHC 2142 per Irwin J; and R (on the application of Green) v Financial Ombudsman Service Ltd [2012] EWHC 1253 (Admin) at

In the present case, there is no challenge to the Ombudsman’s decision on the basis of the irrationality or perversity of his decision. The errors of law relied upon by BBSAL, and summarised above, are alleged to be errors in the Ombudsman’s legal analysis of the rules contained in the FSA Handbook, and which led to him recognising a duty which did not exist. If there were such an error of law, then it was not disputed that the Ombudsman’s decision could be judicially reviewed.

However, I agree with the submission of FOS that there is an important distinction between (i) construction of the rules (which is a matter for the Court), and (ii) the application of those rules to the facts of the case, which is a matter for the decisionmaker. This distinction can be seen in the decision of Ouseley J. in R v Financial Ombudsman Service ex p Norwich and Peterborough Building Society [2002] EWHC 2379, to which both BBSAL and FOS referred. In that case, the Court was concerned with the decision of the Building Society Ombudsman under a statutory scheme which provided for determination of complaints to be “made by reference to what is, in the adjudicator’s opinion, fair in all the circumstances of the case”. Ouseley J. at paragraphs [72] – [73] drew a distinction between issues as to the construction of the Banking Code, which were matters for the Court, and issues as to the application of the Code to the circumstances of the case. He said that the Ombudsman was to be afforded “considerable leeway in the application of the Code to the circumstances

The case-law also establishes that any Ombudsman’s decision letter should be read as a whole and in a common sense, and certainly not in a legalistic way: see R (Garrison Investment Analysis) v Financial Ombudsman Service [2006] EWHC 2466 (Admin) at paragraph [5].

Against this background, I turn to the three errors of law on which BBSAL relied.

On this issue, I accept the submissions of FOS as summarised above. The most important points in my judgment are as follows.

First, I do not accept that the Ombudsman, in his decision, was creating a new rule at all. His approach was simply to identify the existing rules, specifically the Principles, which had been consulted upon, and then to decide how those rules applied in the context of the particular facts before him. This is apparent from the decision as a whole.

Thus, having introduced the facts and the parties’ arguments, the Ombudsman said that he had considered all the available evidence and arguments to decide what was fair and reasonable in the circumstances of this complaint (11). (Bracketed numbers again refer to the pages of his Provisional Decision, extracts of which are quoted in

The Ombudsman then gave his answer to the question: “did BBSAL act fairly and reasonably towards Mr. C”. He said that he was doing so “by considering what BBSAL’s obligations meant in practice, what the firm did, and what it should have done. The Principles and appropriate due diligence are relevant considerations here”. He then addressed the following topics: “what did BBSAL’s obligations mean in practice”(17); the due diligence carried out by BBSAL (18); “what should BBSAL have done” (18); and “If BBSAL had completed sufficient due diligence, what ought it reasonably to have concluded” (20). At the end of that section, he concluded that:

He then went on to consider, additionally, whether BBSAL had acted fairly and reasonably in proceeding with Mr. Charlton’s instructions and concluded that:

I do not consider that there is anything in the Ombudsman’s analysis that makes it appropriate to characterise his decision as the creation of a new rule or guidance which should have been consulted upon. It was simply, as FOS correctly submitted, the application of an existing rule, namely Principles 2 and 6, to a given set of circumstances. The application of the Principles in a particular context may lead to the conclusion that a firm erred by taking or omitting to take particular action. But that does not constitute the derivation of specific rules from general principles, but is merely the operation of the Principles.

At one point in his submissions, Mr. Kirk correctly said that Principle 2 was a very wide general principle, and that what it amounts to may be “very subjective”, with different people holding different views about what a SIPP operator ought to do. He submitted that the Principle had to be applied “reasonably and proportionately”. He also said, again correctly, that Principle 6 was very wide. These submissions to my mind fortify the conclusion that the Ombudsman in the present case was not creating a new rule, but was applying the wide Principles 2 and 6 to the facts before him. The difficulty for BBSAL is that the Principles are indeed wide. But as Mr. Strachan submitted, this was the virtue of the rules, not their vice.

Accordingly, to adapt the words of Ouseley J. in Norwich and Peterborough Building Society, this is a case where the Ombudsman’s decision does no more than apply the Principles “to the circumstances which he finds”. In the absence of a challenge on the basis that the Ombudsman’s decision in that respect was irrational, there is in my judgment no error of law.

Secondly, I consider that there is very good reason not to seek to characterise the

Thirdly, it also seems to me that there is another artificiality in BBSAL’s approach, namely the characterisation by BBSAL of the supposed new “rule” as a duty to investigate. The concept of “due diligence” in Principle 2 inevitably brings to mind the concept of enquiry or investigation. They are not such distinct concepts that an Ombudsman’s conclusion – that the exercise of due diligence involved enquiry or investigation – involves the creation of a new rule.

Fourthly, I agree with FOS’s submission that it is difficult to see how the consultation argument can be a valid ground for reviewing the decision of the Ombudsman. The Ombudsman had to take the rules, including the Principles, as they were. As is clear from his decision summarised above, he considered those rules in arriving at his decision as to what was fair and reasonable. There can be no valid criticism of this approach. Indeed, it is provided for in DISP 3.6.4R.

Finally, I agree with FOS that it is entirely acceptable for the Ombudsman to apply the Principles to the facts in a way which was not spelt out in specific rules. This is clear from the BBA decision. It is also the effect of DISP 3.6.4R, which requires the Ombudsman to “take into account” relevant regulators’ rules. As the Ombudsman correctly stated (17):

“I should stress again that I’m required to make a decision based on what’s fair and reasonable in all the circumstances of the case. This is wider than the rules and guidance that come under the remit of the FCA”.

These considerations provide further reasons why it is not appropriate to characterise the Ombudsman’s decision as the creation of a new rule, as opposed to the application of the existing rules to the facts of the case. Once it is recognised, as BBA shows, that the Principles have room in which to operate irrespective of whether there is a specific rule, then it follows that the Ombudsman’s decision is simply the application of existing rules, namely the Principles. There is no intermediate stage where a new rule has been created.

Accordingly, I do not consider that there was an error of law as suggested by the consultation argument.

I agree with FOS that the reasons why the Consultation argument fails, as set out above, also apply to the Augmentation argument. This argument depends upon the proposition that the Ombudsman’s decision created a “new, unexpected” duty. However, as already explained, I consider that the Ombudsman’s decision simply applies the existing duties, as set out in Principles 2 and 6, to the facts before him. There are, however, two additional reasons why the augmentation argument must fail. 99. First, the premise of the argument is that the Ombudsman’s decision created a “new, unexpected” duty. However, I consider that this argument is inconsistent with the conclusions of the Ombudsman as to what “he considers to have been good industry practice at the relevant time”; this being one of the matters to which the Ombudsman was entitled to have regard under DISP 3.6.4R. It is clear from the Provisional Decision that the Ombudsman received submissions as to what good industry practice was. As already stated, his conclusion (26) was:

This conclusion is not the subject of any judicial review challenge for which permission has been granted, and accordingly this case must be determined on the basis of that conclusion. The relevant conclusion is either a factual conclusion as to what constituted good industry practice at the time, or perhaps more strictly the Ombudsman’s conclusion as to what he considered to be such practice. On any view, it was not (as Mr. Kirk sought to submit in reply) a conclusion of law. The Ombudsman’s conclusion as to good industry practice at the time is, in my view, fatal

Secondly, the augmentation argument also involves the proposition that, within an existing regulatory framework, the Principles should only be used to “augment, clarify or enlarge existing duties, rather than to create new unexpected duties that have not been the subject of consultation”. The premise of the argument, therefore, was that there were limitations in the extent to which the Principles could augment the existing rules, with a distinction to be drawn between the augmentation of “existing duties” and the creation of “new unexpected” duties. I do not consider that this argument is consistent with the decision of Ouseley J. in BBA, and in substance it seeks to advance the case that was rejected in that case.

The BBA case involved a claim for judicial review against the Financial Services Authority and the FOS arising out of complaints handling for PPI policies. The FSA had published a Policy Statement, including amendments to its Handbook rules, and guidance about how PPI sales complaints should be handled by banks, and the basis on which they should be decided. The claimant (“the BBA”), which was the leading association which represented banks, argued that the Policy Statement was unlawful on various grounds. One of those grounds was that the FSA were using the Principles in order to augment or contradict specific regulatory rules, and this was not permissible. The BBA submitted that where specific rules had been promulgated by the FSA “to occupy the field”, and where the purpose of the specific rules was to implement specific Principles, the FSA could not additionally resort to those Principles. If that contention were correct, then the FOS was also acting unlawfully in publishing and maintaining guidance which stated that the Principles would be taken into account in deciding whether compensation was fair and reasonable. As the argument developed, it was focused primarily on the question of whether specific rules could be augmented by the general Principles, rather than on the question of whether the specific could be contradicted by the general: see paragraphs [96] and [158].

Ouseley J. rejected the BBA’s argument, and said:

These passages explain the overarching nature of the Principles. As the FCA correctly submitted in their written argument, the role of the Principles is not merely to cater for new or unforeseen circumstances. The judgment in BBA shows that they are, and indeed were always intended to be, of general application. The aim of the Principlesbased regulation described by Ouseley J. was precisely not to attempt to formulate a code covering all possible circumstances, but instead to impose general duties such as

Furthermore, it is clear from the judgment that (consistent with the status of the Principles) the concept of augmentation is very broad indeed. Thus, at paragraphs [167] – [179], Ouseley J. considered a number of examples where the BBA had argued that the FSA had used the Principles to create conflict with the specific rules or illegitimately to augment them. In each case, he held that there was no contradiction and only a legitimate augmentation. In each case where there was a legitimate augmentation, there was plainly a widening of what the rules had previously expressly required. Thus, at paragraph [173], Ouseley J. addressed the fact that a PPI sale would now be treated as substantially flawed where a complainant had orally not been given information concerning the amount of a refund of premium in the event of early termination. Ouseley J. accepted that this went “further than the specific rules do”. He said that it did not contradict them, but augmented them and this was lawful. Another example was addressed at paragraphs [175] – [177], where the judge held that the existing rules in relation to oral sales had been augmented. He said that it was:

“a very good example of why the FSA approach to the role of Principles is correct and illustrates the need for an overarching framework from which the specific rules are drawn without exhausting the ability of the Principles to cover gaps in the regulatory framework to deal with new techniques”.

Similarly, in paragraph [178], the judge referred to a number of situations addressed in the evidence of an FSA witness, and not covered by specific rules. He held that:

“in so far as the Principles add to the specific rules so as to deal with those situations, it shows that they should do so. They do not contradict rules, but add to them to cover areas which are not covered specifically”.

The passages in the judgment of Ouseley J. discussed above were essentially directed at the question of whether the FSA could use the Principles to augment the rules. The answer to that question was that it could and there is no suggestion that the concept of augmentation was to be limited in the manner for which BBSAL contended. However, it is also important that the present case concerns the decision of an Ombudsman, rather than the FSA. In that connection, it is clear from the judgment of Ouseley J. that the Ombudsman can permissibly take an even broader approach than the regulator. Thus, in an earlier part of his judgment (addressing a different ground of challenge), Ouseley J. said:

Ouseley J. went on to say (at [184])

I consider that these passages, too, are fatal to BBSAL’s attempts to put limits on the extent to which the Ombudsman was entitled to use the Principles in order to augment existing rules or duties. The Ombudsman has the widest discretion to decide what was fair and reasonable, and to apply the Principles in the context of the particular facts before him.

BBSAL sought to distinguish BBA on the grounds that the FSA’s Policy Statement in question had been the subject of consultation by the FSA and was to be used only to impose duties on banks going forward. Here, however, there had been no consultation by the FSA on its regulatory approach, upon which the Ombudsman had relied. I consider, however, that this factual distinction has no impact upon the decision in BBA as to the significance of the Principles, their relationship to the other rules within the FSA Handbook, and the width of the Ombudsman’s discretion.

BBSAL also submitted that it was important to look carefully at the ratio decidendi of BBA. Mr. Kirk submitted that the ratio was that the Principles could augment a rule by amplifying on existing duty. This could be seen by careful consideration of the examples discussed by Ouseley J. at paragraphs [167] – [179] of his judgment. But none of those examples were cases where a new rule, which does not amplify an existing duty, had been created by using the Principles. Properly understood, the BBA case had not been wrongly decided. However, he submitted that if it was authority for the proposition that the Principles could be used to create new and unexpected duties, then it was wrongly decided.

In my judgment, however, the ratio of the case was that the Principles were overarching, and that they could therefore be used, both by the FSA and the Ombudsman, to augment the rules. There is no suggestion that the augmentation was limited to amplification of an existing duty. Indeed, this proposed limitation is in my view inconsistent with the overarching nature of the Principles. It would also give rise to subtle questions as to what was meant by ‘amplification’ in any particular case; questions which in my view are not consistent with the language of the Principles, or their effect as decided upon by Ouseley J. I also consider that there is no basis on which I can or should say that BBA was wrongly decided in these respects or indeed at all.

I therefore reject the Augmentation argument. On this aspect, there was no error of law by the Ombudsman

BBSAL’s case was that the Ombudsman imposed a duty of inquiry in conflict with COBS 11.2.19R (1). That rule provides:

BBSAL’s case was that Mr. Charlton had given a specific instruction to acquire the Capital Builder asset. They referred specifically to the Asset Purchase Form signed by Mr. Charlton on 8 September 2011, including the following question:

BBSAL contended that the effect of COBS 11.2.1R (1) was that they had to execute the order which they had been given. There was no room for the exercise of any discretionary decision-making on the part of BBSAL. They placed particular reliance on the final sentence of Article 21.1 of MiFID (the acronym for the Markets in Financial Instruments Directive 2004/39/EC of the European Parliament and of the Council) to which COBS 11.2.19R (1) cross-referred. This provided:

“Article 21

Obligation to execute orders on terms most

favourable to the client

(1)

Member States shall require that investment firms take all reasonable steps to obtain, when executing orders, the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order. Nevertheless, whenever there is a specific instruction from the client the investment firm shall execute the order following the specific instruction.” (Emphasis supplied)

FOS and the FCA contended that this approach was fundamentally flawed. They contended that COBS 11.2.19R (1) was subject to the Principles, which were the ever present sub-strata or overarching framework which stood over COBS 11.2.19R at all times.

Furthermore, COBS 11.2.19R (1), when seen in context, was simply concerned with the manner in which an order should be executed. This too was the effect of Article 21 of MiFID, as well as Article 44 of Commission Directive 2006/73/EC which implemented MiFID. Thus, to give an illustration used in the course of argument, if a client gave an instruction to a firm for the purchase of 100 shares in company A, the firm would have to comply, when executing that order, with the best execution provisions. This might involve, for example, deciding to purchase the shares on an exchange in New York rather than London, if that were more beneficial to the client.

The Ombudsman addressed this issue in his Decision. Having set out COBS 11.2.19R (1), as well as COBS 11.2.6, he said:

I consider that the submissions of FOS and the FCA on this issue were correct, and that there is no error of law in the Ombudsman’s reasoning. I start by considering COBS 11.2.19(R) in context, bearing in mind the approach to construction of the Handbook set out in GEN 2.2.1R and GEN 2.2.2G. These provide:

COBS 11.2.19R appears in section 11.2 of the Handbook. This is headed: “Best execution”. The first provision is COBS 11.2.1R. This provides:

“Obligation to execute orders on terms most

favourable to the client

COBS 11.2.1R

A firm must take all reasonable steps to obtain, when executing orders, the best possible result for its clients taking into account the execution factors.

[Note: article 21(1) of MiFID and article 25(2) first sentence of the UCITS implementing Directive]”

The execution factors referred to are defined as “price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of an order.”

The heading to COBS 11.2.1R shows that it is concerned with the manner in which orders are to be executed: i.e. on terms most favourable to the client. This is consistent with the heading to COBS 11.2 as a whole, namely: “Best execution”. The text of COBS 11.2.1R is to the same effect. The expression “when executing orders” indicates that it is looking at the moment when the firm comes to execute the order, and the way in which the firm must then conduct itself. It is concerned with the “mechanics” of execution; a conclusion reached, albeit in a different context, in Bailey & Anr v Barclays Bank [2014] EWHC 2882 (QB), paras [34] – [35]. It is not addressing an anterior question, namely whether a particular order should be executed at all. I agree with the FCA’s submission that COBS 11.2 is a section of the Handbook concerned with the method of execution of client orders, and is designed to achieve a high quality of execution. It presupposes that there is an order being executed, and refers to the factors that must be taken into account when deciding how best to execute the order. It has nothing to do with the question of whether or not the order should be accepted in the first place.

This conclusion is confirmed by other parts of COBS 11.2. Thus COBS 11.2.6R identifies various criteria, which a firm must take into account “for determining the relative importance of the execution factors”. These include, for example, the characteristics of the client. The opening words of this rule are: “When executing a client order”. COBS 11.2.7R addresses the role of the price “[w]here a firm executes an order on behalf of a retail client”. COBS 11.2.9R, together with COBS 11.2.10G11.2.13G, address the issue of delivering best execution where there are competing venues. All of these provisions are concerned with the manner in which the order is to be carried out, if it is to be executed.

Similarly, COBS 11.2.20G provides:

Given that all of these provisions are concerned with the manner of execution, it is appropriate to construe COBS 11.2.19R as concerned with the same subject-matter. That provision, when read as a whole, is simply an exception from the general requirement on the firm, in COBS 11.2.1R, to carry out the client’s order so as to obtain the best possible result. When executing an order, if the firm decides that it is appropriate to do that, it should follow any ‘specific instruction’. When it follows that instruction, there can be no complaint, in that respect, about best execution.

This approach is in my view consistent with Article 21 of MiFID, which is quoted above. MiFID has a lengthy list of recitals which provide context to Article 21. Recital (2) identifies the need for the degree of harmonisation “needed to offer investors a high level of protection”. Recital (5) refers to the need to “ensure a high quality of execution of investor transactions”. Recital (33) identifies the necessity “to impose an effective ‘best execution’ obligation to ensure that investment firms execute client order on terms that are most favourable to the client”. It is in that context that Article 21 is to be construed.

The heading to Article 21 (“Obligation to execute orders on terms most favourable to the client”) shows clearly that the Article is concerned with the manner of execution. This is also clear from the first sentence of Article 21, which requires investment firms to take all reasonable steps to obtain the best possible result for their clients “when executing orders”. The first sentence then identifies various factors to be taken into account when carrying out the execution, including price, costs, speed, likelihood of execution and settlement and “other considerations relevant to the execution of the order”. Again, these factors are referable to the manner of execution.

The second sentence of Article 21 must be seen in the context of the first. It is a qualification to that first sentence. It addresses the case where there has been a

“specific instruction from the client”. That naturally refers to an instruction relating to one or more of the matters identified in the first sentence. Thus, where a client gives a specific instruction as to how (i.e. the manner in which) an order is to be executed – for example an instruction as to the venue, or the identity of a counterparty with whom the transaction is to be concluded – then the firm should follow that instruction. However, there is nothing in the final sentence, when seen in the context of Article 21 as a whole, and the other provisions of MiFID, which creates (as BBSAL contended) a self-standing obligation on a firm to execute a transaction come what may. A contrary conclusion would also be difficult to reconcile with the stated purpose of MiFID, namely to offer investors a high degree of protection.

This approach is also consistent with the Implementing Directive (Commission Directive 2006/73/EC). Recital (67) provides:

Similarly, and importantly, Article 44 of this Directive, headed “Best execution criteria”, provides:

“1.

Member States shall ensure that, when executing client orders, investment firms take into account the following criteria for determining the relative importance of the factors referred to in Article 21(1) of Directive 2004/39/EC

(a)

the characteristics of the client including the categorisation of the client as retail or professional;

(b)

the characteristics of the client order;

(c)

the characteristics of financial instruments that are the subject of that order;

(d)

the characteristics of the execution venues to which that order can be directed.

For the purposes of this Article and Article 46, ‘execution venue’ means a regulated market, an MTF, a systematic internaliser, or a market maker or other liquidity provider or an entity that performs a similar function in a third country to the functions performed by any of the foregoing.

2.

An investment firm satisfies its obligation under Article 21(1) of Directive 2004/39/EC to take all reasonable steps to obtain the best possible result for a client to the extent that it executes an order or a specific aspect of an order following specific instructions from the client relating to the order or the specific aspect of the order.

3.

Where an investment firm executes an order on behalf of a retail client, the best possible result shall be determined in terms of the total consideration, representing the price of the financial instrument and the costs related to execution, which shall include all expenses incurred by the client which are directly related to the execution of the order, including execution venue fees, clearing and settlement fees and any other fees paid to third parties involved in the execution of the order.

For the purposes of delivering best execution where there is more than one competing venue to execute an order for a financial instrument, in order to assess and compare the results for the client that would be achieved by executing the order on each of the execution venues listed in the firm's order execution policy that is capable of executing that order, the firm's own commissions and costs for executing the order on each of the eligible execution venues shall be taken into account in that assessment.”

I agree with the submission of the FCA that the list of factors in Article 44(1), the words in Article 44(2) “to the extent that” the firm executes an order, and the explanation in Article 44(3) of what is meant by the “best possible result”, all serve to confirm that these provisions relate simply to manner of execution of an order once accepted. There is nothing in Article 44, or any other part, of this Directive which mandates a firm to execute an order which has been given by a client, or which suggests that there is an obligation to execute.

In these circumstances, there is no difficulty in concluding, as the Ombudsman concluded, that the Principles were applicable to the question of whether BBSAL should accept the investment in the first place, and that COBS 11.2.19R applied to the execution of the transaction once that decision was made. There is, therefore, no conflict between the application of the Principles, and COBS 11.2.19R, to the issue

There are additional reasons for reaching this conclusion.

First, the Principles are indeed the ever-present sub-strata or overarching framework which stood over COBS 11.2.19R. It is appropriate, if possible, to construe COBS 11.2.19R harmoniously and consistent with the Principles. The Ombudsman’s decision does so. BBSAL’s submission creates a conflict where none exists. Indeed, at paragraph [162] of BBA, Ouseley J. said that “the Principles always have to be complied with. The specific rules do not supplant them and cannot be used to contradict them”. In so far as BBSAL contended that COBS 11.2.19R mandated execution of Mr Charlton’s instruction, notwithstanding that the scheme into which the investment was to be placed was fraudulent and lacked underlying assets, it seems to me that they were repeating the submission, rejected in BBA, that a specific rule must necessarily fill the space and leave no room for the application of the Principles.

Secondly, any suggestion that a SIPP provider must, as a result of COBS 11.2.19R, execute a transaction, regardless of the duties contained in the Principles, produces surprising results and in my view cannot be right. A number of examples were given during the course of argument as to circumstances in which, having received an instruction, the SIPP provider would or might think it inappropriate to proceed, or at the very least query the transaction with his client. These included situations where:

Thirdly, it seemed to me that, ultimately, BBSAL did not dispute that the Principles were potentially applicable in some situations; so that in certain circumstances a SIPP provider could and should properly decline to accept an investment. In his oral opening submission, when asked whether there was a duty to execute even if the investment was not SIPPable, Mr. Kirk sensibly submitted that the obligation to execute was not “immutable”. He accepted that there were some circumstances – where execution would further a fraud, or breach the criminal law such as the Proceeds of Crime Act 2002, or where existing express duties were incompatible with execution – where the SIPP provider could decline to execute. But he submitted that in the circumstances of the present case the obligation to execute should not have been contradicted by the obligations in the Principles such as due diligence. This submission was somewhat refined in reply, where Mr. Kirk accepted that the duty under COBS 11.2.19R was not immutable in the sense that no civil duties are immutable: they are all subject to criminal law and specific legal duties. But this did not mean that there was a discretion as to whether or not to execute. He therefore submitted that COBS 11.2.19R was subject to Principle 2 and 6, but that the Ombudsman’s construction of the Principles conflicted with the rule. In short, the error of law was to construe the Principles so as to find the duty of enquiry.

In my view, however, once it is accepted (correctly) that COBS 11.2.19R was not immutable and did not override the Principles, the question of the application of the Principles to the particular circumstances of the case was a matter for the Ombudsman: see the Norwich and Peterborough Building Society case and my conclusions in relation to the “Consultation Argument” above. If, as I conclude, the Principles have room to operate in a situation where COBS 11.2.19R is potentially applicable, then it was for the Ombudsman to decide how the Principles apply in a particular context. Absent a challenge on the basis of irrationality, which was not the case articulated, there is no error of law.

The Ombudsman’s reasons for declining to follow the decisions of the POS were contained in his Final Decision, which was given following further representations by BBSAL on the consistency question. The Ombudsman said:

There were therefore essentially two reasons why the Ombudsman declined to follow the conclusions of the POS. First, there was a different statutory scheme. Secondly, it was for the FOS Ombudsman to decide, applying the statutory scheme, what the fair and reasonable outcome of the complaint should be. I do not consider that either approach betrays any error of law.

First, the statutory schemes under which the POS and the FOS operate are different, and the criteria for a decision under section 228, including the matters to be taken into account under DISP 3.6.4R, are different from and indeed have no parallel in the POS scheme. In my view, this is fatal to any challenge based upon the public law principle concerning consistency. No authority was cited where there has been judicial review of a decision-maker, acting under one statutory jurisdiction, on the basis of inconsistency with the decision of a decision-maker acting under a very different statutory jurisdiction.

Secondly, the decision in O’Brien involved inconsistency in the decisions of two independent assessors who were assessing compensation payable for miscarriages of justice under section 133 of the Criminal Justice Act 1988. The two applicants in that case had been awarded significantly less compensation than another individual who had been wrongly convicted of the same murder. Even though the compensation regime was the same for the applicants and the other individual, their appeal was nevertheless dismissed. Lord Bingham said:

Lord Carswell said:

This authority provides support for the Ombudsman’s approach in this case, namely to consider the relevant facts in the case before him, and come to a conclusion applying the FOS statutory scheme as to what, in his opinion, was “fair and reasonable in all the circumstances of the case”. He considered that it was and he expressed his reasons in a lengthy and cogent decision. In reaching his conclusion, he took into account (as he was entitled to do under DISP 3.6.4R) what he considered “to have been good industry practice at the relevant time”. There is no challenge to any aspect of his decision on the basis that it was not reasoned, or on the basis of irrationality. It was also common ground that he was not bound to follow the decisions of the POS. Against this background, there can in my view be no sustainable challenge on the basis of a lack of consistency with the decisions of the POS.

In view of these conclusions, it is not necessary for me to express a concluded view as to the extent to which the three decisions of the POS were cases sufficiently similar to Mr. Charlton’s case. It is not clear to me that the facts of any of the cases were quite as stark as Mr. Charlton’s case, where the underlying assets did not exist. It is fair to say, however, that the approach taken by the Ombudsman in the present case as to

For these reasons, the claim for judicial review is dismissed.