Financial Services Authority v Matthews & Anor

These proceedings are brought by The Financial Services Authority (“FSA”) for relief under section 382 of the Financial Services and Markets Act 2000 (“the Act”). The substantive relief sought is:-

The FSA is represented by Mr David Mayhew and the Defendants appeared in person.

The hearing came before me initially on 16^th November 2004, and was adjourned part heard until 13^th December 2004. The reason for the adjournment was to see whether the parties could come to some accommodation as regards the claim. In the events that have happened no such accommodation has been made which has lead to this judgment now being delivered.

At the conclusion of the hearing I determined that the Defendants had contravened a relevant requirement and that it was appropriate to pay compensation for the losses suffered by their Clients as a result of the Defendants' default.

I determined in the exercise of my discretion, under S382 to direct the amount of compensation should be on the top up basis (as set out further in this judgment) rather than the reinstated basis.

The amount was set out in the Second Witness Statement of Mr Cooke, referred to below and the relevant figures (which were not challenged by the Defendants) are £52,472.23 (Merriman) and £29,876.97 (Bayliss). I also summarily assessed the FSA’s costs at £11,500.00 and ordered the Defendants to pay the costs in addition to the compensation.

At the start of the hearing Mr Mayhew on behalf of FSA sought permission to rely upon two witness statements provided by a Trevor Melvyn Cooke a qualified actuary and Fellow of the Institute of Actuaries. The first statement was dated 1^st October 2004 and the second was dated 16^th November 2004. The purpose of these statements is to analyse on an actuarial basis (as appears in this judgment) a comparison of the costs of re-instating the clients into their former pension with the Mineworkers Pensions Scheme (“MPS”) as opposed to the cost of topping up the existing benefits payable to the clients on the policies which they took out when they transferred out of the MPS.

Mr Matthews objected to the admission of this evidence. His primary submission was based on an allegation that the whole of the proceedings brought against him was unfair and oppressive and that this was the last stage of that exercise. I asked him whether or not he disputed the figures and he said that he did. I therefore asked him whether or not he sought an adjournment to adduce evidence to challenge the figures. He said he did not do so, because he could not afford to employ his own actuary, and therefore was not in a position to dispute the figures. I reminded him that it was always open to him to attempt the actuarial exercise himself, if he could not afford an actuary, but he said that he wished to have the matter finally resolved and was not in a position to challenge the figures and therefore, for the purposes of establishing the quantum of any claim for compensation (if any), he did not challenge the figures put forward by Mr Cooke in his two witness statements.

In fact it is clear from the statement of assets produced on 13^th December by Mr and Mrs Matthews that until April of this year they had cash of in excess of £90,000.00, which Mrs Matthews lent to her brother in unusual circumstances. The loan is interest free, unsecured and undocumented. No terms as to repayment have been agreed. Given the fact that the loan was made whilst the present proceedings were in train I view it with suspicion and the protestations of lack of funds to defend these proceedings with equal suspicion.

Accordingly, I gave the FSA permission to rely upon the two witness statements.

There is an agreed statement of facts. The claims, as I have said, are for order under section 382 of the Act in respect of losses suffered by two clients of the Defendants' former partnership Williams Life Pension Mortgage and Insurance Services (“the Partnership”). Those losses arise from the failure to comply with the two Personal Investment Authority Ombudsman Bureau Awards dated 29^th March and 7^th August 2000 relating to complaints about pension miss-selling (“the Awards”). Before making an order under section 382 the court is required to be satisfied;-

The Defendants admit to not complying with the Awards and do not dispute that Mr Merriman and Mr Bayliss are qualifying persons. They question however the validity of the Awards themselves and their compatibility with Article 6 of the European Convention on Human Rights.

The FSA contends that the Awards are final and binding on the Defendants and it is not open to them to re-argue the merits of the Awards either on substantive or procedural grounds.

The parties dispute how the quantum of loss and therefore any compensation should be calculated. The FSA argues that the Awards provide for reinstatement in accordance with the regulatory guidance and redress should be by way of reinstatement. The Defendants argue that if the Awards are valid, then the basis of compensation should be by way of augmentation (or top up) of the existing personal pension contracts rather than the greater sums required for reinstatement in the original occupational pension scheme. As appears from the second witness statement of Mr Cooke, the difference between the figures is significant. In the case of Mr Merriman the cost of reinstatement is £91,519.83 (a net figure giving credit for the transfer of the value of the existing personal pension policy), whereas the amount required to top up varies on whichever basis is taken between £52,472.23 and £96,133.60. In the case of Mr Bayliss the reinstatement figure is £53,662.49, whereas the top up basis (on either of those alternatives) is £29,876.97. The difference between Mr Bayliss and Mr Merriman is that Mr Merriman attained 60 in July 2003 and would have been entitled to retire under the MPS scheme had he been a member. These figures (and this is why Mr Matthews did not seek an adjournment to challenge them) are apparently entirely academic because the Defendants contend they can no longer pay any compensation whether determined on a reinstatement or top up basis.

The regulatory context is the review of pension business transacted between 1988 and 1994, and the provision of redress to investors where miss-selling of personal pensions had occurred involving the transfer out of occupational pension schemes.

The Defendants were in business in the partnership as an independent financial intermediary and were regulated under the provisions of the Financial Services Act 1986 (“FSA 1986”). First by the self-regulatory organisation known as FIMBRA (the Financial Intermediaries Managers and Brokers Regulatory Association) and subsequently by the PIA, as members of those organisations. Since 1^st December 2001 the partnership was governed by the FSA. The partnership was subsequently dissolved, but the date of dissolution is disputed, and by no means clear. It is not necessary for me to determine the date of dissolution in these proceedings, and I do not do so. Mr and Mrs Matthews are jointly and severally liable for any default caused by the partnership during the period when they were partners. At all material times during the period covered by the present claims, they were partners and the subsequent dissolution has no impact on their antecedent liabilities for third parties as co-partners.

In 1990 (in circumstances which I will set out in a little more detail in this judgment) the partnership arranged for pension transfers for two clients from their occupational pension scheme with the MPS. From 1995 members of the PIA were required where necessary to review advice given to clients who transferred out of occupational pension schemes. The partnership conducted such reviews in relation to the transfers and concluded in both cases that the advice was compliant with the regulatory requirements.

The clients however were not satisfied and in 1999 and 2000 they made complaints to the PIA Ombudsman Bureau (“PIAOB”). After reviewing the complaints, including submissions and evidence from the partnership, the PIAOB made Awards in favour of Mr Merriman in March 2000 and in the case of Mr Bayliss in August 2000 (“the Awards”). The partnership was ordered to carry out a loss assessment in accordance with PIA guidance and pay any redress due.

The partnership initially indicated that they proposed to challenge the Award by court proceedings, but none were ever taken. Subsequently, it declined to comply with the Awards pending a resolution of a dispute with professional indemnity insurers over cover for these liabilities. The insurers refused to pay and having taken legal advice the partnership did not challenge that decision. It took steps to obtain the necessary information to settle the Awards, but ultimately failed to do so. Over a number of years various calculations were put forward, but no redress has ever been paid.

Regulatory action was initially taken by the FSA, but in the mean time the partnership dissolved by operation of law consequent upon the Second Defendant, Mrs Matthews, resigning from her partnership. As a result of that the business ceased to be authorised. An attempt was made by Mr Matthews to apply for authorisation on his own, but it was indicated that that would be opposed on the grounds (inter alia) of failure on the part of the partnership to honour the Awards. As a result of that Mr Matthews contended forcibly before me that he was in a no win situation. He could not trade and without trading he could not (absent insurance) discharge any liabilities. Mr Matthews feels strongly about the situation that they are in and I have sympathy with that, but my sympathy cannot extend to not applying the legal principles applicable to the case. In particular, two points are not relevant as far as I can see to the matters before me. First, the fact that they no longer have insurance is an irrelevant feature and second, the loss of the authority to transact business is not a matter before me. There are procedures whereby that can be challenged, but those procedures cannot in my judgment be challenged in the present application.

It is necessary to set out in a little detail the statutory path trod by the FSA to constitute the present action. Section 382 of the Act provides:-

“382.

(1) The court may, on the application of the Authority or the Secretary of State, make an order under subsection (2) if it is satisfied that a person has contravened a relevant requirement, or been knowingly concerned in the contravention of such a requirement, and –

(a)

that profits have accrued to him as a result of the contravention; or

(b)

that one or more persons have suffered loss or been otherwise adversely affected as a result of the contravention.

(2)

The court may order the person concerned to pay to the Authority such sum as appears to the court to be just having regard –

(a)

in a case within paragraph (a) of subsection (1), to the profits appearing to the court to have accrued;

(b)

in a case within paragraph (b) of that subsection, to the extent of the loss or other adverse effect;

(c)

in a case within both of those paragraphs, to the profits appearing to the court to have accrued and to the extent of the loss or other adverse effect.

(3)

Any amount paid to the Authority in pursuance of an order under subsection (2) must be paid by it to such qualifying person or distributed by it amongst such qualifying persons as the court may direct.

(4)

on an application under subsection (1) the court may require the person concerned to supply it with such accounts or other information as it may require for any one or more of the following purposes -

(a)

establishing whether any and, if so, what profits have accrued to him as mentioned in paragraph (a) of that subsection;

(b)

establishing whether any person or persons have suffered any loss or adverse effect as mentioned in paragraph (b) of that subsection and, if so, the extent of that loss or adverse effect; and

(c)

determining how any amounts are to be paid or distributed under subsection (3).

(5)

The court may require any accounts or other information supplied under subsection (4) to be verified in such manner as it may direct.

(6)

The jurisdiction conferred by this section is exercisable by the High Court and the Court of Sessions.

(7)

Nothing in this section affects the right of any person other than the Authority or the Secretary of State to bring proceedings in respect of the matters to which this section applies.

(8)

“Qualifying person” means a person appearing to the court to be someone –

(a)

to whom the profits mentioned in subsection (1)(a) are attributable; or

(b)

who has suffered the loss or adverse effect mentioned in subsection (1)(b).

(9)

“Relevant requirement” –

(a)

in relation to an application by the Authority, means a requirement -

(i)

which is imposed by or under this Act; or

(ii)

which is imposed by or under any other Act and whose contravention constitutes an offence which the Authority has power to prosecute under this Act;

(b)

in relation to an application by the Secretary of State, means a requirement which is imposed by or under this Act and whose contravention constitutes an offence which the Secretary of State has power to prosecute under this Act”.

The Defendants admit that the two clients are qualifying persons for the purposes of this section. The next question is whether or not the failure to comply with the Awards is a relevant requirement, which has been contravened. Under the provisions of the Financial Services Markets Act 2000 (Transitional Provisions and Savings) (Civil Remedies Discipline Criminal Offences etc.) (Number 2) Order 2001, reference is made to the PIA Rules. By paragraph 2 it is provided that “any requirement, condition or prohibition imposed before commencement by or under any of the provisions specified in paragraph (3) is to be treated as a relevant requirement for the purposes of section 380 (2) and 382”. Under paragraph (3)(N) any rule (within the meaning of section 8(3) of the FSA 1986) of a recognised self-regulating organisation to which the person concerned was subject and which regulated the carrying on by him of investment business was a relevant requirement.

Section 8(3) FSA 1986 set out references to the rules of a self-regulating organisation which the organisation has power to enforce in relation to the carrying on of the business in question or which relates to the admission and expulsion of members of the organisation or otherwise to its constitution. Under the requirements of schedule 2, paragraph 6 of the FSA 1986, the relevant organisation was required to have effective arrangements for the investigation of complaints against the organisation or its members.

The PIA was a company limited by a guarantee and was a self-regulatory Organisation (“SRO”) recognised for the purposes of FSA 1986 and of which the Defendants were members from 18^th July 1994. Prior to that date, the regulatory functions had been exercised by two other SRO’s, namely FIMBRA and the Life Assurance and Unit Trust Regulatory Organisation (“LAUTRO”).

The PIA chose to fulfil the obligation by the establishment of an independent complaint adjudications service, the PIAOB. This was established as independent both from PIA member firms and the PIA itself and operated equally from 18^th July 1994. It was a company limited by guarantee. The governance of the company and the organisation was split between a Board of Directors (“the Board”) and a Council (“the Council”). The Board was comprised of individuals who were also appointed as directors of the PIA.

I will set out the procedure for dealing with complaints further in this judgment.

Membership of the PIA was achieved by contract. Member firms would apply to the PIA to become a member and in so doing would agree to abide by the PIA Rules and that is apparent from the standard application form, which would have been completed by the Partnership. The actual application form has not been discovered, but nevertheless section 4 of a standard application form would have contained undertakings by the partnership (inter alia) to deal with all complaints and disciplinary matters in accordance with the Rules (undertaking 4.5). Section 7 of the PIA individual questionnaires contains certain warranties, including that the individuals would at all times comply with the PIA Rules.

The Defendants, as I have said, were members of the PIA.

The Defendants as partners in a partnership consequent upon their membership, as I have said, became bound by the PIA Rules. That was reinforced, for example by Rule 1.3.1(2), which required them to obey the Rules. By Rule 8.5 they were obligated to cooperate with the PIA Ombudsman “in any procedure which may it may adopt with a view to the conciliation or adjudication of a complaint” and further the member must give promptly to the PIA Ombudsman all files documents and other materials, which the Ombudsman may indicate, are relevant to a complaint.

The key Rule is Rule 8.6, which provides:-

“A member must comply promptly with any award made against him by the PIA Ombudsman except only where a member exercises in good faith a right of appeal, or applies for other relief, to the Court”.

This loomed large in the Defendants’ case.

Complaint was made by the Defendants that the PIA Ombudsman failed to draw to their attention that there was any appeal or otherwise clarify the effect of Rule 8.6.

The Ombudsman’s terms of reference were attached to the second witness statement of Mr Kirby dated 1^st June 2004, on behalf of the FSA (exhibit JAK 4). By those terms of reference it was expressly provided (paragraph 1.2(b)) that no appeal should lie from any Ombudsman to any other Ombudsman or the Council. Paragraph 3 sets out the procedure which enabled the Ombudsman in his own discretion to decide the procedure to be adopted by him investigating and considering complaints and he was required to act impartially. Under 3.6 he was not bound by any legal rule of evidence. Regulation 5 sets out the procedure of dealing with the complaint and the making of an Award.

It follows therefore that there is no right of appeal. The question then arises as to how a decision by the PIA Ombudsman could be challenged. Anyone from a legal background would know that the only way of challenging an Award would be by Judicial Review and that such an application would have to be made within three months allowed by the judicial review procedure. The Defendants say that they as laymen were unaware of that, and I can understand that. Nevertheless, as will appear, later in this judgment from an examination of the evidence, they plainly had legal advice within the three-month period after the Merriman Award and it is not suggested that they did not receive proper advice in respect of how (if possible) the PIA Ombudsman’s Awards could be challenged. In the case of the Bayliss Award, they had already received correspondence from the PIA Ombudsman that the time limit for challenging the Merriman decision (namely three months) had expired so they were on express notice that there was considered to be a three-month period for challenge.

It seems to me plain, on the statutory and procedural analysis that I have set out above that the Defendants, as members of the PIA, were bound by its Rules and by the procedure for investigating complaints set out within the Ombudsman’s terms of reference. The result of that is that in my judgment and I so held, they are bound by the PIA Ombudsman’s Awards unless they have challenged it within the time limits that are prescribed. The only possible way of challenge is Judicial Review and no such challenge has been mounted.

It is not open therefore in my judgment to the Defendants to go behind the Awards at the hearing before me. This undoubtedly will disappoint the Defendants, but as I set out later in this judgment when I analyse the documents it is quite clear that they had legal advice at the time of the Awards and it is clear therefore that if there was to be a challenge they had the necessary legal input to enable them to act that way if they so wished. They plainly did not make any challenge and indeed the evidence shows that they proceeded on the basis that they would not challenge the Award and would move as suggested by the PIA Ombudsman directly to the question of compensation. Their problems, I suspect, have arisen from the loss of insurance (a matter also not before me as I have already indicated).

The Defendants submit that the lack of appeals procedure in the PIA Ombudsman’s terms of reference means that their Human Rights have been infringed, in that they have not had a fair hearing under Article 6.

There are a number of reasons why this does not apply. First, the Awards were accepted by them when they had legal advice and they became bound to obey them by a matter of contract. The clients' rights and their liabilities were determined by the agreed mechanism in 2000. No legal challenge was mounted and as I have said they showed they intended to comply. Both of the Awards pre-dated the commencement of the Human Rights Act 1998 (2^nd October 2000). That Act does not have retrospective effect as regards acts committed before that date; see Wilson –v- First County Trust Ltd. [2003] 3 WLR 568 at 574 and 605.

Mr Mayhew, quite properly conceded that whilst his primary submission was that it was not open to the Defendants to raise Human Rights issues as regards the original procedure, for the reasons set out in paragraph 38 above, it was nevertheless open to me to allow the Defendants to seek to rely on the Human Rights in the context of how I might exercise my discretion under section 382. Even then, he submitted that I should not allow a collateral attack on the determinations of the PIA Ombudsman. The Ombudsman's decisions were made on paper, on an examination of documents. I find it surprising that the Ombudsman was able to determine factual issues, which involved a conflict of potential oral testimony as to what was said at meetings, but nevertheless that is what it did in both cases. Given that, it seemed to me that it was right to afford the Defendants an opportunity to raise (if they wished) (1) a challenge to the procedures in the original awards, and what oral testimony they might have produced and (2) evidence explaining why, given the fact that they had legal representation at the time, they nevertheless sought neither to invite the Ombudsman to conduct an oral hearing, nor challenge the determination on account of lack of oral hearing. It seemed to me that it is essential at this stage to ensure that the Defendants have a fair hearing now and that they should be given that opportunity. In the event, after a short adjournment, when they consulted a financial adviser who was informally helping them in this case, they determined not to seek any such evidence. In so doing they acknowledged (as I explained to them) that that would mean that the determinations would not be open to challenge by them before me. That they accepted.

Therefore in the light of the matters set out in paragraph 39, I do not consider that the complaints about the procedure can be challenged. The facts appear to me in that light to be clear. There was nothing to stop, for example, oral evidence being led, but the Defendants have at no time requested oral evidence. Nor is there anything in the point about time limits. Whilst the first letter from the PIA Ombudsman dated 29^th March 2000 accompanying the Merriman Award did not tell them what steps to take if they disagreed with the decision, the Defendants response (letter 11^th April 2000) was “I have to inform you I disagree with your decision”.When pressed on 7^th June (still within the time limit) for a decision Mr Matthews said he was still taking legal advice. In respect of the Bayliss Award that was made on 7^th August 2000, by which time he had been expressly alerted to the three month time limit by the PIA Ombudsman in a letter dated 5^th July 2000 referring to that limit in respect of the Merriman Award.

There was no procedural unfairness, the only inference to be inferred is that no challenge was made because advice was given that no challenge was likely to be successful. That is why subsequent to that the Defendants proceeded to address the issue of quantum rather than liability.

In my judgment none of this for the reasons I have set out above can be revisited at the hearing before me. For the reasons set out above, I am of the opinion that the failure to comply with the Awards is a contravention of a relevant requirement for the purposes of section 382. It follows therefore that the only matter before me is whether I should make an order and if so the nature of that order.

Under section 382 the court may only order payment of “such amount as appears to the court to be just having regard … to the extent of the loss or other adverse effect”.

The FSA contends that in accordance with the Awards and the relevant regulatory guidance, redress shall be by way of reinstatement in the MPS. The Defendants argue that the basis of compensation should be by way of augmentation (or top up) of existing personal pension contracts, rather than the greater sums required for reinstatement.

As the material exhibited in support of the application shows, the guidance issued for compensation points to a prima facia determination in general that compensation ought to be ordered on a reinstatement rather than a top up basis, but where the difference is unreasonably high that can be taken into account in assessing the level of compensation. The clients seek reinstatement. That would put them in the position as if they had never left the MPS. Top up on the other hand, is an amount, which is currently estimated that will be required to be added, by way of top up to the existing policies, to obtain the benefits, which would have been expected to be obtained. Like all such matters of course, it involves a considered opinion as to future events. The present considered opinion might not prove to be correct.

As I have said earlier in this judgment, the Defendants for the first time produced statements of means at the hearing of 13^th December. The FSA does not challenge the figures put forward. The statements show that apart from their residence and the attendant contents, the Defendants' position is relatively modest. Not included were pension funds and Mr Matthews told me that he and his wife had pension funds respectively with values of £27,000.00 and £37,000.00. Those sums are modest. The figure that stood out however was in Mrs Matthews' statement, which showed that she had an asset of a loan of £90,000.00 to her brother. This is the loan to which I have made reference earlier in this judgment. It seems to me that is an asset, which realistically I ought to regard as being available to discharge any order I make against the Defendants.

Whilst the preferred road is for reinstatement, it seems to me that it would be unjust to make an order on that basis. First, the evidence shows that Mr and Mrs Matthews could not make that payment without in effect disposing of all of their assets. Given their present financial position that is something that I would be reluctant to do. The disadvantage to the clients is that their top up funds might not achieve a full benefit. Nevertheless, they will achieve benefits whereas the order for reinstatement will effectively require the Defendants to lose everything. Second, I bear in mind the fact that the Defendants have lost everything. They were unfortunate in the loss of insurance cover, which otherwise would have provided an indemnity and they were unfortunate in the loss of business. By the use of the word unfortunate, I point to the consequences of those factors and do not in anyway suggest that the FSA or the claims brought by their former clients are causative of those matters. I am merely indicating that ordinarily they would not have expected to have faced this level of financial claim to be met from their own resources. Finally, given the level of pensions benefits, it seems to me that the cost of reinstatement is disproportionately large.

Taking into account all of those factors, it seems to me that for the reasons set out earlier) there is no basis for challenging the enforcement of the awards by the FSA. It is just to award a level of compensation on a top up basis rather than a reinstatement basis. I do that because I regard the £90,000.00 loan as being available monies for discharging that liability. It was available until April this year in a free form and I therefore ignore the fact that it is now out on loan to Mrs Matthews’s brother, on terms, which remain obscure.

As I have already set out earlier in this judgment, I also have ordered the Defendants to pay the FSA’s costs, assessed at £11,500.00. Since the hearing Mr and Mrs Matthews approached the FSA and made representations as to time for payment. The FSA has agreed that they should have until 24^th January 2005 to pay the Awards. No extension of time has been sought in respect of the costs which accordingly are payable within 14 days i.e. by 4:00 pm 5^th January 2005.