Court considers challenge to FOS determination by financial services provider

All licenced financial service providers in Australia are required to subscribe to an external dispute resolution scheme approved by ASIC.

Of the two schemes approved by ASIC, the Financial Ombudsman Service (FOS) deals with the broadest range of disputes. Many financial service providers are signatories to FOS.

FOS has a broad discretion on how it determines disputes. The determination can be made binding on a financial service provider at the consumer’s election. The financial service provider does not have a right, in general terms, to refuse to be bound.

Financial service providers who are dissatisfied with a determination made by FOS can challenge the decision in a court. However, the grounds of challenge can be quite narrow and successful challenges are rare.

An example of such an unsuccessful challenge is the recent Western Australian Supreme Court case of Financial Ombudsman Services Ltd v Utopia Financial Services Pty Ltd [2016] WASC. The financial service provider in this case disputed FOS’s ability to order the assignment of interests in a trust.

Case facts

The case arose from financial advice given by Utopia Financial Services Pty Ltd (Utopia).

The financial advice recommended that Utopia’s client, Dr Craddock, through her self-managed superannuation fund (SMSF), invest in the St Hilda’s Friends Property Trust (Property Trust).

When Dr Craddock wanted to wind up the SMSF and sell her interest in the Property Trust, she was unable to find anyone who wanted to buy the interest. To enable the SMSF to exit the investment, she purchased the SMSF’s interest in the Property Trust and transferred the units to her own name.

A FOS Panel upheld Dr Craddock’s complaint that the advice provided by Utopia was inappropriate and that Utopia had a conflict of interest in giving the advice. The Panel determined that Utopia and Dr Craddock should resolve the dispute as follows:

• Utopia would pay, as compensation to Dr Craddock, the money she had spent on the investment in the Property Trust.
• Dr Craddock would assign to Utopia all of her rights and interest in the Property Trust.

Under the FOS terms of reference, Utopia was required to implement the Panel’s decision as soon as practicable after being informed that Dr Craddock had accepted it. Despite receiving such notice, Utopia did not make any compensation payments. FOS commenced court proceedings against Utopia seeking an order requiring Utopia to comply with the determinations.

In its defence, Utopia argued that the determinations were made by FOS in breach of an implied term that FOS’s exercise of its power to adjudicate must not be unreasonable.

Utopia alleged that the unreasonableness arose because:

• Dr Craddock had transferred her units in the Property Trust from her SMSF to her own name without complying with the procedure prescribed under the Property Trust deed (in particular, the relevant pre-emptive conditions); and
• as a result of the failure to comply with the relevant preconditions, Dr Craddock was not the true owner of the units and was therefore incapable of assigning her rights and interests in the Property Trust to Utopia.

Utopia also said that the Court should decline to order that Utopia comply with the determination because the transfer of the units from the SMSF to Dr Craddock was contrary to section 109 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) (which forbids an SMSF from entering into a transaction with a related party other than on arm’s length terms) and that to uphold FOS’s determination would involve the Court facilitating an unlawful transaction.

Court decision

The Court held that Utopia had breached the terms of reference and ordered Utopia to comply with the determination.

On the question of reasonableness, the Court identified that clause 5 of the terms of reference required FOS to deal with a complaint on its merits and do what, in its opinion, is fair, having regard to relevant matters including applicable legal principles and judicial authority. The key issue was whether a reasonable person, acting rationally and with regard to the clause 5 matters, could have formed the opinion that the determinations were fair.

The Court found that there was no evidence suggesting that the preconditions in the Property Trust deed had not been complied with and that Dr Craddock was entitled to the benefit of the presumption of regularity. It was therefore not unreasonable for FOS to have reached the conclusion that Dr Craddock was the true legal owner of the units in the Property Trust.

As to whether the original transfer from the SMSF to Dr Craddock was in breach of section 109 of the SIS Act, the Court found that:

• Utopia had not shown that the consideration paid for the units was less than their market value; and
• even if section 109 had been breached, the SIS Act specifically states that a breach of section 109 did not invalidate the transaction.

Comment

FOS has a broad discretion as to how it determines disputes that fall within its jurisdiction and challenging a determination can be very difficult. Courts will always retain some power to overturn FOS’s decisions; however this case demonstrates that the bar for success is set very high.

Financial services providers who are a party to a dispute before FOS should ensure that they fully engage with the process and make careful and comprehensive submissions supported by the best available evidence to give the strongest chance of success.

Also, any financial service provider who has received a FOS decision that they do not agree with should seek legal advice as soon as possible as to whether their case falls within the narrow avenue for a successful challenge.

Cooper Grace Ward’s dispute resolution group regularly assists financial services providers in FOS matters including with the development of detailed case submissions. If you would like more information about these issues, please contact Rocco Russo on +61 7 3231 2468.