The extensive reforms to insurance law over the last few years have been directed at what is fair, but there continues to be an unhappy relationship between the law and the rules which govern the Financial Ombudsman Service (FOS), which is often the first port of call for policyholders. A recent judicial review has confirmed that the Financial Ombudsman has discretion to depart from the relevant law, so that it can do what is fair and reasonable in all the circumstances. But how is that discretion exercised?

On what basis can the FOS be asked to make a decision?

The FOS is mandated to make determinations “by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case” (s.228(2) of the Financial Services and Markets Act 2000). The question of deciding what is “fair and reasonable” has been up for debate, but is assisted by DISP 3.6.4R of the FCA Handbook, which states that the FOS will take into account the relevant law and regulations, and regulators’ rules, guidance and standards, codes of practice and, where appropriate, what it considers to have been good industry practice at the relevant time.

R (on the application of Aviva Life & Pensions (UK) Limited –v– Financial Ombudsman Service & Ors [2017] EWHC 352 (Admin)

Aviva agreed to insure Mr McCulloch with a life policy in November 2013 (the Policy). At the time he applied for the Policy, Mr McCulloch had separated from his wife and so he had cancelled a joint policy which they had previously held. When obtaining the Policy, he failed to disclose to Aviva that he had been referred to a consultant psychiatrist and for a CT scan. He was later diagnosed with early onset dementia and because his condition was terminal, his family made a claim to Aviva under the Policy.

The law was clear: Aviva was entitled to avoid the Policy for misrepresentation and if the court were asked to make a decision, it would more likely than not have ruled in Aviva’s favour. Nevertheless, a complaint was made by Mr McCulloch to the FOS, who decided that Mr McCulloch’s misrepresentation to Aviva had been innocent and the Policy should remain in place.

Aviva sought a judicial review on the basis that: (1) the FOS had failed to take into account the requirements of DISP 3.6.4R of the FCA Handbook referred to above; and (2) the decision was Wednesbury unreasonable. The test, from Associated Provincial Picture Houses Ltd –v– Wednesbury Corporation [1948] 1 KB 223,  is a standard of unreasonableness used in reviewing a public authority’s decision; a decision is Wednesbury unreasonable (or irrational) if it is so unreasonable that no reasonable person acting reasonably could have made it.

The FOS argued that, even when considering the factors in DISP 3.6.4R of the FCA Handbook, it was open to them to find that conduct in accordance with the relevant law was not necessarily reasonable in all the circumstances. Despite some very clear misgivings, the judge sided with the FOS and ruled that, in the present case, the FOS’ decision had not been Wednesbury unreasonable. The case was referred back to the FOS, however, because it had failed to give full details of its reasoning in its original decision.


It should be noted that the FOS is not always going to rule in favour of policyholders who make arguably material misrepresentations to insurers. Each case will continue to be reviewed on their merits. The decision is, however, a useful reminder that the FOS has a wide discretion and its decisions are only likely to be overturned by the courts if they do not satisfy the Wednesbury test for unreasonableness.  When the FOS does depart from the law and regulations, it must give detailed reasons for doing so.

For further information regarding this topic or any other insurance litigation dispute, please contract Roger Franklin and Oliver Pannell, Partner – Grace Harrison, Associate, or any member of Edwin Coe’s Insurance Litigation team.

Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.

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