FOS Departs From Established Law To Hold That Losses Caused By The Financial Crisis Do Not Break The Chain Of Causation

On 9 February 2012, the Financial Ombudsman Service ("FOS") issued a provisional decision in a financial mis-selling claim, rejecting the argument that losses caused by the financial crisis were not reasonably foreseeable.

In coming to this decision, the principal ombudsman expressly departed from the approach taken by the High Court in the recent mis-selling case of Rubenstein v HSBC Bank Plc [2011], which held that the unprecedented market turbulence caused by the financial crisis broke the chain of causation on grounds of remoteness and forseeability.

This decision clearly demonstrates that, when discharging its duty to decide claims "fairly and reasonably in the circumstances", the FOS will not shy away from coming to conclusions which are diametrically opposed to established case law, often resulting in markedly pro-claimant decisions.

Surprising approach

The approach of the ombudsman is perhaps particularly surprising when one considers the factual similarities between the two mis-selling claims, namely (i) both claims related to investments in the AIG Life PAB Enhanced Fund (the "Enhanced Fund"), (ii) both defendant banks were held to have provided unsuitable investment advice and (iii) both claimants suffered a considerable capital loss following the suspension, and ultimate closure, of the Enhanced Fund after the collapse of Lehman Brothers in September 2008.

In coming to the decision, the ombudsman acknowledged that, when considering what was fair and reasonable, he had to take into account relevant law and regulations (such as the Rubenstein decision), however, he held that:

The approach in assessing fair compensation in retail markets is to seek to return customers to the position they would have been in but for the negligent advice. The fact that there were (relatively) extreme market conditions in this case does not appear to justify a change in that approach...notwithstanding the arguments around possible breaks in the chain of causation or of remoteness of loss The ombudsman awarded compensation of £100,000 to the claimants, and recommended that the defendant bank make up any shortfall in the claimants' capital loss. This is in stark contrast to the nominal damages awarded to Mr Rubenstein for breaches of the FSA's code of business, after...