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ombudsman news

issue 8

August 2001

the Taber test case and windfalls

In recent issues of ombudsman news we have referred to the test case on windfalls and the pensions review that was pending in the High Court. The case was brought by Collegiate, the professional indemnity insurers of an independent financial adviser, Needler Financial Services. They brought the case to obtain a decision on whether, in cases settled in accordance with the review guidelines for pensions and free-standing additional voluntary contributions (FSAVCs), windfall payments should be taken into account when calculating what compensation was due to individual investors.

Collegiate contended that if a consumer took a pensions transfer case to court instead of going through the pensions review process, the court would take any windfall benefit into account and reduce any compensation due to the consumer accordingly. If this interpretation of the law was correct, it could result in no compensation being payable at all in cases where the value of the windfall was greater than any compensation that would otherwise have been due. In Collegiate's view, PIA was not justified in issuing guidance that was at variance with the remedy available at law in the courts.

the test case

The case was based on the facts of an individual complaint made to the PIA Ombudsman Bureau by a Mr Taber against Needler Financial Services. The presiding judge was the Vice Chancellor, Sir Andrew Morritt, who is, effectively, the chief judge of the High Court's Chancery Division. He took the view that he should treat the case as if Mr Taber were suing Needler Financial Services over the pension transfer, instead of going through the pensions review, and that he should pass his judgment on the law accordingly. For the sake of this case, Collegiate/Needler conceded liability, so the only issue the court had to decide was whether account should be taken of the windfall when calculating the compensation due to Mr Taber.

the result

Judgment was handed down in the case on 31st July. Sir Andrew Morritt found in favour of Mr Taber and, on the facts of his case, stated that under common law there would be no need for the value of any benefit he received by way of a windfall payment to be deducted from his compensation payment. Here is a brief quotation from the judgement:

"First the relevant question is whether the negligence which caused the loss also caused the profit in the sense that the latter was part of a continuous transaction of which the former was the inception. Second, that question is primarily one of fact."

Put very simply, this means that an adviser could only deduct a benefit received by an investor if it could be said that the advice, even if negligent in other respects, had been the cause of the investor receiving that benefit.

In the Vice Chancellor's judgment, the link between the negligent advice and the receipt of the windfall was broken by all the actions the society's directors took during the 1990s, with the court's approval, in order to bring about the firm's demutualisation. The cause of Mr Taber's receiving the windfall was not the negligent advice but the directors' decisions. All the advice had done was to give rise to the opportunity for Mr Taber to benefit from the directors' actions.

what happens next-

Collegiate/Needler have until 17 September 2001 to seek leave to appeal against this decision.

In Regulatory Update 89, the PIA allowed regulated firms to suspend a pension review in order to await the outcome of the test case, where:

  • the case has progressed to the point where the windfall has become a relevant consideration in calculating loss;
  • an offer has been made and has not been accepted.

We will therefore continue the policy outlined in the May 2001 edition of ombudsman news.

pension and FSAVC review

This case appears to lend support to the legal underpinning of the guidance on this issue in Regulatory Update 33.

While we wait for the judgment to become final, after we have concluded that there has been initial negligence or a compliance failure in an individual complaint, the firm should proceed to gather the information necessary in order to calculate loss in accordance with the Review Guidelines.

mortgage endowment complaints

The FSA has announced that it will be considering the issue of windfalls in relation to the calculation of compensation for mis-sold mortgage endowment policies.

Notwithstanding the guidance in Regulatory Update 89, not all firms decided that they wished to delay making final offers to await the outcome of this case. Some firms are reconsidering their position in the light of the decision but others are continuing to make offers without any deduction for windfall payments.

Until we have reviewed the position after 17 September, we will not be issuing any ombudsman's decisions in pensions review cases, other than to endorse offers firms have made which do not seek to take windfalls into account.

Walter Merricks, chief ombudsman

ombudsman news issue 8 [PDF format]

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.