Pursuer: D. Logan; Campbell Smith LLP

Defender: A. Mackenzie, Simpson & Marwick

19 November 2010

The Question
[1] Is the Financial Ombudsman an arbitrator? Put in its broadest form, that is the question in this case. If the answer is in the negative, then Mr Clark's claim has prescribed. If, however, the question receives an affirmative answer, then his claim can proceed.

Background

[2] Argyle Consulting Limited ("Argyle") is an independent financial adviser ("IFA"). Mr Clark became one of its clients in July 2000. He dealt mainly with Mr Stuart Dunbar, who is variously described in the pleadings as an employee of Argyle, as a director and as its managing director.

[3] At the time that he first approached Argyle, Mr Clark was 46 years old. He wished to review his pension position. He held preserved benefits in two occupational pension schemes from his past employment. It was principally in relation to those benefits that he sought financial advice from Argyle. His aim was to achieve a particular level of income when he retired.

[4] Before providing Mr Clark with advice, Argyle sought information about his financial circumstances. That was elicited during a series of meetings between Mr Clark and Mr Dunbar. Argyle also arranged for the completion of a lengthy questionnaire. It set out the details of Mr Clark's income and assets, his experience as an investor, and his attitude towards investment risk.

[5] Subsequently, Argyle advised Mr Clark to transfer his monies into a fund administered by Standard Life. Between March 2001 and May 2002, he followed that advice and placed sums with Standard Life. That involved him in taking out new personal pension plan policies. The investments were not as successful as he expected.

[6] Mr Clark maintains that Argyle's advice was negligent. There are several strands to his claim. First, he contends that the questionnaire contained a number of factual inaccuracies. It under-reported his income, over-estimated his capital, and erroneously described him as an experienced investor. On his account, it was never read over to him, nor signed by him. Secondly, he maintains that, against his wishes, he was advised to transfer his monies into a high risk fund. Thirdly, he claims that Argyle failed to make a careful and reasoned assessment and failed to recommend investments appropriate to his financial circumstances.

[7] On 8 October 2003, Mr Clark made a complaint to the Financial Ombudsman, which was recorded as being in two parts:

"Mr Clark has complained about the advice provided by Argyle ... His complaint relates to the nature and risk profile of the investment fund selected.

He has also complained about the advice to transfer the value of preserved benefits to his personal pension, stating that the advice did not consider his circumstances or attitude to risk."

[8] The Adjudicator appointed by the Financial Ombudsman issued a provisional decision on 9 June 2005. He rejected the first part of the complaint. However, he upheld the second part of the complaint. Argyle made a number of comments about the provisional decision. Mr Clark chose not to do so.

[9] The final decision was issued on 29 September 2005. It affirmed the provisional decision. A specific sum was not awarded to Mr Clark. Instead, Argyle was directed to "carry out a loss assessment of the transfers" and "to make good any loss identified" to Mr Clark. That calculation was to follow a recognised method published by the Financial Services Authority.

[10] The Adjudicator required Mr Clark to notify him on or before 26 October 2005 whether he accepted the final decision. Mr Clark failed to do so within the time limit. In the pleadings, he explains that he did not do so because he had sustained concussion in an accident. The Ombudsman deemed Mr Clark to have rejected the decision. The decision was therefore not binding upon Argyle.

[11] Almost three years later, the current action was raised. The summons was served on 8 September 2008. Mr Clark seeks a total of £81,973 by way of compensation for his alleged loss. His pleadings effectively rehearse the same grounds that he presented to the Financial Ombudsman. For present purposes, it is unnecessary to set them out. It is enough to say that they are lengthy and complex. The claim is founded on breach of contract, delict and breach of statutory duty.

Submissions
[12] While maintaining all of its other lines of defence, Argyle argues that the claim has prescribed. It founds on the fact that the present action was raised more than five years after the cause of action arose.

[13] Mr Clark accepts that fact. However, he submits that the prescriptive period was interrupted. He argues that his complaint to the Financial Ombudsman constituted an arbitration. It was therefore a "relevant claim" for the purposes of section 6 of the Prescription and Limitation (Scotland) Act 1973 ("the 1973 Act").

[14] Parties agree that there is no authority directly in point. In essence, the issue between them turns on whether to adopt a wide or a narrow construction of the term "arbitration". Mr Logan argues on behalf of Mr Clark that it should be given a wide construction and that it embraces the Financial Ombudsman Scheme. On behalf of Argyle, Mr Mackenzie submits that arbitration is ordinarily understood to be different from other types of dispute resolution. In the absence of any specific reference to an ombudsman scheme in the 1973 Act, "arbitration" should be confined to its ordinary meaning.

The Statutory Framework
The 1973 Act
[15] The 1973 Act does not define the term "arbitration". In order to understand its relevance within the statute, a number of provisions require to be considered in sequence. The starting point is section 6 (1). It states that certain obligations are extinguished, if they have subsisted for a period of five years "without any relevant claim having been made in relation to the obligation". One then turns to section 9 (1), which defines a relevant claim as one made by a creditor "for implement ... of the obligation, being a claim made - (a) in appropriate proceedings ...". That last term is defined by section 4(2). It means: (a) court proceedings, (b) any arbitration in Scotland, and (c) any arbitration in a country other than Scotland, being one where the award would be enforceable in Scotland:

[16] The 1973 Act has been amended by the Arbitration (Scotland) Act 2010. It substitutes the term "arbitrator" for "arbiter". I shall use the former term in this opinion, unless the context otherwise requires. It is also worth noting that the 2010 Act defines "statutory arbitration" as "an arbitration pursuant to an enactment which provides for a dispute to be submitted to arbitration".

The 2000 Act
[17] The Financial Ombudsman Scheme is governed by Part XVI of the Financial Services and Markets Act 2000 ("the 2000 Act"). Its principal features are set out in sections 225 to 228 and Schedule 17:

• The aim of the scheme is for an independent person to resolve disputes quickly and with minimum formality.
• A person who wishes to bring a claim against an IFA has a right to elect between bringing proceedings in the courts or before the Ombudsman.
• If the complainant has brought legal proceedings, the Ombudsman may dismiss the claim if he considers that the complaint would be best dealt with in those proceedings.
• The complaint is to be determined by reference to what is, in the opinion of the Ombudsman, fair and reasonable in all the circumstances of the case.
• The determination must be given in writing and the Ombudsman is required to give his reasons.
• The complainant must notify the Ombudsman, within a given period, whether he accepts or rejects the determination. A failure to do so means that he is deemed to have rejected the determination.
• There is a maximum amount of compensation which the Ombudsman can compel an IFA to pay, currently the ceiling figure is £100,000.
• The award is enforceable.

Discussion
[18] I shall anticipate my conclusion by stating that I reject the argument advanced on behalf of Mr Clark. In my opinion, a complaint to the Financial Ombudsman does not constitute a relevant claim. Accordingly, Mr Clark's claim has prescribed. I arrive at that view having regard to the following factors.

The Hallmarks of an Arbitration
[19] Mr Logan submits that all the elements of the Financial Ombudsman scheme set out above exhibit the elements of an arbitration. In particular, he founds on the following factors: the Ombudsman is: (a) independent; (b) has a duty to hear representations and evidence; (c) makes a decision on the merits; and (d) can make an order for compensation, which is enforceable.

[20] While there are similarities, there are also important differences between the two regimes. Unlike an arbiter, the Financial Ombudsman is not required to determine a complaint in accordance with the common law: R (Heather Moor & Edgecomb Ltd) v FOS [2008] Bus LR 1486, Stanley Burnton LJ (at paragraph 36); Rix LJ (at paragraph 80). The flexibility of the Ombudsman's approach has been outlined by Lewison J in Bunney v Burns Anderson plc [2008] Bus LR 22, (paragraph 22):

"In determining what is fair and reasonable in all the circumstances of the case it is common ground that the ombudsman does not have to apply the law. He could for example decide that an insurer had a technical ground on which to repudiate liability under an insurance policy but decide that it was not fair to rely on it; or override a limitation defence to which the court would have to give effect if he thought that it was unfair to rely on limitation."

The practical consequence is that the Financial Ombudsman cannot be required to state a case.

[21] The second important distinction relates to the status and effect of the decision. In an arbitration, both parties are bound by the determination. By contrast, the complainant has an option in respect of the Financial Ombudsman's decision. He can accept it or reject it.

[22] In my view, these are material distinctions. They point toward the Financial Ombudsman not being an Arbitrator. Both the process by which he arrives at his decision and the effect of the decision itself are different.

Statutory Terminology
[23] My view is reinforced by a consideration of statutory terminology. Parliament has long been familiar with the term "arbitration". Many statutes stipulate that certain types of dispute should be resolved by that means. Examples include the Agricultural Holdings (Scotland) Act 1883, the Building Societies Act 1874; the Agricultural Holdings (Scotland) Act 1991, and the Bankruptcy (Scotland) Act 1985. In each case, the term "arbitration", "arbiter", or "arbitrator" is used.

[24] The concept of the ombudsman is of more recent vintage. It was introduced into the United Kingdom from Scandinavia in 1967. That was when the office of the Parliamentary Commissioner for Administration was created. That office was seen as an innovation. Since then, ombudsman schemes have figured in a number of statutes.

[25] Mr Mackenzie stated that his researches had failed to disclose any statute that deemed some other form of dispute resolution process to be a form of arbitration. That is not surprising. It is a well-recognised concept. In my view, it would be odd if parliamentary draughtsmen intended to set up arbitration schemes without using that term.

[26] Mr Logan did not argue that all ombudsmen are arbitrators. Rather, he submitted that the correct approach is to scrutinise each individual ombudsman scheme to check whether it has the relevant indicia. The Parliamentary Ombudsman is not an arbiter, for example, because his task is to look at maladministration and he cannot make enforceable orders.

[27] I have difficulty in accepting that submission. Although a term can have different meanings in different statutes, that is normally made plain from the definitions provided. Where Parliament has used two separate terms it is at least curious that no one has ever stated that an ombudsman scheme is just one species of the genus arbitration, far less that they are synonyms.

Case Authority
[28] I turn to consider the guidance that can be drawn from the authorities. Two recent Scottish decisions emphasise that clear distinctions must be drawn between different forms of dispute resolution. In Diamond v PJW Enterprises Ltd 2004 SC 430, it was held that adjudication is not a form of arbitration. Lord Justice Clerk Gill stated at paragraph [20]:

"Adjudication has certain superficial similarities to arbitration; but in my opinion it is a sui generis system of dispute resolution. Whereas arbitration is a form of conclusive resolution of disputes, an adjudication is a form of provisional resolution only. Adjudication does not oust the jurisdiction of the courts or of an arbiter. Its primary purpose is to regulate a dispute ad interim, pending a definitive resolution of it by litigation, arbitration or agreement."

[29] In Macdonald Estates plc v NCP Ltd 2010 SC 250, it was submitted that any agreement to refer a matter to the determination of a third party was a reference to arbitration. The court rejected that approach. Lord Reed, delivering the opinion of the Inner House, stated that it was the limitations of arbitration which had led to the development of a number of other forms of dispute resolution and added:

"The difference between the role of an expert and that of an arbiter has become well understood in general terms, although the boundary between them can sometimes, in particular circumstances, be difficult to draw." (paragraph 88)

[30] In my view, the thrust of these passages is equally applicable to the circumstances of the present case. There is no warrant to collapse the distinction between ombudsmen and arbitrators. They are different forms of dispute resolution: each with its own regime.

Legal Literature

[31] In Prescription and Limitation, Johnston states that the better view is that "appropriate proceedings" does not include tribunal proceedings (paragraph 5.06). Later, he states (paragraph 5.65):

"... it is not enough that something is done which shows that the creditor is aware of or is insisting in his rights or intends to press a claim. What matters is that what is done falls within the strict confines of the statutory definition."

[32] Professor Davidson published his work Arbitration in 2000. In the opening chapter, he provides a taxonomy of different forms of dispute resolution, including mediation, conciliation and evaluation by a neutral expert. He places ombudsmen into a distinct category (paragraph 1.18).

[33] These passages confirm my view that a narrow construction to the term "arbitration" is to be preferred and that it does not embrace the Financial Ombudsman Scheme.

Summary
[34] All these considerations in my view point compellingly in one direction: the Financial Ombudsman does not conduct an arbitration. It follows that Mr Clark did not make a relevant claim and that the prescriptive period was not interrupted.

Alternative Argument
[35] Mr Mackenzie made an alternative submission. As I understood his argument, he contended that if the complaint to the Financial Ombudsman was an arbitration, it was not enforceable in Scotland. That was because Mr Clark failed to accept the award within the specified time period. The argument was not advanced with any degree of force and in my view is misconceived. The question must focus on the proper characterisation of the process involved, not the result. I agree with Mr Logan that if the proceedings before the Financial Ombudsman did constitute an arbitration, it would have been enforceable in Scotland.

Order
[36] In light of the above discussion, I shall dismiss the action.