Financial Ombudsman Service

Is this decision fair and reasonable?

I have been taking a summer break from writing this column and this return is by way of a one-off digression from my usual theme.

I recently received an adjudication from the Financial Ombudsman Service in which my claim was all but rejected. I have accepted the paltry compensation offered so that is the end of the matter for me, but there must be many others who will find themselves in the same boat as me and for whom the issue I describe below would be well worth fixing. Since many of my readers are from the world of finance, I thought I would write about my experience and invite you to let me know through the comments section if you think I am wrong. (You are also most welcome to comment if you think I am right!)

The story in a nutshell

Last year, I decided to move some of my investments from one platform to another. It used to be the case that making such a switch could mean having to sell the existing investments in order to realise a cash lump sum which would then be transferred to the new platform where it would be invested once again.

In 2019, the Financial Conduct Authority decided that this process entailed unnecessary “complexity and cost” for consumers. It set about making a change in the regulations in order to require platforms to offer consumers the chance to transfer their investments directly (called an in specie transfer) without having to realise them in cash and then reinvest. A direct transfer avoided the risk that the market might move sharply against the consumer during the days when their investment would otherwise have been sold for cash before being converted back into an investment.

So you can imagine my surprise when the platform I moved away from, Quilter (strapline: “We’re here to help you prosper”), transferred some of my investment into cash and then sat on it (as cash) for two months despite repeated requests from me to transfer my money. By the time the cash had reached the new platform, the market had moved against me. For every 100 units I had previously owned, my cash was now able to buy just 94 units.

I complained, but Quilter did not accept that their treatment of my cash was in any way inappropriate. I took the matter up with the Financial Ombudsman Service, thinking that the matter would be a slam dunk in my favour. Sadly, not. In the words of the Ombudsman, Quilter’s treatment of my money was “fair and reasonable”.

The full story is below. I believe I have given a neutral account. As a check, I am making the Ombudsman’s decision available here (lightly redacted to avoid revealing names or anything confidential).

More details

When I lodged my request to transfer, the receiving platform (who behaved impeccably throughout) notified Quilter that they could receive most of my investments directly, but there was one of my holdings that they couldn’t take and they asked for it to be turned into cash. (It was my fault for not checking the compatibility of all the investments before instructing the transfer.)

So Quilter cashed out the one holding that couldn’t be transferred directly. At the same time, they started the process of transferring everything else. Most of the direct transfers went through without a hitch. But one of the transfers got stuck … and it remained stuck for two months. The delay was caused by an administrative problem at a third-party intermediary and I don’t blame Quilter at all for this. The delay should not, in itself, have caused me a problem. The investment holding was intact (albeit stuck in limbo) and it eventually arrived at the receiving platform no worse for wear and with no loss suffered.

But whilst that one investment holding was stuck, Quilter chose to keep hold of the part of my investment that they had needed to turn from units into cash. It was a significant amount. They said their standard process was to transfer any cash last. Initially, I asked them to vary the process in light of the third-party problem they were having, but Quilter refused. I asked repeatedly. Quilter refused repeatedly.

So the part of my investment that was turned from units into cash was now out of the market and Quilter kept it out of the market for more than two months (without crediting any interest either, although, to be fair, the contract doesn’t allow for that).

When Quilter finally deigned to let the cash back into the market, they paid over only 95% of it, holding back the final 5% for a few days more. During all of these shenanigans, the market had moved against me and the final outcome was that, when all the cash had been moved to the new platform, it could purchase only 94% of the units that I had held at the start.

Quilter’s justification

Whilst the delay was ongoing, Quilter told me that they would compensate me later for any loss. But when the time came to make good the loss, they changed their tune and refused. Or, to be precise, they offered to compensate me for a delay of just five days. To make matters worse, the five days they chose covered a period when there was no loss. They made a point of telling me that there was no loss over the period they were offering to compensate.  

Quilter’s stated position was that they always transfer the cash last, in case they need to deduct anything by way of costs and fees. But when the time came to calculate any fees, there were none. Quilter have never explained to me why they ever thought that there might be any fees. Additionally, on any reasonable assessment, the amount of my cash they held onto was out of all proportion to the amount they could plausibly have charged me – at least one hundred times over and possibly much more.

The Ombudsman’s assessment

The Financial Ombudsman Service was set up by an Act of Parliament. The Act states that the Ombudsman must decide complaints on the basis of what is “fair and reasonable”. That phrase appears rather a lot in the Ombudsman’s decision and that is why I use it here. According to the FOS’s website, the significance of the phrase is that:

the decision we come to on what is fair and reasonable in all the circumstances of the case may be different to what a court would decide applying legal rules. 

I knew about that in advance and I was well prepared for a “fair and reasonable” decision, even one that might not apply the legal rules. But I don’t believe that’s what I got. (And neither did I get one that applied the legal rules.)

The Ombudsman decided that I should be compensated only to the extent of any loss resulting from the final 5% of the cash being held back for a few extra days after the bulk of the cash had been passed over. Crucially, the Ombudsman decided, it was fair and reasonable for Quilter to hold on to all of my cash during the two months it had taken for the third party to extract my investment holding from its administrative limbo. The primary reason the Ombudsman gave for her decision was the terms of the contract. Well, the contract says this:

We may be instructed by the new [platform] to sell the fund or [Exchange Traded Investment] and carry out a cash transfer instead. Payment of a cash transfer will be made to the receiving pension scheme within ten working days of when we accept your instruction. We will pay the transfer proceeds as one amount once we receive them from the fund managers for all of the funds and ETI proceeds being transferred. [Emphasis added]

The second of those sentences is crystal clear. It says ten working days, not two months. But the Ombudsman decided that those words should only be applied when the whole transfer is for cash and not when cash is created by selling one fund or one traded investment. She interpreted the contract as if the second sentence (the one with the ten-day rule) started with the words “Where we have to sell every fund in your account …”.

But even those imagined extra words would not have been enough to justify the decision she reached. That is because the final sentence cannot be saying that Quilter must wait for the remaining fund to be released from limbo. That is because the sentence speaks of waiting to “receive” the transfer proceeds and “pay” them “as one amount”. These words – “receive”, “pay” and “one amount” – can only refer to the amounts received in cash. Quilter wasn’t waiting to “receive” the fund that was stuck in limbo (it was stuck on its way out to the new platform). That fund was not “paid” by Quilter (it was transferred directly to the new platform). And this certainly wasn’t all done “in one amount” (the fund was released; Quilter was notified several days later; and only then did it start its own admin for paying out the cash, which took several more days).

Some might say that these are extraordinary contractual contortions to undertake in order for the Ombudsman to arrive at a result that she favoured. Legally, I believe the Ombudsman is allowed to make these contortions, but only if it leads to a result that she thinks is “fair and reasonable”. In other words, if the Ombudsman thinks the fair and reasonable result is for Quilter to hold my cash hostage for two months rather than transfer it so that it can be put back into the market, she can decide that … but only if she thinks it is fair and reasonable.

The Ombudsman never actually explained why she thought that would be a fair result or a reasonable one. She merely said that it is “standard industry practice” to hold onto the cash in this way.

I had been notified about industry practice by a colleague of the Ombudsman who carried out the initial investigation. The investigator told me (in writing) that these transfers are not always done electronically, which means that they can “take anything from a month to as long as six months to process, depending on the circumstances and … this is across the industry.”

Despite these potentially very long transfer processes, it was (as the Ombudsman’s investigator told me) industry practice to cash out the funds that had to be sold and to hold onto that cash for potentially six months. And, because this was industry practice, the Ombudsman’s investigator thought it would justify the conclusion that the practice was fair and reasonable. When he told me this, I suggested that one should not equate “widespread” with “reasonable”. I said that an unfair and unreasonable practice does not become fair and reasonable just because lots of companies do it.

Nevertheless, the investigator was unmoved and the Ombudsman said that she agreed with him. She made it clear that the widespread nature of the practice was part of her rationale for concluding that the practice was fair and reasonable.

The Ombudsman added that the platform’s terms and conditions “allow for any outstanding charges to be deducted [and therefore] I’m satisfied that it was reasonable for Quilter to transfer the cash last.” We were back to the contractual wording once again. And, once again, the Ombudsman was applying words that weren’t actually in the contract. The contract says: “we may, with your agreement, pass these costs on to you by deducting them from your account before carrying out the transfer.” Well, plainly, I didn’t agree. I wanted them to transfer the cash ASAP and let me settle any fees myself.

I can’t tell from the Ombudsman’s decision whether she simply didn’t notice that the contract required my agreement or whether she thought it was fair and reasonable for Quilter to proceed without it.

Looking at everything in the round

It is frustrating to lose a claim. I don’t take it personally. And I don’t, of course, know the Ombudsman who looked at my case. LinkedIn tells me we have professional acquaintances in common, one of whom (the only one I have asked) speaks very highly of her.

In trying to decide what to make of the Ombudsman arriving at a decision that I find so utterly unreasonable, I need to consider whether there is some aspect of all this that I am completely missing. Perhaps comments from readers will enlighten me (or perhaps readers will reassure me that my thinking is sound).

In different circumstances, I might wonder whether the Financial Ombudsman Service simply had an off day. But that doesn’t seem likely. The initial investigator went through his thinking with me, in some detail, over the phone and he invited me to comment, which I did in writing. He even took the trouble to phone me a second time to go through my comments. He wasn’t persuaded by them (to my dismay), but he definitely studied them. I know that the Ombudsman also saw what I had written because she specifically alluded to it in her decision.

She clearly had every chance to get it right. But in her decision:

• She decided that keeping a customer’s cash out of the market for months on end (possibly as much as six months) is fair and reasonable.

• She tied herself up in knots interpreting the contract in a way that amounted to deleting some words and adding others in order to arrive at a result that isn’t what the contract provided for (and one that the drafter of the contract plainly did not intend - see postscript below).

• She arrived at a result that clearly flies in the face of the Financial Conduct Authority’s objective that platforms should make these transfers less costly and less complex for consumers.

Why did she reach that conclusion? I can think of only one other possible explanation. The clue is right there in the words “standard industry practice”. My claim was not driven by a one-off set of circumstances that the Ombudsman could deal with and move on from. If the Ombudsman had ruled in my favour, she would have been deciding that the industry has got this practice totally wrong.

In my view, that is exactly what she should have decided. I have written this article in the hope that a sufficient number of readers from the industry will suffer pangs of conscience and sort this out. It won’t benefit me. It’s too late for that. But it’s not too late for everyone who switches platforms in future. It’s not too late for the industry to show the Financial Ombudsman Service what it means to behave in a way that is fair and reasonable.

[Note: Comments are open to all, including people who aren’t subscribers to this column. The system may ask you to enter an email address in order to submit, but that won’t cause you to be subscribed and, so far as I can tell, that won’t give me access to your email address.]

A small postscript

Anyone who reads the Ombudsman’s decision will also see a further issue regarding the changes in the contract terms and conditions. It’s not a big point but, for those who look at the decision and wonder what that is all about, I offer this brief explanation.

When I opened my account with the Quilter platform, the terms and conditions didn’t allow for any in specie transfers. All transfers were to be made fully in cash within ten working days. The terms and conditions were subsequently altered by Quilter to enable the in specie transfers. Changing the terms is allowed. The contract permits Quilter to make unilateral changes in certain circumstances and I do not doubt that this change falls within the permitted circumstances. But Quilter were required to notify me of any changes that would operate to my disadvantage.

In my submissions to the Ombudsman, I made the point that, since Quilter had not notified me of the change, they must have thought I wouldn’t suffer any disadvantage. That must mean that the drafters of the revised wording did not intend that their colleagues would take customers’ money out of the market for months on end. Introducing in specie transfers might mean that the whole process could take longer than cash, but the in specie investments would remain intact. And, so long as the cash would still go through within ten days, I would suffer no disadvantage.

The Ombudsman refused to consider this point. She appears to have thought that I was raising a new complaint (ie that Quilter had failed to notify me) without me having put the complaint to Quilter first. That was somewhat ironic given that Quilter’s failure to tell me about the new wording meant that I didn’t know it had happened so I couldn’t have complained to them. It was the Ombudsman’s own investigation that revealed to me that Quilter was working from a playbook that I had never seen.

But, irony aside, the Ombudsman does not appear to have twigged that I was not making an additional complaint. I was making a point which I thought would assist her in arriving at a correct interpretation of the contract. One that was more fair and reasonable.