UK Court of Appeal requires FOS to reduce award in successful JR challenge

In Linear Investments Ltd v Financial Ombudsman Service Ltd [2025] EWCA Civ 1369, the Court of Appeal considered a judicial review challenge to a FOS decision awarding compensation to a retail investor who had mischaracterised their trading experience. The bar remains high for a successful judicial review challenge to a FOS decision but this judgment highlights the potential value of judicial review where FOS decisions misstate the law. The decision is also a reminder to financial services firms that contributory negligence can justify reduction in redress where a customer is at fault as well as the firm.

What happened?

Linear Investments accepted a professor at the LSE as an elective professional client based on his self-certified trading experience, knowledge and financial position. The information provided was not complete and accurate.

Linear Investments used a trading strategy involving higher risk CFDs, which resulted in an investment loss. The customer complained that the firm mismanaged his investment, provided inaccurate information about performance and gave him inadequate information about fees. Notably, he did not complain about his categorisation as an elective professional. Subsequently, he referred the complaint to the FOS. 

The FOS found that Linear Investments had failed properly to categorise the professor as a retail investor. The FOS awarded compensation for the losses that he had sustained on his investment, calculated by reference to a notional investment of the same amount in a FTSE benchmark tracking a combination of indices of diversified equities and bonds.  

Linear Investments challenged the FOS decision in a judicial review application.

The High Court refused the application for judicial review

Linear Investments sought judicial review on three grounds:

1. Linear Investments was entitled under the FCA’s conduct of business (COBS) rules to rely on the customer’s representations when accepting him as an elective professional client, such that the FOS’s finding of liability was wrong in law and irrational;
2. the benchmark used to quantify the award was irrational because the customer had sought high-risk investments; and
3. the FOS failed to account for contributory negligence.

Stacey J rejected all three grounds, affirming the FOS’s broad discretion under FSMA to determine what is “fair and reasonable”.

The Court of Appeal reached a different decision 

The Court of Appeal upheld the High Court’s findings on the first two grounds. It confirmed that the firm was required under COBS rules to do more than a tick-box compliance exercise in accepting a customer as an elective professional client. COBS rules require, amongst other criteria, firms to undertake “an adequate assessment of the expertise, experience and knowledge of the client that gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the client is capable of making his own investment decisions and understanding the risks involved”. The Court of Appeal considered that the FOS was entitled to find that some inconsistencies in the information provided and the lack of any supporting evidence put the firm on notice that further enquiry was needed before proceeding. 

The Court of Appeal found that the use of a lower-risk benchmark for reference in calculating the award was rational, given the client’s lack of experience and the firm’s failure to assess suitability.

The Court of Appeal, however, allowed the appeal on the third ground. It held that the FOS had erred in law by failing properly to consider the legal principles of contributory negligence. The customer’s failures to provide complete and accurate information were an operative cause of his loss, and the FOS’s reasoning did not adequately explain its departure from established legal principles. The Court of Appeal rejected FOS evidence that the Ombudsman would have made the same decision even had he understood and stated the law correctly.

The matter was remitted to the FOS to reassess the award.

Implications for financial services firms

This case offers several practical takeaways for financial services firms: 

• Firms using elective professional client classification should revisit their onboarding procedures to ensure that they collect and assess all of the information required to meet the criteria in the COBS rules. Firms should consider whether additional corroborating evidence is needed to resolve inconsistencies and fill in gaps in the information provided, or if there are other factors that put them on notice that an applicant does not fulfil the criteria for an elective professional customer.
• The decision is a reminder that contributory negligence is an appropriate consideration in determining what redress should be paid where a customer’s own conduct contributes to their loss.
• Firms should request the FOS to articulate the legal principles that it is taking into account in decisions, so that firms have the opportunity to challenge the interpretation or application of the principles by the FOS in an individual case.