FOS remedies scrutinised

Insurance eBulletin - 25 October 2012 - 4 October 2013


  • FOS's discretion in deciding an appropriate remedy is wide and is not limited to common law or equitable remedies.
  • In calculating losses associated with frozen investments, FOS may award the notional calculation of loss and order a claimant to assign their interest in the investment to the respondent if requested.


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An Australian Financial Services licensee, Utopia Financial Services Pty Ltd (Utopia), challenged a determination by the Financial Ombudsman Service (FOS) on the grounds that FOS breached its contract with Utopia by ordering a remedy that was not provided for in its Terms of Reference. 

FOS had ordered that Utopia compensate clients who claimed that they had suffered losses from investments in an unlisted diversified property trust and a capital protected investment. 

At the time of lodging the dispute with FOS, the capital value of the investments had fallen and the property trust was frozen. The clients claimed that the value of their investments had therefore diminished and the dividends on their investments and their tax benefits were not sufficient to cover the interest payments on their loans.

FOS upheld the clients' complaint and found that Utopia did not have a reasonable basis for its advice. 

In assessing the amount of the clients' loss, FOS observed that the property trust investment was frozen and so it might:

  • be worthless, in which case, it would be unfair to deduct an amount for its current theoretical value in calculating compensation; or
  • have residual value, in which case, if no amount was deducted from the amount awarded, the clients would receive a windfall gain. 

FOS determined that the uncertainty of the future of the property trust could be resolved by deeming the investment to be worthless but requiring it to be assigned to Utopia if it so requested.


Utopia's claim

Utopia challenged FOS’s determination on breach of contract grounds, claiming that it acted outside its Terms of Reference by ordering payment of damages which were not “direct financial loss or damage”.

Utopia argued that, at the time the dispute had been lodged, the clients had not suffered any actual loss or damage. This was because if they continued to retain the capital protected investment, their capital would ultimately be returned to them. Further, in view of the uncertainty over the frozen property trust investment, it could not be said that any loss had been suffered at all.

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The Court's decision

The Western Australian Supreme Court dismissed Utopia's claim, finding that FOS did not act outside its Terms of Reference and, in doing so, confirmed that FOS's discretion in deciding a remedy is very wide and should not be construed as limited to traditional common law or equitable remedies.

The Court agreed that the contract between FOS and Utopia required FOS to deal with the dispute between Utopia and its clients in accordance with the Terms of Reference.

The Court also emphasised FOS's wide discretion to determine an appropriate remedy under its Terms of Reference, noting that paragraph 9.1, which provides that FOS "may decide that the Financial Services Provider undertake a course of action to resolve the Dispute including…the payment of a sum of money", enabled FOS to order the transfer or assignment of an interest in property, in this case, units in the property trust.

Importantly, the Court disagreed that FOS had no power to make an award of compensation until loss or damage had actually been suffered, in the sense that the subject investments were realised. It confirmed that where loss is not capable of being ascertained until some time in the future, loss occurs when it is reasonably ascertainable, not when it is actually ascertained. 

In this case, according to the Court, the clients had suffered economic loss by the time of FOS's determination because their interest in growing or maintaining the capital value of their investments and not incurring a negative cash flow, had been infringed by Utopia as a result of its breach. Their economic loss was therefore reasonably ascertainable. 

The Court also upheld a counterclaim by FOS seeking specific performance of the contract between it and Utopia, as a member, by ordering that Utopia pay the clients the amount of compensation determined by FOS.



This case sets a significant precedent for future challenges to FOS decisions. In particular:

  • in clarifying FOS's broad power under its Terms of Reference to order remedies that are not confined to common law or equitable remedies;
  • by upholding FOS's approach to determining and quantifying a client's loss in respect of investments where there is no secondary market; and
  • by confirming that FOS may enforce its determinations by seeking specific performance of the contract between it and its members.

FOS's decision that the clients transfer their interest in the (frozen) property trust at Utopia's request was an attempt to ensure that the clients were not overcompensated in the event that a deemed worthless asset ultimately had a residual value once unfrozen. This was presumably considered by FOS to be a remedy to which its Terms of Reference refer variously as "fair in all the circumstances" or "fair and appropriate".

The utility of such an order is, however, questionable as licensees may have little or no interest in taking an assignment of such assets, particularly if they carry ongoing obligations. Further, how such assets are to be brought into account when seeking indemnity from an insurer in respect of FOS determinations is problematic.

Readers may be interested to know that an application for special leave to appeal to the High Court has been lodged in Mickovski v FOS, which was the subject of our August 2012 eBulletin. Should leave be granted in that case, the High Court will adjudicate on whether FOS decisions are challengeable not just in contract, as in Utopia, but also on administrative law grounds. We are monitoring developments in that regard with interest.

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Eliana Katsavos, Lawyer
Kate Clark, Special Counsel


Further information

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