FOS decision on contributory negligence quashed

Why should I read this?

On 29 October 2025, the Court of Appeal issued its decision in Linear Investments Ltd v Financial Ombudsman Service Ltd [2025] EWCA Civ 1369 (the “Judgment”). The Judgment is particularly notable, as the Court of Appeal found that the Financial Ombudsman Service (“FOS”) had erred in law in its analysis of causation, when FOS had concluded that an investor that provided inaccurate information which led to his miscategorisation as an elective professional client had not contributed to his own loss.  The Judgment also provides commentary on the requirements for firms in categorising clients as elective professional clients under COBS 3.5.3 R, the Court of Appeal upholding FOS’s decision that the requirements had not been satisfied in this case.

What are the facts?

Via Linear Investments Limited (“Linear”), an investor (the “Investor”), invested £100,000 in a high-risk, computer-driven trading strategy for contracts for differences (“CFDs”), which was intended for professional investors. The Investor applied to be treated as an “elective professional client”.

When completing Linear’s account opening form (“AOF”) the Investor stated that he had experience in trading CFDs (when he did not), but also made contradictory statements, defining his trading experience as relating to “blue chip stocks” without reference to CFDs; failing to provide an explanation of his CFD experience where invited to do so in the AOF; and failing to provide documentation to support his categorisation where invited to do so in the AOF.

When completing an application form for the CFD product, the Investor had stated that he had worked in the financial sector for at least one year in a professional position that required knowledge of the nature and risk of the type of trading that he intended to carry out – a statement which ostensibly conflicted with his stated employment on the AOF as an academic for the last 12 years.

The Investor completed tick boxes on the AOF to indicate that he had traded in CFDs with an average transaction size of “20+” lots per transaction.  The AOF did not require the Investor to specify the CFD market they had previously traded on, or the lot size.

After losing approximately half of the value of his investment on short term CFD trades in a 12 month period between February 2018 and 2019, the Investor complained to the FOS. Broadly, the Ombudsman found that:

• Categorisation: Linear had failed to conduct an adequate, objective assessment of the Investor’s expertise and experience for the purposes of COBS 3.5.3 R (1) (the qualitative test) and, it had not collected sufficient information to determine whether the CFD transactions were of significant size, or that they were on a relevant market to satisfy COBS 3.5.3 R (2)(a) (the quantitative test).  Linear should not have categorised the investor as an elective professional client or provided the CFD trading strategy to him.
• Measure of Loss: Compensation should be assessed based upon the difference between the value as at the date that Linear ceased to manage the investment and the value if the Investor had invested in a benchmark FTSE portfolio (plus simple interest at 8%).
• Contributory Negligence: In his first provisional decision, the Ombudsman had expressed the view that there was no reasonable basis for the Investor providing incorrect information to Linear, that it would not be fair and reasonable for Linear to bear all responsibility for his losses and that the Investor should bear 25% of his losses. In his final decision, the Ombudsman, changed position, deciding that Linear was solely responsible for the Investor’s losses or alternatively, even if he was wrong on that, it would not be fair and reasonable to reduce the compensation, because Linear had also provided the Investor with misleading information and failed to provide information about the cost of its services.

Linear challenged the Ombudsman’s decision via Judicial Review, the key arguments being that:

• Categorisation: the Ombudsman’s decision that Linear had failed to comply with COBS 3.5.3 R was either irrational, or wrong as a matter of law, in that it was entitled to rely upon the statements made by the Investor (effectively arguing estoppel by representation);
• Measure of Loss: that it was irrational for the Ombudsman to assess compensation by reference to a benchmark FTSE portfolio, in circumstances where the Investor had been seeking higher risk investments; and
• Contributory Negligence: the failure by the Ombudsman to reduce the award to account for contributory negligence was irrational or wrong as a matter of law.

FOS succeeded in its defence of the Judicial Review application in the High Court before Stacey J.  Linear appealed to the Court of Appeal, where the Court of appeal found for FOS on the issues of Categorisation and the Measure of Loss, but for Linear on Contributory Negligence.

What did the Court of Appeal decide?

Categorisation: Linear’s defence of estoppel by representation failed. For the defence to apply, the representation needed to be clear and the representee’s reliance on it must have been reasonable. If the representation was unclear or incomplete, or if there were circumstances which suggested that it may not be accurate and called for further clarification or inquiry, the representee would not be able to hold the representor to it.  That was the case in this instance.  The contradictory statements in the AOF and lack of supporting explanations and documentation supported that conclusion.  There was nothing irrational about the Ombudsman’s findings relating to Linear’s breach of COBS 3.5.3 R.

Measure of Loss: Linear had not conducted a proper assessment to satisfy itself that the Investor was capable of understanding high risk investments and it followed that the Ombudsman was not irrational in choosing a benchmark FTSE portfolio (the sort that would be suitable for a medium risk investor) to assess loss.

Contributory Negligence: The Ombudsman’s approach to causation and contributory negligence was legally flawed, the decision on quantum was quashed and the issue was remitted to the Ombudsman to make such reduction to the award as would be fair and reasonable. Further:

• s.1 of the Law Reform (Contributory Negligence) Act 1945 requires damages to be reduced where the claimant’s fault partly caused the loss. Causation applies equally to claimant and defendant fault, regardless of whether the fault of the claimant occurs prior or subsequent to the wrongdoing of the defendant. The Ombudsman wrongly treated Linear’s acts and omissions as the sole cause of loss. The Investor’s misrepresentation about his CFD experience and financial sector employment were an operative cause of loss. Without them, Linear would not have accepted the Investor as an elective professional client, and he would not have accessed the relevant trading strategy or incurred losses. Both parties contributed to the loss.
• The Ombudsman was not obliged to apply the law of contributory negligence, but he was obliged by DISP 3.6.4 R to take it into account, to do so accurately and to give reasons why he was departing from the law if he decided to do so (which he did not).
• The Ombudsman’s argument that the decision on quantum should not be quashed (pursuant to s.31(2A) Senior Courts Act 1981), because the outcome would not have been substantially different if the Ombudsman had not erred, was rejected. The Ombudsman argued that the same outcome would have been reached if he had chosen not to apply the law on contributory negligence, relying on his fair and reasonable jurisdiction. The Court could not have confidence that the outcome would have been the same, but for the error regarding the law on contributory negligence, as in an earlier provisional decision before the error, the Ombudsman had proposed a 25% reduction for the Investor providing Linear with incorrect information.

Key takeaways

Contributory Negligence:

• Investment firms will welcome the clarity provided by the Court of Appeal, that investors who provide inaccurate information to obtain access to high risk investments can be held partly liable for their losses, even where the firm has failed to comply fully with COBS rules relating to client categorisation.
• Firms will be pleased to see that the Court of Appeal ruled against FOS on a clear misinterpretation of the law and also, crucially, that the Court of Appeal rejected FOS’s argument that the error would not have changed the outcome.  The Court of Appeal was clear that if FOS is to depart from the law on contributory negligence, it needs to state the law accurately and it will need to provide a rational explanation for departing from the law.
• Firms may wish to consider any comparable complaints that are in process with the FOS to ensure that any client contributory negligence is taken into account and, that the FOS is correctly interpreting (if not applying) the law in those cases.

Client categorisation:

• Prior to the Court of Appeal’s Judgment, much of the press associated with the case had focused on criticisms of Linear’s approach to categorising elective professional clients as amounting to no more than “self-certification” or a “tick box” exercise.  However, the Court of Appeal was clear that Linear’s documentation was more than “self-certification” and a “tick box” exercise, as it required clients to provide explanations of their experience and knowledge and to provide documentary evidence in support.
• The Judgment does not suggest that firms need look behind information provided by clients, where that information is consistent, credible, supported by reasonable explanations and documentary evidence (where requested). The failure in this instance was one of proceeding on the basis of forms which were incomplete or where explanations were lacking, where some answers were potentially contradictory and were not supported with the evidence requested.
• Firms may wish to consider the rigour of their own client onboarding and categorisation processes, with particular emphasis on ensuring that records are kept that support the decisions made.

In conclusion

On 8 December 2025, the FCA published its consultation CP25/36 regarding reform of the rules for elective professional clients,  The proposals include: an “Alternative Wealth Assessment” for individuals with investable assets of at least £10 million to opt out of retail protections; removing the COBS 3.5.3R(2) quantitative assessment; introducing an enhanced qualitative assessment; and improving other safeguards to prevent clients from being incentivised, pressured or misled into opting out of retail protections.

HM Treasury and joint FCA and FOS consultations on reform of the redress system closed on 8 October 2025 (for further details see our article here).  Further proposals for reform are expected to be published in H1 2026.