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The Court of Appeal has held that complainants who accept a decision by the Financial Ombudsman Service are not entitled to "top up" that award by raising the same claims in later Court proceedings, even if they could have recovered more in those proceedings.
In this article, Kate Allass reviews the important recent decision by the Court of Appeal in Clark -v- In Focus Asset Management  and discusses its implications for claims against financial services businesses.
The powers of the Financial Ombudsman Service ("FOS")
FOS was established pursuant to section 225(1) of the Financial Services and Markets Act 2000, which provided for the creation of a scheme under which disputes between consumers and businesses providing regulated financial services could be resolved quickly and with minimal formality.
The ombudsman has the power to determine complaints on the basis of what it considers to be "fair and reasonable in all the circumstances of the case", and has the power to make monetary awards to compensate complainants for their losses. This is subject to a cap of £150,000 plus interest at 8% and costs.
If the ombudsman believes that fair compensation exceeds the £150,000 cap, it can recommend that the business pays an additional amount – however, that recommendation is not binding and the business is entitled to decide not to comply with it.
The complainant is given the option of accepting the ombudsman's decision. If he or she does so, the award becomes binding upon the complainant and the business and is, according to section 228(5) of FSMA, "final".
The facts of Clark
In November 2008, Mr and Mrs Clark complained that they had lost more than £300,000 through negligent investment advice given to them by In Focus Asset Management.
The ombudsman found in favour of the Clarks, and decided that they were entitled to compensation in excess of the statutory limit in force at the time of the decision (£100,000). FOS awarded the Clarks the maximum of £100,000 and recommended that In Focus pay further sums to compensate the Clarks fully for their losses.
The Clarks accepted the payment of £100,000 but noted on the pro forma acceptance form that this was subject to their "right to pursue the matter further through the civil court".
In March 2010, In Focus paid the £100,000 award, but not the compensation recommended above this level. In June 2010, the Clarks issued proceedings in the County Court for the balance.
The early court decisions
In Focus resisted the claim for the Clarks' top up claim on the basis of the "doctrine of merger".
This means that a person who has obtained a final judgment in a tribunal of competent jurisdiction is barred from later recovering in court a second judgment the same relief in respect of the same subject matter. The cause of action which the claimant first advances "merges" with the judgment, so that there is no cause of action to pursue on the second occasion.
Initially, this argument was accepted by the County Court, which struck out the Clarks' claim. However, the Clarks appealed to the High Court, and this appeal resulted in a highly controversial decision in December 2012. In it, Mr Justice Cranston found that the County Court's decision had been incorrect because, he said:
1. FOS should not be treated as a "tribunal of competent jurisdiction", because its activities as a whole differed from those of a traditional tribunal (including, for example, the power to resolve disputes through mediation); and
2. The Clarks' complaint had not "merged" with the FOS decision, because there was a distinction between:
- the approach taken by FOS which dealt with "complaints, and not legal causes of action, within a particular regulatory setting"; and
- the determination of a civil court following the application of the facts to tightly drawn legal principles.
In addition, Mr Justice Cranston held that the description in FSMA of FOS decisions as "final" meant only that the FOS process had been concluded, and not that the complainant was barred from taking further proceedings.
The High Court's decision was greeted with great concern by the financial services industry, as it was thought that it could encourage complainants to use the FOS scheme as a tactical device to strengthen their position in subsequent litigation. Through the use of the scheme, complainants could try out their claims, obtain insight into their opponents' position and early sight of documents and, if successful, use any award made by FOS as a "war chest" for further litigation.
There was also concern that complainants could use the findings of FOS in support of a court claim, notwithstanding that its decisions are reached on the basis of what is "fair and reasonable", as opposed to requiring the complainant to satisfy the more complex and inflexible tests applied by a court of law.
All this they could do at relatively little risk, because complainants are not at risk of bearing the businesses' costs of the FOS process.
The Court of Appeal's approach
More than a year after the High Court's decision was handed down, the Court of Appeal has reversed it. On 14 February 2014, the Court of Appeal held that:
- The ombudsman is a "tribunal of competent jurisdiction", and its award is a judicial decision.
- A complaint to FOS may consist of, or include, facts which are capable of constituting a cause of action. This would, in the opinion of the Court of Appeal, be sufficient to show that the complaint may itself be (or contain) a legal cause of action. This is true even though:
a. the ombudsman may make no finding about whether the underlying facts amount to a cause of action; and
b. the ombudsman decides a complaint by reference to what in his opinion is fair and reasonable, and not by reference to legal principles.
- The important consideration was that the ombudsman would decide whether a complaint was made out on the basis of those facts, and that they would lead to the grant of a remedy against the business.
- Where the same cause of action is presented to FOS and the court, the doctrine of "res judicata" is triggered (which for these purposes is very similar to the doctrine of merger) which bars the claimant from proceeding.
- However, there may be cases in which the facts presented to the FOS may differ from those presented to the Court, particularly bearing in mind that lay complainants may act in person when approaching FOS, but are more likely to instruct lawyers when issuing proceedings. The Court of Appeal concluded that there may be occasions on which the cases presented to FOS and to the Court could be sufficiently different to allow them both to proceed.
- It is inconsistent with the statutory aims of the FOS scheme for complainants to be free to pursue the same claims in litigation, even though they have accepted an award. The drafting of FSMA does not preclude the application of res judicata.
For these reasons, the Clarks' appeal was dismissed, and they are not able to recover more than the £100,000 they received nearly four years ago.
This decision will be welcomed by financial services firms and their insurers, and reintroduces clarity to the purpose and implications of the FOS scheme. Only in the most unusual of cases, involving a materially different claim to that presented to FOS, will a complainant be allowed a second bite at the cherry (arguably it would have to be a different cherry). Businesses can try to avoid this possibility by ensuring that all possible causes of action are drawn to the ombudsman's attention and dealt with in detail in their response to the complaint.
The decision should dissuade many claimants from bringing a second set of proceedings, and thus reduce the potential exposure of financial services businesses. In marginal cases, where the sum claimed is not much greater than £150,000 complainants may decide to cap their claim at £150,000 than risk litigating and being exposed to costs risks. In turn, this should have a positive impact on professional indemnity premiums.
It also means that complainants seeking compensation significantly in excess of £150,000 are more likely to apply to the court for relief rather than approaching FOS first. Arguably this presents a more difficult path for potential claimants, who will be required to prove their claims by reference to strict legal principles, rather than claiming compensation by the rather more elastic measure of what could be considered "fair and reasonable" by FOS. These claimants will also face the prospect of meeting the firms' legal costs if they do not succeed.
It is also worth noting that FOS has the power to dismiss complex high-value claims under DISP 3.3.4R(10), on the basis that such claims should more appropriately be dealt with by the courts.
If you require further information on anything covered in this briefing please contact Kate Allass (email@example.com; 020 3375 7220) or Grania Baird (firstname.lastname@example.org; 020 3375 7443) or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Disputes page on our website.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, March 2014
Court rules out second bite at the cherry for FOS complainants.pdf115kB