UK: The Financial Ombudsman Service - A Launch Pad For Litigation?

Last Updated: 22 March 2013
Article by Rachel Couter and Lucy Kerr

A recent High Court decision has opened the gateway for consumers to bring claims in relation to disputes for which they have already received compensation via a Financial Ombudsman Service ("FOS") award.  The previously accepted position was that once a FOS award was accepted by a consumer it was final and binding on the parties and no further claims could be brought. This case has changed the status quo; making the position unclear, such that financial services firms should be prepared for claims to reappear even after they make a payment to settle the matter through the FOS.

The case in question, Clark v In Focus Asset Management1, relates to financial advice given to the complainants, which the FOS agreed was inappropriate and awarded the statutory maximum compensation (then £100,000, now £150,000) along with a recommendation that the firm should pay a further amount to satisfy the complaint.  The complainants accepted this award, subject to a handwritten amendment to their acceptance that they reserved the right to pursue their claim through the courts.  The firm paid the obligatory £100,000 but no more and the complainants then issued proceedings for the balance of their losses.  The High Court refused the firm's application to have the claim struck out and the claim has been allowed to proceed. 

This decision directly contradicts an earlier High Court decision (Andrews v SBJ Benefit Consultants2), which dismissed a claim based on almost identical facts.  The judge considered that the claimant's acceptance of the FOS determination extinguished any further claim it might seek to make on the same subject matter.  The judge's decision was based on the doctrine of merger, which precludes a party from seeking a second judgment on a matter that has already been determined by a competent tribunal or court.  The judge believed the FOS was a competent tribunal for these purposes, as it was held to be one in Heather Moor & Edgecomb v FOS3.  The judge also noted that the purpose of the FOS, as enacted in legislation, is to resolve disputes quickly with minimal formality and any determination it makes, which is accepted by the complainant, should be final and binding on the parties.  The judge commented that the FOS would be somewhat redundant if a claim could continue after the FOS had "resolved" it.

In Clark v In Focus, the judge disagreed with Andrews v SBJ Benefit Consultants.  He did not consider the FOS to be a competent tribunal for the purposes of the doctrine of merger, basing his decision on the fact that the FOS is not bound to act in accordance with English law, but rather it must decide matters based on what it believes to be fair and reasonable.  He considered a FOS determination to be final and binding only in terms of the FOS process, not in relation to the subject matter of the dispute. Further, he stressed that the FOS deals with complaints rather than legal causes of action (as discussed in Heather Moor & Edgecomb v FOS) and thus the judge believed that any determination of the FOS could not extinguish a cause of action because no cause of action has technically been considered by the FOS.

The legal position is now unclear due to these two conflicting judgments.  Whilst it would be easy to assume that the distinction between the two cases could be explained by the handwritten reservation of rights in Clark v In Focus, that did not feature heavily in the judge's decision.  What is clear is that the decision in Clark v In Focus raises a lot of issues for financial services firms.  It not only means that claimants can now use the FOS procedure as a dry run for litigation, as it gives them the opportunity to gather evidence and test the respondent's defence without having to pay a penny to do so, as the FOS process is free for consumers, but it also means that complainants can obtain an award of up to £150,000 from the FOS and then use this award to fund a claim in the courts on the same matter.  Financial firms would not only be dealing with the same claims twice but would, in effect, be funding the very litigation they seek to defend.

A further concern is the uncertainty of what would happen if a claimant went on to lose at trial.  What effect would it have on the validity of the earlier FOS determination? Would the claimant be obliged to pay back the compensation it had already received? It is evident that a Court of Appeal decision is sorely needed to provide a decisive authority on this matter. However, unless Clark v In Focus is overturned by the Court of Appeal, firms should be prepared for the consequences of this decision.  As it stands, consumers are in a stronger position than ever before now that they have the chance to pick up a fighting fund from the FOS on their way to the courts.


1. Clark v In Focus Asset Management & Tax Solutions Limited [2012] EWHC 3669 (QB)

2. Andrews v SBJ Benefit Consultants [2010] EWHC 2875 (Ch)

3. R (Heather Moor & Edgecomb Limited) v Financial Ombudsman Service Limited [2008] EWCA Civ 642

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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