UK: FOS Awards No Longer "Final"?

The English High Court has recently delivered a decision in Clark v In Focus Asset Management & Tax Solutions Ltd (2012), which allows complainants who had previously accepted and been paid the statutory maximum award made by the Financial Ombudsman Service ("FOS"), to pursue a claim against their IFA for the balance of what they allege is their full loss caused by unsuitable investment advice.

The FOS Scheme

The FOS provides a free and independent dispute resolution service for customers of FSA-regulated firms. While detailed rules exist relating to the jurisdiction of the FOS, those who can use its services, the subject matter of complaints and the timeframe within which complaints should be referred, some of the key rules are as follows:

  • In certain circumstances, the FOS may dismiss a complaint without consideration of its merits. This includes where the subject matter of the complaint has been the subject of court proceedings where there has been a decision on the merits; is currently the subject of current court proceedings (unless stayed); or would be more suitable to be dealt with by a court, arbitration or another complaints scheme
  • The ombudsman is required to determine complaints by reference to what is, in his opinion, "fair and reasonable" in all the circumstances of the case. In considering this, the FOS will take into account relevant law and regulations, regulators' rules, guidance and standards, codes of practice, and, where appropriate, what it considers to have been good industry practice at the relevant time
  • If the complainant accepts an FOS determination within the specified time limit, the determination is "final and binding" on both the firm and the complainant. If the complainant rejects it (or makes no response, which is treated as a rejection), the determination is not binding on anyone. The firm has no ability to reject the determination – the only right of challenge available to it is on public law grounds by way of an application for judicial review
  • Where a complaint is determined in favour of the complainant, the FOS may make a money award in a sum which it considers to be "fair compensation" for financial loss, up to a limit of £150,000 (prior to 1 January 2012 the limit was £100,000)
  • Firms are required to comply with FOS money awards and, in the event of non-compliance, they are enforceable through the courts
  • If the FOS considers that "fair compensation" requires the payment of a sum in excess of the maximum limit, the FOS can recommend that the firm pay the balance, but neither the FOS nor the complainants have any ability to compel the firm to do so

The facts

Mr & Mrs Clark made a complaint to the FOS in November 2008, alleging that In Focus Asset Management and Tax Solutions Limited ("In Focus") had provided them with unsuitable investment advice in light of their risk profile. Mr & Mrs Clark had been advised by In Focus in 2001 and 2004 to invest in traded endowment policy plans on which they suffered loss alleged to be in excess of £500,000.

Following an investigation conducted by the FOS, a provisional decision was issued in November 2009. The complaint was upheld and the FOS stated that the Clarks' compensation should be such as would put them back in the position they would have been in, although FOS could not direct In Focus to pay any more than £100,000. The decision stated that the Clarks "may not be able to enforce a greater amount [than £100,000] in the courts. A court would make its own decision of whether to award the recommended greater amount above £100,000. However, I would recommend that [In Focus] pays the full amount in full and final settlement of this complaint". In Focus offered £100,000 in settlement, which the Clarks rejected.

The FOS then issued the final decision, in predominantly the same terms as the provisional decision, noting that if Mr and Mrs Clark accepted the award that they "would be bound by the decision, which will be final".

The Clarks' solicitor, on receipt of the decision, contacted the FOS to confirm the meaning of "final and binding" and asked: "Would the complainants' rights to pursue a civil claim through court proceedings for their additional loss (in negligence or otherwise) be prejudiced in any way by accepting the Final Decision and, if so, how?" FOS responded stating that "if the business did not pay the recommended balance and [the Clarks] decided to sue for the balance in court, the court would make its own decision on whether or not to award anything".

In February 2010, Mr and Mrs Clark accepted the award using the acceptance form provided by FOS, however they also inserted and countersigned the following statement: "we reserve the right to pursue the matter further through the civil court". Later that month the FOS wrote to both parties confirming that the final decision was now binding and asked In Focus to settle the award. The Clarks confirmed that they had received two cheques amounting to £100,000, which were then paid into their bank account.

First instance

In June 2010, Mr & Mrs Clark issued proceedings in the County Court alleging breach of contract, breach of fiduciary and statutory duties and negligence. They sought their full alleged loss less the £100,000 already paid. In Focus applied to strike out the claim on the basis that Mr & Mrs Clark had accepted the FOS determination and the £100,000 payment in full and final settlement and the Court had no jurisdiction to entertain a claim for further sums.

In granting the strike out application, His Honour Judge Barratt QC considered the High Court decision of Andrews v SBJ Benefit Consultants Ltd [2010] EWHC 2875 (Ch). In summary, Andrews involved an individual who had issued a complaint after suffering losses estimated to be in excess of £400,000 following a transfer from an employee pension scheme to a personal pension scheme. The FOS upheld the complaint and awarded the maximum award of £100,000 with a recommendation that the firm in question pay the balance. The individual accepted the award and issued proceedings claiming damages for the balance. It was held that, as the FOS was a "tribunal", its final determinations were "judgments" for the purposes of the doctrine of merger, the effect of which is to preclude the claimant from pursuing a recovery in the courts in relation to the same subject matter.

In Clark, the claim was struck out by Judge Barratt QC on the basis that Andrews was binding. As the issues in front of the court were the same as the issues put before the FOS, the doctrine of merger applied and the Clarks were therefore precluded from bringing a claim against In Focus for the balance of their alleged loss.

Appeal

Mr and Mrs Clark appealed the order to the High Court, and asked the Court to determine whether parties who had accepted a favourable determination of the FOS are subsequently able to bring a claim for damages for the balance of their alleged loss.

Cranston J found that they were. For various reasons, he took issue with the decision in Andrews. These reasons included that the FOS only makes recommendations which are not binding unless the complainant consents, such that the functions of the FOS differ from those of a typical tribunal. Cranston J also noted that "the doctrine of merger turns on a cause of action being extinguished – it is merged in the judgment", therefore as the FOS deals with complaints, not causes of action, the doctrine is not (he said) applicable. Further to this, he noted that the FOS scheme had to be "considered as a whole" and that the term "final" referred to the end of the Ombudsman's process, not the end of the resolution of the dispute.

Consequently, Cranston J held that the doctrine of merger did not apply to those who have accepted favourable determinations from FOS and, so, does not preclude those who have accepted the maximum award from claiming damages for an amount in excess of that award.

Comment

Unless and until a decision is handed down by the Court of Appeal clarifying whether parties who have accepted the maximum award from FOS can bring a claim for damages for the balance of their loss, the High Court decisions of Clark and Andrews represent contradicting authority. It is therefore to be welcomed that In Focus has lodged an application for permission to appeal to the Court of Appeal.

In the meantime, in response to the uncertain state of affairs to which Cranston J's decision gives rise, the FOS announced that it had amended the wording on its website and in its final decisions to reflect that complainants may be able to pursue a claim in the courts for further damages in respect of complaints which exceed the current £150,000 maximum award.

According to the FOS' annual review for 2011/2012 only 1% of cases last year involved the FOS recommending that a business pay compensation in excess of the maximum award, which suggests that only a limited amount of FOS decisions will be affected by this judgment. However, complaints concerning certain types of financial services and products (for example pensions and investment portfolio management) can often involve alleged losses way in excess of the £150,000 FOS cap and, were Clark to stand, it is possible that this would encourage more higher value claims to be referred to the FOS as a pre-cursor to litigation. Indeed, Cranston J did not think it would be inconsistent with the statutory aims of the FOS scheme for customers to refer complaints to the FOS with a view to using the money award to finance court proceedings for a greater amount. No doubt many will disagree with this view.

However, just because a complainant is successful before the FOS it does not automatically follow that they will be successful in an action before the courts. While the FOS is required to take into account "relevant law", it was established by the Court of Appeal in R (on the application of Heather Moor & Edgecomb Ltd) v Financial Ombudsman Service & Simon Lodge (2008) that the Financial Services and Markets Act 2000 does not require the FOS to determine complaints in accordance with the law. Consequently, the court's assessment of the claim may well differ from the FOS's view of what is "fair and reasonable", despite the common subject matter.

Nevertheless, until the position is clarified, FSA authorised firms (and their professional indemnity insurers) will need to exercise extra care when evaluating complaints which likely have a value in excess of £150,000.

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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