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Victory for Financial Adviser ends legal uncertainty relating to Financial Ombudsman Service awards

Clark & Clark v In Focus

Court of Appeal expresses concerns about the activities of claims companies.

The Court of Appeal today handed down judgment in the case of Clark & Clark v In Focus(1).  Reversing the first instance decision, the Court held that it is not possible to collect an award from the Financial Ombudsman Service (“FOS”) and then litigate the same matter in court, upholding our first instance decision in Andrews v SBJ Benefit Consultants Ltd(2).  

The Financial Ombudsman Service (“FOS”) was created by the Financial Services & Markets Act 2000 (“FSMA”).  Its remit is to resolve disputes quickly and with the minimum of formality.  It is free for complainants to use and is funded by a mix of industry levies and case fees.  FOS can currently award a maximum of £150,000 plus interest and (in limited circumstances) costs.

Determination of complaints is subject to s228 FSMA.  Under s228(5) if a complainant (normally a customer) notifies FOS that he or she accepts the determination it is “binding on the respondent and the complainant and final”.

In both Andrews v SBJ Benefit Consultants (in which DWF Fishburns represented the successful financial adviser) and Clark & Clark v In Focus, investors sought to demonstrate that notwithstanding s228(5), a successful complainant who had accepted a FOS award could sue in court for further compensation based on the same facts.

The Court of Appeal has today ruled that this is not possible.  Further, it is not open to a Claimant to accept a FOS award and then reserve the right to go to court.  In reaching its decision the Court considered the principle of “res judicata”, which holds that when a matter has been judicially decided, it cannot be decided again.

In her leading judgment Lady Justice Arden said:

I am satisfied that the ombudsman’s award is a judicial decision for the purposes of the requirements of res judicata. …The fact that the ombudsman has to reach a conclusion on the basis of what in his opinion is far and reasonable does not in my judgment exclude the application of res judicata.”

This should give certainty to firms subject to the jurisdiction of FOS including banks, building societies, insurers, financial advisers, insurance and mortgage brokers that once a claim has been determined by FOS, that determination has been accepted by the customer and compensation has been paid, the claim is effectively over.

The only issue which remains undetermined is the extent to which a customer may argue that while FOS has considered some aspects of his or her claim, there are other issues which were not considered by FOS, which might still be considered by the court.  Lady Justice Arden said:

…there will be occasions when a complainant may bring court proceedings against an adviser even though he has accepted an award to which s228(5) applies. Whether that can happen depends on whether the substance of the proceedings asserted before the courts are the same as that before the Ombudsman Service. Fresh proceedings are not permitted if based on the same cause of action so a complainant cannot use proceedings to top up his award for that wrong. The burden of showing that the requirements for res judicata are made out on the facts of the two sets of proceedings will fall on the adviser.”

Satellite litigation is therefore a possibility, particularly where the same or similar facts are raised but the losses alleged are different, and it will be for the adviser to show that the two cases are in substance the same.

In reaching its decision, the Court gave careful consideration to the rights of customers and whether, in larger value cases, they should be able to use FOS awards to create a fighting fund for subsequent litigation.  Lady Justice Arden said:

On the face of it this result would be for consumers’ interests, but this is not necessarily so. If they lose court proceedings, it may lead them to losing all that they have gained through the Ombudsman Service. It may also lead to the development of a claims industry in this field that increases the cost of obtaining financial advice.”

It is possible that her Ladyship’s judgment was influenced by the fact that at least one claims management company had applied to take part in the proceedings.

In considering fairness to consumers Lady Justice Black pointed out that the customer “holds many of the cards” as the customer can decide whether to accept or reject a FOS award once the result is known, with no fear of having to pay the firm’s costs.

While the Court of Appeal decision is therefore to be welcomed as providing clarity and preventing customers from taking two bites of the cherry at least in respect of the same losses, we conclude that when responding to FOS complaints, firms should ensure that they cover all relevant issues to reduce the risk of customers bringing subsequent court proceedings.

(1) Clark & Anr v In Focus Asset Management & Tax Solutions Ltd [2014] EWCA Civ 118

(2) 2010 EWHC 2875 (Ch)


For further information please contact Harriet Quiney, Partner, DWF Fishburns on 020 7280 8873.

By Harriet Quiney

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.