Ombudsmen within the Financial Ombudsman Service (FOS) make decisions on complaints by customers of financial firms. An example of such a decision is an award of compensation for mis-selling of payment protection insurance. An ombudsman’s decision becomes final and binding when it is accepted by the complainant, who has the alternative option not to accept but to try again in the civil courts. There is usually no right to appeal. 

The binding effect of ombudsman determinations was, however, in effect circumvented in a recent case, Cirencester Friendly Society Ltd v Parkin [2015] EWHC 1750 (QBD).

Mr. Parkin had made a series of untruthful statements about his health to obtain income protection cover from the Cirencester Friendly Society. Shortly thereafter he made a claim on the policy. It was rejected, so he made a claim to FOS and was awarded £19,096.84.

He made a second claim to FOS resulting in a second determination. This time instead of paying, the society sued in the courts. It asked the court to set aside the ombudsmen’s determinations on the grounds of fraud and to direct that it should recover the money paid.

Mr. Parkin did not turn up at the hearing of this action. The judge held that his statements had been fraudulent and upheld the society’s claim.

Nemesis – the Internet

The judge commented:

“Nemesis overtook Mr Parkin most dramatically because, like so many people nowadays, in particular those who seem minded to seek to perpetrate frauds, he seemed incapable of keeping off the Internet and sharing the true nature of his activities through social media.”

Ombudsman practice

It is notoriously difficult to establish insurance fraud in ombudsman proceedings. This is because many rigorous procedures in the courts do not apply. There are generally no formal hearings. A claimant cannot be cross-examined on his or her case. Nor can he or she be directed to make a full disclosure of documents.

Moreover ombudsmen do not allow insurers to do other than investigate reasonably held suspicions that the claimant is being untruthful. They cannot go on a fishing expedition by asking to see his or her medical records. This approach follows a Code published by the Association of British Insurers. There is, however, a conflict of views within FOS as to how this code is to be interpreted. That conflict of views is discussed in this article.

Accordingly statements made by claimants tend to be accepted at face value.

Investigating fraud

There may, therefore, sometimes be an advantage in putting off any search for evidence of fraud until after the determination has been made and then applying to set it aside where appropriate, preferably before the award has to be paid. Money paid to a fraudster is unlikely ever to be recovered even with a High Court judgment.

A leading textbook says that the fact that issues of fraud are not investigated at an earlier stage cannot be held against the victim of the fraud (Spencer Bower and Handley on Res Judicata, 4th edition, para 17.05). The fraudster cannot be heard to say: “you should have realised earlier that I was putting forward false evidence”. Mr. Justice Newey J concurred in this view in Takhar v Gracefield Developments [2015] WLR(D) 206. Only a few weeks later, however, another High Court judge, Mr. Justice Burton, came to the opposite conclusion in Chodiev v Stein [2015] EWHC 1428 (Comm). So the tactic used by Cirencester Friendly Society may have been successful on this occasion but was very high risk.

Moreover a victim may already have evidence of fraud, as opposed to a mere suspicion, before the ombudsman makes his or her determination. The victim may then deliberately choose not to use it until he, she or it seeks to set aside the determination. In that event the award would not really have been obtained by fraud at all and the victim will not be able to set it aside.