The Court of Appeal recently delivered its much anticipated decision in the important case of Clark v In Focus Asset Management & Tax Solutions (2014), precluding complainants who had previously accepted and been paid the statutory maximum award (GBP 100,000 at the time, currently GBP 150,000) made by the Financial Ombudsman Service (“FOS”), to pursue legal proceedings to obtain the balance of what they allege is their full loss.

The FOS Scheme

The FOS provides a free and independent dispute resolution service for customers complaining against FSA-regulated firms. 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.

The FOS is required to determine complaints by reference to what is, in its opinion, “ fair and reasonable” (Section 228, Financial Services and Markets Act 2000 (“FSMA”)) in all the circumstances of the case. In considering what is fair and reasonable, 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 a 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 GBP 150,000 (prior to 1 January 2012 the limit was GBP 100,000) or can recommend a sum in excess of the maximum limit.

While legislation provides the FOS with the authority to award compensation to consumers, the legislation does not provide for whether the consumer can pursue legal proceedings after accepting the award.

The facts

Mr and 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 and 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 GBP 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 should have been in, although FOS could not direct In Focus to pay any more than GBP 100,000. The decision stated that the Clarks “may not be able to enforce a greater amount [than GBP 100,000] in the courts. A court would make its own decision of whether to award the recommended greater amount above GBP 100,000. However, I would recommend that [In Focus] pays the full amount in full and final settlement of this complaint”. In Focus offered GBP 100,000 in settlement, which the Clarks rejected.

The FOS then issued their 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 GBP 100,000, which were then paid into their bank account.

First instance

In June 2010, Mr and 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 GBP 100,000 already paid.

In Focus applied to strike out the claim on the basis that Mr and Mrs Clark had accepted the FOS determination and the GBP 100,000 payment in full and final settlement. Further, 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 excess of GBP 400,000 following a transfer from an employee pension scheme to a personal pension scheme. FOS upheld the complaint and awarded the maximum award of GBP 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.

High Court

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.

In December 2012, Cranston J, found that they were, reversing the first instance decision. 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, of action 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.

Merger and res judicata

While the case had previously been argued in respect  of the principle of merger, the parties argued the appeal based upon the requirements of res judicata. Lady Justice Arden, giving the principal judgment of the Court of Appeal in Clark, summarised the common law doctrines as precluding “a person who has obtained a decision from one court or tribunal from bringing a claim before another court or tribunal for the same complaint”.

The effect of merger is that it precludes a claimant from bringing “a second set of proceedings to enforce his cause of action even if the first tribunal awarded him less than he was entitled to”. Diplock LJ in Letang & Cooper [1965] 1 QB 232 referred to the term “cause of action” as being used to “describe the various categories of factual situations which entitle[d] one person to  obtain from the court a remedy against another”. As such, when a court or tribunal hands down a judgment, the cause of action is extinguished.

Res judicata means that “a court or tribunal has already adjudicated on the matter and precludes a party from bringing another set of proceedingsand applies in two instances, either when “an issue has already been decided or because a cause of action has already been decided”. The latter of the two is known as “cause of action estoppel” and in order to apply must satisfy a number of requirements which were recently set out in R(o/a Coke-Wallis) v Institute of Chartered Accountants in England and Wales [2011] 2AC146) and are as follows:

(i) the decision, whether domestic or foreign, was judicial in the relevant sense; (ii) it was in fact pronounced; (iii) the tribunal had jurisdiction over the parties and the subject matter; (iv) the decision was – (a) final; (b) on the merits; (v) it determined a question raised in the later litigation; and (vi) the parties are the same or their privies, or the earlier decision was in rem.” (Spencer Bower & Handley, Res judicata, 4th ed)

The parties in the appeal disputed the requirements of (i) and (v).

Court of Appeal

Lady Justice Arden rejected the analysis by Cranston J, finding that the allied doctrine of res judicata would apply to prevent further proceedings, provided that the FOS had decided a question posed by facts constituting a cause of action. While the FOS does not decide whether the facts amount to a cause of action and resolves the dispute based upon what is fair and reasonable, the Court found that such reasons did not act as a bar to the application of res judicata, noting that “a complaint may consist of or include facts which constitute a cause of action…that is enough to show that a complaint may be, or include, a cause of action”. Lady Justice Arden was satisfied that the ombudsman’s award consituted a judicial decision for the purposes of the requirements of res judicata. As the Court found that res judicata may be available, that there was no reason to consider whether merger was available.

The Court also found that Parliament had not, in FSMA (under which the FOS scheme is established), manifested any clear intention that the doctrine of res judicata should not apply in this way to FOS complainants.

The Court therefore concluded that a complainant to the FOS who accepts an award in his favour may not bring further proceedings in the courts to claim additional compensation if the defendant can show that the complaint determined by the FOS was in substance based on the same set of facts as constitutes the cause of action relied upon in the subsequent proceedings. If a party wishes to obtain more than the FOS awards, they should reject the award and commence the civil litigation process.

Lady Justice Black highlighted that “if he rejects it, his right  to bring proceedings in the courts is untrammelled. If he takes it, he has benefited from a practical scheme which he has been able to sue without risk of costs”. Importantly, the Court expressly stated that the analysis applies even where the FOS has awarded less than the statutory maximum award, and regardless of any attempt by either a complainant or the FOS to preserve a right for the complainant to bring court proceedings (such as the attempt which was made by the Clarks, when writing to accept the FOS award made in their case, to make it a condition of that acceptance that they remained free to bring court proceedings).

Lady Justice Arden highlighted that there “will be occasions when a complainant may bring court proceedings against an adviser even though he has accepted an award to which section 228(5) applies”. Although, whether the complainant can bring proceedings will depend upon the cause of action upon which the proceedings are based. Lady Justice Arden noted that “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”.

Conclusion

In a welcome development for the financial services industry, the Court of Appeal’s decision finally clarifies  the issue as to whether parties who have accepted the maximum award from FOS can bring a claim for damages for the balance of their loss. Prior to the judgment being delivered, concerns had been raised for financial advisers and their insurers about a loss of finality in the FOS procedure and the prospect of litigants using a FOS award as a “fighting fund” to pursue litigation.

Lady Arden highlighted a remaining element of risk for financial advisers, as complainants could pursue legal proceedings even after accepting an award made by the ombudsman, but only if the cause of action which comes before the court is different to that was before the FOS. Such situations would be extremely rare.

Further, according to the FOS’ annual review for 2012/2013 only 0.5% 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.

The FOS has updated its online technical resource providing guidance to consumers seeking compensation. In response to the Question “Can the consumer accept our decision and take the financial business to court for the balance?” it now states:

There has been legal action in the courts to clarify the position about whether a consumer who has accepted our decision can then go on to pursue the business for further compensation. It seems very unlikely that a consumer could do so. However, whether or not we uphold their complaint, the consumer may wish to consider getting their own independent legal advice before deciding whether they would be better off taking a financial business to court.”

It remains to be seen whether consumers will turn their backs on a FOS award in an attempt to obtain more compensation by way of litigation, but what is clear after the Court of Appeal’s decision, is that if consumers do choose to litigate, they cannot use the FOS award to fund the litigation.

Francesca Morley