Those celebrating the common sense decision of the Court of Appeal in Clark v In Focuswill have an additional reason to smile when they read comments in the leading judgment of Lady Justice Arden on the purpose of FOS and the role of CMCs.
Arden LJ's judgment recognises that consumers' best interests are not served by allowing them to 'top-up' FOS awards in court. She explains the Court's position carefully at paragraph 102 of her judgment:
"It is true that, if the Clarks succeed, so that any complainant can first use the Ombudsman Service procedure and then start court proceedings, a complainant may be able to use an award as a fighting fund for legal proceedings. On the face of it this result would be for consumers‘ interests, but that is not necessarily so. If they lose court proceedings, it may lead them to losing all that they have gained through the Ombudsman Service."
Arden LJ warns in the same paragraph that allowing the Clarks to succeed "may also lead to the development of a claims industry in this field that increases the costs of obtaining financial advice: there are already 210 ombudsmen and many more might be needed if a larger group of complainants can apply." The clear implication is that 'topping-up' risks creating (or expanding) a self-funding litigation industry set against financial firms operating not for the benefit of consumers but for the CMCs themselves.
Arden LJ's judgment emphasises the FOS's social function in providing quick and effective resolution of disputes rather than as a consumer champion. At paragraph 101 of her judgment Arden LJ disagreed with the Clarks' counsel that the legislation governing FOS should be purposively interpreted to protect consumers. Instead, at paragraph 45 Arden LJ is clear on FOS's purpose as: "[a]n efficient system of resolving disputes, like tort law, [that] is likely to raise standards among the industry….[by] alleviating the needs of investors in these circumstances and meeting the valuable social function of efficient dispute resolution." This is a vision which firms will undoubtedly support.
No need to plead
It is FOS's ability to provide fast and inexpensive dispute resolution that is welcomed by firms and is the reason why some firms are willing to submit voluntarily to FOS' jurisdiction where they are not required to do so. CMCs threaten this core function of swift and effective justice by converting complaints, approached fairly by firms conscious of their TCF obligations, into contentious disputes which increasingly threaten to develop into full litigation.
Firms in this unfair situation should be reassured that their regulators are at least aware of the problem, even if their advice for firms is limited. The Claims Management Regulator, the FCA, the FOS and the FSCS released a joint note on 'Claims Management Companies and Financial Services Complaints' this month.
The note warns consumers clearly that there "is no need to use a CMC" and that consumers who complain themselves "will keep any compensation [they] received without any fees being deducted." The guide provides details about when consumers are likely to be expected to pay fees to CMCs and some basic 'dos' and 'don'ts' when dealing with them. The guide also provides an illustration of the costs for a consumer in an illustrative example where CMC fees are 30% of a consumer's award along with the stark warning that "[i]n some cases a CMC's fee could be higher than the compensation received." The note is emphatic that "financial firms should investigate [consumers'] complaints fully, whether or not a CMC is involved. The CMC cannot increase [consumers'] compensation or speed up how quickly [consumers'] complaints will be looked at by the ombudsman service or FSCS." These comments are another strong indication that CMCs are worse than the original advisers against whom the complaints are made. At least the advisers caused their clients losses only inadvertently, while the CMCs are deliberately taking 'money for nothing' – a true misselling scandal.
The note provides very little assistance to firms being targeted by CMCs, commenting, apparently without irony, that "[a]necdotal evidence suggests that CMCs and firms do not always work collaboratively". It also comments, frustratingly, that while the "ombudsman service has the power to dismiss complaints which are considered to be ‘frivolous or vexatious’, … in practice they find such cases to be relatively rare." However, there are some points of advice for firms:
- Firms should ensure that CMCs have a valid letter explaining that they are authorised to represent their clients and the exact nature of the authority they have been granted.
- Firms need not treat Data Subject Access Requests as starting the complaints process.
- If a firm believes that it is being unfairly targeted by CMCs it is advised to inform the Claims Management Regulator so that it can prioritise enforcement action if appropriate.
Frustrated by the limited options available to firms to tackle CMCs, the Association of Professional Financial Advisers (APFA) has launched a campaign so that CMCs have to pay a non-refundable fee to FOS similar to that paid by firms. While the note says that firms cannot try to recover their case fee against unsuccessful CMCs there is nothing that would prevent a rule allowing CMCs to be charged a case fee direct. We will follow APFA's campaign with interest.
However, the solutions for firms targeted by CMCs remain relatively limited and we hope that the regulators return to the pressing issue of CMC regulation in light of the Court of Appeal's clear warning about their social ills.