• Financial services companies put at disadvantage as claimants allowed second bite of the cherry
  • Consumers warned court costs could eat up compensation

Consumers are being encouraged by the Financial Ombudsman Service (FOS) and claims management companies or lawyers to preserve their ability to sue financial services firms even after they have secured the maximum £150,000 they can secure through the FOS, says City law firm RPC. This is despite the Court of Appeal having ostensibly closed this “loophole” in February of this year.

RPC says that FOS settlement documents are being worded so as to leave the way open for consumers who have already accepted the statutory maximum amount available for claims pursued through the FOS to subsequently bring a civil claim through the courts to sue for additional losses as well.

Under the original rules for the FOS, set up more than 10 years ago, customers were supposed to use either the FOS or the courts to get redress from financial services firms – but not both. However, a controversial High Court case opened the way for consumers to claim twice – it was this loophole that the industry thought was finally closed by the Court of Appeal.

RPC explains that the Court of Appeal’s ruling (Clark v In Focus) meant that if consumers accept an award made by the Ombudsman, it is final and binding upon them. They are therefore not able to sue financial services firms in court for the balance of their claim if it exceeds that limit.

However, before a complaint can go before an Ombudsman, it will first be reviewed by an adjudicator. It is being argued that if the adjudicator recommends a settlement figure which is accepted by both sides, this does not automatically make it final and binding, because it is not a formal “award” made by the Ombudsman himself.

Comments Simon Laird, Partner at RPC; “Following the recent Court of Appeal decision, we hoped in vain that that would be the final word on the issue. But, as the Court closed one loophole, another has been created, with the support of the FOS.”

“While awards made by the Ombudsman clearly cannot be ‘topped up’ through the courts, the position is less clear for compensation agreed at the recommendation of the adjudicator. The FOS is making this distinction very clear in its settlement wording. Effectively claimants can still get two bites at the cherry.”

“Consumers need to be aware that there could be significant risks in taking cases all the way to court. This is something that claims lawyers may be keen to promote, but fighting the claim in court could mean that all the compensation they have been awarded in adjudication gets eaten up in court costs.”

“It is vital that financial services firms think carefully when settling complaints at the adjudication stage and take steps to protect themselves from further action.”

RPC explains that there are two options that financial services firms can take, but warns that both have potential pitfalls:

  • Firms could reject the adjudicator’s recommendation to pay the statutory maximum award (even if they wish to accept it), so that it has to be reviewed by the Ombudsman.

However, RPC says some businesses may see this as too high a price to pay, since this would result in the adverse publicity of having the FOS decision published, as well as creating heightened obligations to take the decision into account in the handling of other complaints. “This is also far from ideal from the point of view of creating an unhelpful drain on the Ombudsman’s resources,” adds Simon Laird.

  • Alternatively firms should ensure that any settlement reached at the adjudicator stage is documented in a properly drafted settlement agreement, making clear that it is full and final.

RPC warns that firms must ensure that any such agreement does not contradict anything the adjudicator has put in place.

Says Simon Laird: “The FOS adjudicator will be keen to preserve the complainants’ rights, and may take some persuading to agree to this approach. However, as long as it doesn’t undermine or go against anything the adjudicator has laid down and both parties agree, the adjudicator must accept a full and final settlement.”