In Clark & Anr v In Focus Asset Management & Tax Solutions Ltd, the Court of Appeal overturned a controversial High Court decision on complaints to the Financial Ombudsman Service.
The Financial Ombudsman Service
At its most basic, the Financial Ombudsman (FOS) resolves disputes between consumers (Complainants) and financial services providers. The Financial Services and Markets Act 2000 (FSMA) states at section 228(5) that if a Complainant chooses to accept the determination of an ombudsman, that award is final and binding on both parties. It does not, however, expressly state that the parties are precluded from beginning legal proceedings after accepting an award from the ombudsman.
The Complainants, Mr and Mrs Clark, claimed they had lost more than £300,000 as a result of the negligent investment advice given by their former financial adviser, In Focus Asset Management & Tax Solutions Ltd (the Advisers). After receiving and accepting an award from the ombudsman for the then statutory maximum of £100,000, the Complainants pursued the balance of their claim by bringing legal proceedings in the Chichester County Court. The Advisers successfully pursued an order dismissing these County Court proceedings, arguing that the ‘final and binding’ wording of s.228(5) FSMA prevented the Complainants from bringing legal proceedings after accepting an award from the ombudsman.
The High Court Decision
The Complainants successfully appealed this order dismissing their proceedings, with Mr Justice Cranston finding that the ombudsman’s award of £100,000 was not a ‘final judgment’ but merely the end of the FOS process. This decision flew in the face of previous case law and the general understanding that the common law doctrine of merger applied to awards from the FOS, to preclude “a person who has obtained a final judgment in a tribunal of competent jurisdiction…from later recovering in court a second judgment for the same relief in respect of the same subject matter”. See our blog on this decision here. This decision was appealed to the Court of Appeal.
The Court of Appeal Decision
The Court of Appeal considered whether the common law doctrine of res judicata applied to awards of the FOS. Res judicata is similar to the doctrine of merger (considered by the High Court) in that both preclude 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 requirements for both doctrines vary, but the court stated that if the requirements for one were fulfilled, it was unnecessary to assess the other as well, and in this case res judicata was considered.
The Court was not concerned by the lack of explicit reference to the doctrine of res judicata, merger, or any similar wording in s.228(5) FSMA, stating that it applied because it was part of the common law against which Parliament legislated and it was therefore presumed that Parliament intended it to apply. It considered whether the decision of an ombudsman that is bound to make awards based on what it considered ‘fair and reasonable’, rather than the application of legal principles, could be a ‘court or tribunal’ for the purposes of res judicata. Lady Justice Arden stated that she did not find anything in the requirements for res judicata that meant it could only apply if legal principles were applied.
Finally the Court considered whether (i) complaints to the ombudsman; and (ii) causes of action relied on in subsequent proceedings, were the same – res judicata is intended to prevent claimants from having two bites of the same cherry. The Court concluded that a complaint to the FOS may consist of or include facts which constitute a cause of action. Therefore res judicata can only apply to the extent that an adviser can show that the Complainant relied on a complaint based on a set of facts, which constitute the same cause of action on which he relies in subsequent proceedings.
The Court of Appeal therefore overturned the controversial High Court decision and confirmed that complainants whose complaint to the FOS consists of or includes certain facts, may not accept that FOS award and then bring legal proceedings where those same facts constitute the cause of action. This is likely to preclude a large number of complainants who accept FOS awards from bringing subsequent legal proceedings, and therefore largely restores the pre-High Court decision status quo.
The rationale for the doctrines of merger and res judicata is to bring finality to proceedings and prevent the courts from being clogged up re-hearing the same disputes. They also offer some security to financial services providers that they will not face litigation twice on the same subject matter. This decision restores certainty to an area thrown into confusion by the High Court in 2012 and the potential for what was intended to be a quick and cost-effective dispute resolution process, becoming long and drawn-out, has been largely avoided. Professional indemnity insurers will breathe a sigh of relief as the ‘final’ nature of an FOS award has largely been restored, with complainants once again precluded from bringing legal proceedings on the same cause of action as their FOS complaint, after accepting a FOS award.