The High Court has finally confirmed our expectation that Financial Ombudsman Service (FOS) award limits cannot be sidestepped by a separate court action (see our June 2006 Legal Update here). This judgment has brought clarity to an issue which has previously been untested in the courts by confirming that claimants who accept a final determination from the FOS will be bound by it and cannot then bring a civil claim in relation to the same matter through the courts for any amounts above the maximum award limit (currently £100k but likely to rise to £150k in 2012).
In the case of Andrews v SBJ Benefit Consultants, the claimant suffered loss by transferring his pension into a personal scheme on the advice of his financial advisor, SBJ. The firm admitted liability for negligent mis-selling and agreed to pay compensation but the parties could not agree on the amount. Mr Andrews therefore submitted a complaint to the FOS which awarded him £100k, the current upper limit under its jurisdiction. SBJ were also issued a non-binding recommendation that the firm should consider paying Mr Andrews the loss over and above the £100k. Mr Andrews accepted the award despite being informed that, by accepting it, he may be precluded from bringing court proceedings. SBJ then decided not to comply with the recommendation, which prompted Mr Andrews to issue proceedings for the balance under section 150 FSMA 2000.
The High Court held that Mr Andrews was not entitled to bring two claims to recover losses arising out of the same facts. It was irrelevant that the formulation of the claim was as a breach of statutory duty rather than a claim in negligence. The causes of action had ‘merged’. Contrary to the claimant’s arguments, the ‘merger doctrine’ applied to FOS awards as it is a ‘tribunal’ and its awards, if accepted by the complainant, are enforceable as ‘judgments’.
The impact of the judgment is significant for the increasing number of claims exceeding £100k. In such cases, complainants must consider whether to accept an FOS award subject to the £100k limit, or to reject the award and pursue a civil court claim with the intention of making a full recovery of losses. It will not prevent canny complainants using the FOS as a ‘stalking horse’ to test their case against a firm for free. Mindful of their TCF obligations and concerned about their regulatory reputations, many firms are likely to pay compensation above £100k in accordance with an FOS recommendation. Their insurers’ prior approval should be sought before incurring such an unenforceable, non-legal liability.
Although the FSA is set to increase the FOS’s award limit to £150k from January 2012, this decision demonstrates the wide acceptance that the FOS is not intended to deal with high value claims. Firms and their insurers may be asking themselves where the line is drawn between high value court claims and low value FOS matters. The new limit will allow FOS to deal informally with what in every other sphere would be a substantial piece of high court litigation.
The FOS award limit will increase from £100k to £150k, effective for any complaint referred to FOS on or after 1 January 2012. In recognition of recent case law1, the limit will apply to the costs of complying with any non-monetary award. The limit has remained unchanged since the FOS was created and the FSA believes there are good reasons to increase it, despite estimating that only 0.1% of cases resolved by FOS involve redress of more than £100k. Although some firms will pay compensation in excess of £100k (either when responding to a complaint themselves or pursuant to a recommendation from FOS), this is not visible to consumers who cannot therefore decide to take their business to a firm prepared to pay higher compensation where due. Furthermore, the FSA has anecdotal evidence of firms denying redress to consumers with large potential claims in the knowledge that once the complaint is referred to FOS it is effectively capped at £100k. Whilst equipped with tools to deal with such firms found to be behaving in this way, the FSA believes an increased limit will reduce the incentive to do so.
Whilst larger firms may prefer to have matters resolved quickly and informally by the FOS, smaller firms will find the prospect of such high awards yet further disincentive to enter or remain in the regulated sector. Those familiar with High Court litigation will know that a case is allocated to the (highest) ‘Multi Track’ if it is for £25k or over. It is now anticipated that cases six times that size will be resolved by the quasi-judicial processes of the FOS. The FSA estimates in the consultation paper that the cost of legal services for a consumer to bring a case involving compensation of about £150k in the High Court might be in the range of £125k to £175k depending on the complexity of the case and the number of professionals and expert witnesses involved. Although this raises questions about access to justice and is therefore used as justification for increasing the FOS limit, it tends also to confirm the significance with which such matters are handled by the courts and the expense required to resolve what, but for the FOS, is treated as complex commercial litigation. Although FOS is free to complainants, these larger complaints will be even more expensive for firms.
There are well-known examples of rules and approaches adopted by FOS which differ significantly from the general law. The FOS has no 15 year long stop limitation rule and, indeed, is not even bound to reach the same decision as a court would by applying the general law. The justification for the FOS and its peculiarities has always been that it is intended to be quick and informal – ‘cheap and cheerful’ – with firms protected by the capped compensation limit. Firms are entitled to ask whether the ‘cheap and cheerful’ FOS is appropriate for claims of this size.