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Advisers – No More Double Claims From Clients?

James Denison,  from the Professional Risk team at national law firm Weightmans LLP, reports on a welcome court decision

 

On Friday 14 February 2014, the Court of Appeal handed down a welcome decision for financial advisers, ruling that they will not be pursued for damages in addition to compensation awarded by the Financial Ombudsman Service (“FOS”).

In the case of Clark & Anr v In Focus Asset Management & Tax Solutions Ltd, the Court of Appeal ruled that a complainant who accepts a favourable award of the FOS may not then start further proceedings in court to claim additional compensation for the same grievances under the common law doctrine of res judicata, which is not excluded by the relevant provisions of the Financial Services and Markets Act 2000 (“FSMA 2000”).

Res judicata will apply where the substance of the complaint to the FOS is the same as the cause of action on which the subsequent court proceedings are based. If the substance of the complaint is the same then the court proceedings will be struck out.

Background to the appeal

The scenario facing the Court of Appeal had previously been addressed in two conflicting judgments of the High Court: the decision of HHJ Pelling QC in Andrews v SBJ Benefit Consultants Ltd and the decision of Cranston J in Clark v In Focus Asset Management against which the IFA appealed.

The question they faced was this:

A complainant, A, successfully pursues a complaint to the FOS seeking redress from a firm, B, for losses in excess of the upper limit of the amount that FOS can award (currently £150,000 plus interest). The final decision of the FOS includes a recommendation that B pay the full redress amount, which exceeds the maximum enforceable award. A accepts the FOS decision and reserves the right to pursue court proceedings in respect of the difference between the enforceable award and the total alleged loss. B is automatically bound by A’s acceptance of the Final Decision, but B does not pay any amount over the maximum enforceable award. Can A then bring court proceedings for the difference?

The Court of Appeal heard not just from the parties themselves but also from the FOS itself, which intervened in the proceedings adopting a neutral approach to the issues to be determined.

All the judges on the case unanimously allowed the appeal. The leading judgment was delivered by Arden LJ who examined in detail not just the background to the appeal but also the statutory scheme, the “ambiguity” in the FSMA 2000 and the conflicting decisions of the High Court. The matters considered ranged wider than either of the High Court decisions. In her conclusion, Arden LJ stated:

Parliament did not manifest any intention that complainants to the Ombudsman Service should be in any different position from other claimants who have taken their claim for compensation through a tribunal for dispute resolution and obtained a decision, and then sought to litigate the same grievances again in the courts. They are not able to raise the same claims in court proceedings even if they could have recovered more in court proceedings. What they had to do to obtain this higher level of compensation was to reject the award and bring court proceedings for that amount.

She went on:

…..this means in future cases that, if and to the extent that the defendant can show that before the Ombudsman Service the claimant relied on a complaint which was in substance based on a set of facts which constitutes the cause of action on which he relies in his subsequent proceedings, and the ombudsman determined that complaint whether by reference to what is fair and reasonable or by reference only to legal principles (which he considered to be fair and reasonable to apply), then res judicata applies. It does not matter whether the award was for the maximum sum that can be awarded or for a lesser amount.

Accordingly the law, as determined by the Court of Appeal in this case, can now be set out quite simply.

The current position

If a complainant to the FOS accepts a favourable award she cannot then seek further compensation through the courts if the substance of the complaint to FOS and the cause of action she seeks to advance are the same. If they do then those proceedings can be struck out. The perceived unfairness to complainants was dealt with by Lady Justice Black who said:

Although there may, at first sight, appear to be an unfairness in preventing a claimant from taking legal proceedings to recover the balance of his loss over the award made by the ombudsman, it is important to remember that the claimant himself holds many of the cards. He can consider the award issued by the ombudsman and any recommendation that the ombudsman makes for additional compensation and, with the benefit of that independent evaluation of his claim, decide whether to take the award or to reject it. 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 use without risk of costs.

This decision has brought clarity and certainty to what had become a problematic area and will be welcomed by the financial services industry. It also provides those advising parties to such disputes, whether complainants or respondents, now have an authoritative decision upon which to base their advice.

James Denison is an associate in the Professional Risk team at national law firm Weightmans LLP

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