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FOS loophole exposes contradictions


A warning from lawyers that consumers can still accept a Financial Ombudsman Service award and sue for more redress in court exposes some worrying contradictions in the system.

This week, Money Marketing reveals a Court of Appeal ruling in February which held that a complainant cannot accept redress from the FOS and pursue the firm in court for additional redress over the same complaint only applies to final decisions from the ombudsman, and not adjudicator decisions.

The maximum award the FOS can enforce is £150,000 – above that amount, it can only recommend the firm pays more.

And thanks to the Court of Appeal decision, if an ombudsman made a recommendation of £200,000 redress, the firm would only need to pay £150,000 and could not be pursued for more.

But if the same complaint was resolved at an earlier stage – at adjudicator level – and the firm paid £150,000, the consumer could claim for the additional £50,000 in court.

The FOS’ explanation for this discrepancy is that an adjudicator decision is “an informal resolution and the first stage of the process”. Complainants receive an adjudicator decision first, and if it is rejected by at least one party it goes to an ombudsman.

Hill Dickinson partner Sarah Naylor explains: “The Court of Appeal had to consider whether FOS was a judicial body and the FOS award was a judicial decision for the requirements of the legal principle of res judicata.

“Although the adjudicator’s decision is part of the FOS process it is not an award as such – and this is where the loophole comes from.”

But adjudicator decisions account for the vast majority of FOS rulings. In 2013/14, 94 per cent of FOS decisions – 487,749 out of a total of 518,778 – were decided by an adjudicator and not an ombudsman.

So for adjudicator decisions not to qualify as FOS awards in the application of the law seems bizarre.

Further to that, if only ombudsman rulings qualify as a ‘final’ decision, can they also legitimately function as an appeals process to a decision?

Highclere Financial Services partner Alan Lakey says: “When I have queried the lack of an appeals process with the FOS before, they have told me that escalating the complaint to an ombudsman is an appeals process. That does not sit well with what the FOS is saying now.”

If an ombudsman decision is considered an appeal, surely the decision which precedes it must be a FOS decision in its own right.

The issue also confuses how much the FOS can award in compensation.

A FOS spokesman says there has been a “perception” in the industry that it can only award £150,000. He says: “We can in fact award more, but firms are only liable to pay £150,000.”

This voluntary system for any redress over £150,000 is confusing enough in itself, but the Court of Appeal loophole means there is effectively no compulsory limit on adjudicator decisions.

It is nonsensical for different rules to apply to adjudicator and ombudsman decisions, and a solution must be found before a consumer exploits this loophole, which would surely be against the intentions of the Court of Appeal.

Tessa Norman is regulation reporter at Money Marketing


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Contractually anon 22nd August 2014 at 8:48 am

    Maybe I haven’t had enough coffee to get my head round this. It seems to me that the timeline of events before the loophole could be argued to be detrimental in building industry and customer trust. Please correct me if I’m wrong but the events would have to be as follows:
    – The customer has complained to a firm that their actions have caused substantial losses in excess of £150,000.
    – The complaint gets nowhere with the firm so the customer goes to FOS.
    – The FOS adjudicates and determines that the firms’ actions have caused substantial losses in excess of £150,000, recommending that higher than £150,000 is paid.
    -The firm decides that they now agree that they have caused their customer substantial losses, and pay out, but only up to £150,000 because FOS powers do not extend beyond this.

    Does anyone know how many cases there have been and over what timeline line? Also if these cases can be broken down into advisors, banks and insurers. That would be useful to know before there is a mass call for a change in law.

    Personally, if the legal situation with adjudications is deemed to be such a problem (or the problem complained about in this article rather than the other problems that this could also demonstrate), then my view would be that it would be cheaper for the industry and more reasonable to raise the FOS limit than get rid of adjudications.

  2. This is a non-story.

    Clark v In Focus, the Court of Appeal decision concerned, (please don’t comment on it unless you’ve read it) decides a very simply point, namely that a decision of FOS once accepted by the Complainant binds the Complainant and firm and prevents the former from bringing any court case based on the same allegations. It decides nothing to do with settlement agreements negotiated by FOS which clearly are not covered by the decision. Clark v. In Focus is based essentially on the notion that an Ombudsman’s decision has the effect of a judgement of the ordinary court system.

    Neither FOS nor the Court of Appeal has decided anything about settlement agreements and if a firm insists on them being based on a proper discharge, namely that they are in full and final settlement of the complaint or of any dispute arising out of or relating to the sale, that is more than adequate to achieve the same effect as Clark v. In Focus provides for Ombudsman decisions. If an adjudicator insists on a different discharge, the firm can simply insist on an Ombudsman’s decision and explain to the adjudicator that this will produce the same effect as a discharge.

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