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Peter Hamilton: Closure for advisers on FOS complaints

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The Court of Appeal has recently settled a disagreement between two High Court judges over whether a complainant to the Financial Ombudsman Service is able to take legal proceedings after accepting an award under the FOS scheme.

The purpose of taking those proceedings is to top up the amount awarded by the FOS, the usual situation being that the consumer has lost more than the maximum amount which the FOS has jurisdiction to award and seeks to recover the excess in the court proceedings. 

The Court of Appeal has said that, subject to possible exceptions, no one can legally have two bites at the same cherry and therefore it is not permissible to seek to recover the excess in court.

The first case was Andrews vs SBJ Benefit Consultants, which was decided in November 2010. The claimant had been wrongly advised to shift his pension from his employer’s scheme to a personal pension and the losses had been provisionally quantified at over £400,000.

At that stage, the maximum amount which could be awarded by the FOS was £100,000. The claimant was awarded that amount by the FOS and he then sued in court for the balance.

The judge applied the common law doctrine of merger and dismissed the claim. He described the doctrine of merger as “the principle that a person in whose favour a tribunal of competent jurisdiction has provided a final judgment is precluded from afterwards recovering from any other English tribunal a second judgment for the same relief in respect of the same subject matter”.

The legal theory behind this doctrine involves the following steps:

  • A cause of action is the right of a person to sue another on the facts of the case and to recover some remedy from the court. Thus the innocent passenger in a car who is injured in an accident caused by the negligence of the driver has a cause of action against the driver. Thus too, a customer who is missold a financial investment by his adviser and suffers a loss as a result has a cause of action against the adviser.
  • When a court hears and decides a case, if the claimant succeeds, his cause of action is merged into the judgment.
  • That merger means that the cause of action disappears and the claimant is left with nothing to enforce other than the judgment.

There are two public interest justifications for the doctrine. The first is the need of society in general to ensure that all disputes are brought to a final conclusion. The second is the need to protect the private interest of the defendant by ensuring that nobody is vexed twice with litigation on the same subject.

To apply this doctrine, the judge followed established judgments and decided that the FOS is a judicial tribunal for the purposes of the doctrine.

It followed that when the customer in that case received an award from the FOS based on the facts which were considered, once he got the award, his cause of action disappeared and was merged into the award itself. 

So when the customer tried to sue the adviser for the balance of his loss beyond the maximum amount which the FOS has power to award, the court found that his cause of action had disappeared and he had nothing to enforce except the ombudsman’s award. The action was therefore struck out.

The second case was called Clark & Clark vs In Focus Asset Management. Mr and Mrs Clark lost more than £300,000 through the negligent advice of the firm. They were awarded £100,000 and the ombudsman recommended that the firm should pay the balance. The Clarks accepted the award subject to their right to claim the balance in court proceedings. The firm refused to follow the recommendation and so the Clarks sued. 

The legal argument took a different direction. The judge disagreed that the doctrine of merger was applicable and allowed the case to proceed in court. The adviser firm appealed.

In the Court of Appeal, it was decided that the doctrine known to lawyers as res judicata applied. Essentially that means a party cannot sue again where:

  • The first decision was a judicial one
  • It was in fact pronounced
  • It was a final one and on the merits
  • It decided the issue in question in the later proceedings
  • And the same parties were involved.

The same two public interests were engaged, namely that society needs there to be a conclusion to all litigation and nobody should be vexed twice in litigation over the same issues. 

In the Court of Appeal, Lady Justice Arden said: “If the requirements of res judicata are fulfilled, they constitute an absolute bar and the court has no discretion to hold that res judicata should not apply in any particular case.” 

She added: “If the requirements of merger are satisfied, it is unnecessary to see if the requirements of res judicata were fulfilled, and vice versa.” 

The two doctrines are closely related.

The Court of Appeal held that the requirements of res judicata were fulfilled.

A previous decision of the Court of Appeal (supported by the European Court of Human Rights) had held that the FOS was a judicial tribunal, the award had been pronounced and it was on the merits. It decided the same question which was to be decided in the court action. 

It followed, therefore, that the Clarks were not able to sue in court to recover the balance.

The general conclusion is that a complainant who accepts an award from the FOS is not able then to sue on the same facts again in court.

The Court of Appeal did consider briefly whether there were likely to be exceptions to this general rule. There could be an exception if the complaint to the FOS and the subsequent court action did not involve the same facts or issues. But that would be unusual.

A further question has now surfaced: can the FOS sub-divide a complaint so that the maximum amount recoverable on each part is no more than £150,000? 

The short answer is that it all depends on the facts of the case. There will be some cases in which the complainant has made two entirely separate complaints against the same firm in the same complaint form. Such a situation should not be difficult to identify or deal with. The complainant should have made two separate complaints and they should be dealt with separately.

On the other hand, it would not be right to try to divide what is essentially a single complaint about a specific event, simply to attempt to avoid the £150,000 limit. There are two reasons:

  • It is not possible to sub-divide a single ground of complaint to the FOS. The ground of complaint would not make sense, nor survive any such attempt
  • The maximum award has been fixed by the Financial Conduct Authority acting under FSMA s.229(6). FSMA s.229(5) says: “A money award may not exceed the monetary limit…” of £150,000. Neither the FOS nor the courts would permit an attempt to bypass the limit by any such stratagem.

Thus, the ombudsman has power to award up to the limit but no more. It would be acting outside its legal powers if it were to attempt to do so.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Very interesting and extremely helpful.

    What would be interesting to hear, is whether, given the view that the FOS is viewed as a judicial tribunal, an adviser/firm can legally be afforded the same principles and protection as would be afforded by a Court?

    It does seem that the absence of a long-stop for claims against individuals and also individuals who were directors of authorised firms, even when they have exited the industry, seems to be somewhat at odds with the judicial process. So which is it please (anyone?).

  2. @ Steve D

    Certain courts can and have developed principles which they apply and Peter’s article is a good example of this. However, generally speaking courts do not, of themselves, provide any protections but simply apply the law. The Government can write any law, including one that overrides generally accepted principles and earlier laws. FSMA purports to give such powers to the FOS in respect of the long stop.

    As such, however unpalatable, there is no conflict as you suggest.

  3. Thanks Grey Area, that is helpful and does clarify the rationale (unpalatable though such a position is).

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