On 4 November 2010, the High Court decided that once a complainant had accepted a final decision by the FOS, the complainant could not sue in a court to recover further recompense for any losses suffered in respect of the financial transaction which was the subject of the complaint. The case was Andrews v. SBJ Benefit Consultants.
Then two years later, on 19 December 2012, a different judge in the High Court reached the opposite conclusion in a case called Clark and Clark v. In Focus Asset Management.
So what are we to make of the fact that two High Court judgments have reached inconsistent conclusions?
Primarily, it is a problem for complainants and their advisers; but it does concern firms subject to the FOS jurisdiction because they need to know the limits of their exposure in complaints going to the FOS.
The legal question was (and is) how to interpret the words from the Financial Services and Markets Act 2000: “If the complainant notifies the ombudsman that he accepts the determination, it is binding on the respondent [ie, the firm] and the complainant, and final”.
The maximum that the FOS can award is now £150,000. But the Act goes on to say that the ombudsman can “recommend” that the firm against whom the award is made should pay more if he considers that “fair compensation requires the payment of a larger amount”.
Even before the Andrews case, a perfectly respectable interpretation of the above words that an accepted award was final and binding, was that they meant what they said, which was that the complainant had to stick with his or her decision to take the money awarded and accept that it was unlikely, especially in the current financial climate, that the firm would voluntarily pay the balance between the maximum and the figure which represented the so-called “fair compensation”.
On that interpretation, the complainant could not then seek to recover the balance in a court. Thus, if the compensation was likely to be well in excess of the maximum, the advice would usually have been not to bother with a complaint to the FOS, but to institute proceedings in court straightaway.
Equally, if the figure for the “fair compensation” was likely to be only slightly over the maximum, given that a complaint to the FOS is free to the complainant, and that procedure is relatively simple and that if there is any merit in the complaint, the FOS is likely to find for the complainant, the advice would be to go to the FOS and not the courts.
But there would be many cases in between those extremes: what should the complainants in those cases do?
In the Andrews case, Mr Andrews had been wrongly advised to transfer his pension from his employer’s scheme to a personal pension. The firm accepted that the advice was wrong. The issue was how to calculate the compensation.
The necessary sum required to put him back in the financial position he would have been in if the transfer had not taken place was reckoned to be over £400,000. At that time the maximum the FOS could award was £100,000. Nevertheless, Mr Andrews took his complaint to the FOS.
In due course, the ombudsman directed the firm to calculate the loss in accordance with the FSA guidelines, and added that if the amount so calculated exceeded £100,000, he recommended that the firm should pay the balance.
Mr Andrews accepted the award, so it became binding on him and the firm and was final. The firm did not follow the recommendation to pay the balance, with the result that Mr Andrews began court proceedings in order to claim it.
The court considered as a preliminary issue whether such claim as Mr Andrews had, had been extinguished by the FOS award. That would be the result of applying a well-established legal principle that a person who has obtained a final judgment in a tribunal with appropriate powers and jurisdiction is precluded from later recovering in court a second judgment in respect of the same matter.
This principle is known as the doctrine of merger, and is a sensible one which seeks to prevent the relitigation of the same issues.
Since Mr Andrews was claiming damages in respect of the same advice, the judge had no doubt that he was seeking a second judgment in respect of the same matter. In a careful judgment, the judge held that doctrine of merger did apply, and so after Mr Andrews’ acceptance of the FOS award, his right to sue in respect of the same issues had been extinguished. His claim was dismissed.
In the Clark case, the claimants said they were given inappropriate advice by the defendant and had suffered losses of over £500,000. The claimants took the matter to the FOS two years before the decision in the Andrews case. The ombudsman issued his final decision in January 2010 – again, well before the Andrews case was decided.
In his decision, the ombudsman directed the firm to calculate the compensation in accordance with a formula, and that if that produced a sum greater that the £100,000 maximum that the FOS could award, he recommended that the firm pay the balance. He went on to warn the claimants that they might not be able to recover the balance in the courts and that if they accepted the award, they “would be bound by the decision, which will be final”.
When they accepted the award, the claimants added a rider to the acceptance form in capital letters: “WE RESERVE THE RIGHT TO PURSUE THE MATTER FURTHER THROUGH THE CIVIL COURT”.
The firm paid the £100,000 but declined to accept the recommendation, so the Clarks began proceedings in the High Court. The firm applied to have the claim struck out, relying on the judgment in the Andrews case, which had by that time been delivered.
In due course the matter was heard by a different judge. He acknowledged that the earlier judge had considered the issues with “care and cogency”, but disagreed with the conclusion. Judges in the High Court treat judgments by other judges sitting at the same level with respect but are not bound by them, so he was entitled to disagree.
The legal point at the heart of both cases will have to be settled by the Court of Appeal. The firm in the Clark case has applied for permission to appeal, so the doubt as to which judgment is correct could be resolved in the foreseeable future.
One important point to be dealt with by the judge in the Clark case was that, even if the Andrews decision was correct, the attempt by the Clarks to reserve their right to sue for the balance was ineffective, and so would not prevent the doctrine of merger from operating to extinguish the right to sue.
In my view, however, I think the judgment in the Andrews case is likely to be preferred by the Court of Appeal. Time will tell.
In the meantime, complainants seeking to recover more than the maximum which the FOS can award, should think very carefully before accepting a FOS award.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk