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Second bite of the cherry: Loophole means clients can sue advisers after FOS award

Lawyers are warning advisers remain vulnerable to consumers accepting a Financial Ombudsman Service award and then suing for more redress in court, despite a Court of Appeal ruling which held they cannot do so.

Money Marketing can reveal a loophole in the legislation because the ruling applies to ombudsman decisions only and not those made by an adjudicator.

In February, the Court of Appeal ruled a complainant cannot accept redress from the FOS and then pursue the firm in court for additional redress over the same complaint.

The case centred on advice given by In Focus Asset Management & Tax Solutions to clients Barry and Julie Clark, who accepted the FOS’s maximum award of £100,000 (now £150,000 for cases brought after 1 January 2012) and attempted to sue for the balance of their loss in court.

The FOS can recommend a firm pay more in redress than its maximum award but cannot enforce it.

The Clarks complained to the FOS in 2008 that unsuitable advice to invest the proceeds of the sale of a family business in a geared traded endowment plan led to losses of £500,000. The case was initially rejected by a county court judge but the Clarks won on appeal in the High Court, before the decision was overturned by the Court of Appeal.

Risk of further redress

But lawyers warn despite the ruling, firms are still susceptible to further litigation if the case is settled at adjudicator rather than ombudsman level.

Under the Financial Services and Markets Act, if a consumer accepts an ombudsman’s final decision it is binding on both sides. But this does not apply to adjudicator decisions.

A FOS spokesman says if an adjudicator recommends a firm pay compensation of more than £150,000, the decision is binding only if the firm pays the full amount. If it pays only £150,000, the complainant can sue in court for the rest.

The spokesman says: “Adjudicator decisions are an informal resolution and the first stage of the process, so a settlement is only final if firms pay the full amount we recommend.”

DWF Fishburns partner Harriet Quiney says her firm has dealt with several adjudicator decisions of this nature in recent months. She says: “The problem is advisers may have been lulled into a false sense of security by the Clark v In Focus decision and may mistakenly believe it applies to adjudicator decisions.

“To ensure adjudicator decisions are truly final we have had to draw up separate binding settlement agreements to be signed by both parties.”

One adjudicator decision, seen by Money Marketing, says: “It is unlikely that a consumer who accepts an ombudsman’s decision is able to go to court and ask for further compensation in excess of the award made by the ombudsman.

“If this case is settled earlier and the compensation comes to more than £150,000, the business can do one of two things: it can pay the full amount in full and final settlement of the claim; or it can limit the payment to £150,000 but that will not be treated as full and final settlement and it would not prevent a court considering whether to award more.”

Adviser awareness

Lawyers say although cases of this nature are rare – few awards are for more than the maximum limit and firms would usually escalate such a complaint to an ombudsman – firms need to be aware of the loophole.

In the financial year 2013/14, the FOS resolved a total of 518,778 cases, of which 0.5 per cent, or 2,594, related to compensation of more than £150,000.

Of the total cases, 94 per cent, or 487,749, were resolved by an adjudicator rather than an ombudsman.

Clarke Willmott partner Stephen Searle says: “The FSMA legislation on awards applies only to final decisions by an ombudsman so at the adjudicator stage there is in reality no £150,000 limit.

“But in practice, firms rarely accept adjudicators’ recommendations if they are likely to require redress of more than £150,000 because there is still the chance an ombudsman may reject the complaint.”

But he says: “That is not to say there is no issue here. There has been a lot of press coverage about how Clark v In Focus prevents consumers from suing in the courts for more than £150,000 and it is possible firms could mistakenly believe their liability will be capped if they settle at the adjudication stage.”

Highclere Financial Services partner Alan Lakey says without a doubt, advisers will have assumed the Court of Appeal ruling applies to both adjudicator and ombudsman decisions.

He says: “This is another disconcerting example of the lack of certainty in our industry, which makes it very difficult to run an advisory business. It shows the FOS and the law, which are supposed to work together, do not marry up. It is crucial firms are aware of the need to refer decisions of this nature to an ombudsman to create certainty over any future liabilities.”

Two options

Experts say firms which wish to accept an adjudicator decision in a case worth more than £150,000 without exposing themselves to the risk of further litigation in court have two options: refer the decision to an ombudsman or arrange a full and final settlement agreement through a lawyer.

4 Pump Court barrister Peter Hamilton says: “My advice to a firm would be: do not pay redress without getting an ombudsman decision.

“A settlement agreement through a lawyer would also prevent the consumer from suing through the courts but to ask a client to engage with lawyers in what is supposed to be a free dispute system is not necessarily in the client’s best interests.”

EXPERT VIEW: Harriet Quiney


In recent months my firm has dealt with several Financial Ombudsman Service cases where the adjudicator has recommended a payment of more than the maximum limit. And although, for various reasons, the firms have wanted to accept the decision, should they do so there is still a risk of the consumer suing for further redress in court.

In each decision, the adjudicator says in effect that if it is accepted by both parties, the Clark v In Focus judgment does not apply because it is an adjudicator decision
rather than one made by the ombudsman. As a result, the claimant could go to court for further redress.

So far, we have generally advised parties to enter a binding settlement agreement, which has to be drafted by lawyers. This ensures the settlement is final and the consumer cannot subsequently go to court.

The difficulty is the FOS is meant to be a free and readily accessible process for consumers. Claimants should not need legal representation. 

The other option is for the firm to ask for an ombudsman award, which it may be forced to do if the consumer refuses to sign a binding settlement.

This puts advisers in a difficult position because it is not treating the customer fairly to ask them to take legal advice. Nor is it fair to refer the decision to an ombudsman if it does not need to be because that wastes the customer’s time and FOS resources.

This is not what the FOS is for nor what it is about and there needs to be a solution to the problem because the situation is not fair on consumers or firms. 

A possible solution could be to have adjudicator decisions rubber-stamped by an ombudsman so that they qualify as ombudsman decisions in the application of
Clark v In Focus.

Harriet Quiney is a partner at DWF Fishburns

Adviser views


Peter Chadborn, Director, Plan Money

This may create a risk of treating the customer unfairly, particularly if the firm has taken legal advice but the consumer has not. But the reason consumers go to the FOS in the first place is because it is a free alternative to legal recourse. While complaints for such a large amount of redress are relatively rare, it is important that firms and consumers are aware of this.

Philip Milton, Managing director, Philip J Milton & Company


I completely disagree with the FOS’s viewpoint. Where in the legislation does it say that an adjudicator’s decision is different from an ombudsman’s decision? If a FOS adjudicator has made a decision which is accepted by both parties, I fail to see how that would be regarded as different from an ombudsman decision by the courts.


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There are 6 comments at the moment, we would love to hear your opinion too.

  1. To pick up on Peter Hamilton’s point, I have *always* advised firms when settling a FOS award (at whatever stage) to insist on the mechanics of offer letter and discharge form, with wording such as “full and final settlement” and “no admission of liability”. Many PI insurers also approach the matter in this way.

    The FOS do not like this approach, but the simple answer is that it is done at the behest of the insurers.

    On a lighter note, your firm would really need to have done something wrong to rollover at adjudication stage. Claims of these sizes are usually complex and beyond the skill set of the average adjudicator. The grown-up Ombudsman is more likely to understand matters, subject to the usual caveats.

  2. For integrity, the Ombudsman – in whatever guise, should ensure its awards reflect the law and case precedent – so should not touch upon anything other than the maximum award allowed by it too. There is no ‘need’ to mention anything above £150000 ever and it demonstrates an abject lack of integrity when this limit is abused too.

  3. Michael Winfield 24th August 2014 at 3:53 pm

    Is Master and Servant Law, being ignored.

    The Ombudsman in Law is the master, who in law is responsible for all but criminal acts of his Staff.

    An adjudicator is relies on the authority of the Master. Therefore in Law the Ombudsman is negligent if a servant acts Ultra-vires of authority.

    Otherwise the office junior could end up in the Civil Court.

    This is common in all English Law Systems.

  4. As with the sister blog, I’m afraid that this is a profound non-story.

    Firms faced with a suggestion from an adjudicator to settle simply have to say that the offer is made in full and final settlement of the complaint and the matters raised by it to achieve exactly the same outcome as an Ombudsman’s decision. If the adjudicator declines to transmit the offer, the firm just needs to insist on an Ombudsman’s decision to achieve the same outcome.

    By law, sections 228-229 FSMA, the Ombudsman is required to reach fair and reasonable decisions, not those mandated by other parts of the law. Parliament enacted this and has on two occasions declined to change it.

    There are no master/servant implications here since the firm always has the option of insisting on an Ombudsman’s decision. If the adjudicator refuses to transmit an offer in the appropriate form, the process takes care of the situation.

    Having said all this, the FCA can take enforcement action against a firm who declines to make a fair offer of redress under DISP 1.4.1R(2) and Principle 6, regardless of the award limit which does not apply to those provisions.

  5. Sadly too, those who offer compensation on the basis of an agreement signed by the complainant could well find a Court of law says that the agreement is null and void in that no-one can sign-away their appropriate and statutory rights to full compensation.

    Which adviser is prepared to accept that risk?

    I should still like to believe that the FOS, adjudicator or not, is all bound by the same premise and that a Court would consider it preposterous if the monkey thought his proposal was any less relevant under law than his employer, the organ grinder!

    I should like to see the FOS in all guises binding itself by the law and in integrity making awards within the statutory and proven limits only. ‘It’ might think it is God but I am unaware such powers have been granted to it. Even Courts are not bound by an FOS judgement which could be overturned when the better demands for ‘evidence’ exists. Wouldn’t that be justice in an FOS award which was inequitable!

  6. Contractually anon 26th August 2014 at 2:57 pm

    As I commented on a previous article, the series of events required for this ‘loophole’ to apply would be outrageous. Fortunately, I believe there have been minimal, if any, of this situations that have ever occurred. I note the article mentions that ‘several adjudicator decisions of this nature in recent months’. Can MM clarify if the law firm actually mean adjudications where the FOS have recommended more than £150,000 in redress and the firm believes that they are in the wrong but want to cap the redress at £150,000 because that is the FOS limit regardless of the loss suffered by the customer?

    This appears to be poor journalism designed to agitate people who don’t understand the processes. It would perhaps be more beneficial for the industry if agitation was directed towards firms that are not interested in redressing their mistakes.

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