Last week’s landmark Court of Appeal ruling finally brings clarity to the issue of whether a consumer can accept a Financial Ombudsman Service award and sue in court for additional redress.
In a judgment handed down Friday morning at the Royal Courts of Justice in London, the court found that a complainant cannot accept redress from the FOS and pursue the firm in court for further redress over the same complaint.
For consumers this means they have a clear-cut choice: they can either accept an award from the FOS, or reject it and bring proceedings in the courts.
And for advisers, it means greater certainty on the extent of their liability for claims.
The case centered around advice given by In Focus Asset Management & Tax Solutions to clients Barry and Julie Clark.
The Clarks complained to the FOS in November 2008 that In Focus gave them unsuitable advice by recommending they invest the proceeds of the sale of a family business in a geared traded endowment plan, leading to losses of £500,000.
After accepting the maximum £100,000 award from the FOS (now £150,000 for cases brought after 1 January 2012), in June 2010 the Clarks issued proceedings against In Focus to recover the balance of their loss.
Legal experts had warned that if last week’s judgment had gone against In Focus, advice firms could face open-ended compensation claims which would in turn impact on professional indemnity insurance.
Advisers do need to be aware, however, of a potential loophole in the judgment.
Lady Justice Arden says there will still be occasions when a complainant can bring court proceedings even after accepting a FOS award.
This is because the case hinges on the “doctrine of merger”, a legal principle which holds that a person cannot receive more than one judgment in a tribunal or court for the same cause of action, or on the same matter.
So the ruling only applies to cases where the facts presented to the FOS are the same as those presented to the court. And the burden of showing whether the two sets of facts are the same will fall on the adviser.
DWF Fishburns partner Harriet Quiney says this would only apply in very rare cases where a major incident – such as a fraud – only came to light after the FOS had considered the case.
But she says firms should mitigate the risk of this occurring by being as comprehensive as possible in the decision letters they issue to customers who complain, as the FOS relies on these letters when deciding what the complaint relates to.
She says: “The only unknown is the extent to which a customer may argue that while FOS has considered some aspects of his or her claim, it did not consider other issues and that these might still be considered by the courts.
“When responding to complaints, firms should ensure their decision letters cover all relevant complaints to reduce the risk of customers bringing subsequent court proceedings.”
The judgment has also been welcomed as a foil to a new breed of claims firms.
Lady Justice Arden says: “If the Clarks had succeeded, a complainant may be able to use an award as a fighting fund for legal proceedings. On the face of it this result would be for consumers’ interests, but that is not necessarily so.
”If they lose court proceedings, it may lead to them losing all they have gained through the FOS. It may also lead to the development of a claims industry in this field that increases the costs of obtaining financial advice: there are already 210 ombudsmen and many more might be needed if a larger group of complainants can apply.”
Quiney says “a whole industry” of claims firms could have set up around the FOS if the decision had gone in favour of the Clarks. She adds claims firms would have targeted those who had won a FOS case and tried to persuade them to go to court for further redress.
So while an element of uncertainty remains, all in all this judgment is a major win for advisers.
Tessa Norman is regulation reporter at Money Marketing – follow her on Twitter here