Keoghs Insight


Anthony Middleton

Second bite of the cherry following FOS decision?

Property Insurance Aware 1

The Financial Ombudsman Service (FOS) has official powers to decide individual complaints between consumers and financial businesses. The powers include awarding compensation up to £150,000 (recently increased from £100,000). However, what is the position when the policyholder’s claim exceeds £150,000? In this article we consider whether it is possible for a policyholder to pursue civil proceedings as well as a complaint to FOS.

The former position

Until 2010 it was thought that the answer was no due to the decision in Andrews v SBJ Benefit Consultants Limited [2010] which held that once a complainant accepted the decision of the FOS, the award became binding and prohibited the complainant from bringing a civil claim through the courts. The decision was based on the doctrine of merger of causes of action (a person cannot receive more than one judgment in a tribunal of competent jurisdiction for the same matter).

Therefore if the claim exceeded the maximum amount that the FOS could award then a complainant was prohibited from bringing a further action in the court. Consequently, the FOS, in their final decisions, have been making complainants specifically aware that in accepting any FOS determination they would likely be precluded from bringing further court proceedings. As a result it was unlikely for claims with an estimated value of more than £150,000 to have been lodged with the FOS for determination.

The current position

The position has now been contradicted following the decision in Barry Clark and Julie Clark v In Focus Asset Management and Tax Solutions Limited.

In November 2008, the Clarks complained to the FOS that Focus had wrongly advised them in relation to their investments. The Clarks relied on Focus’ advice and alleged that they suffered losses of over £500,000. At that time, the maximum award that the FOS could make was £100,000. The FOS found in favour of the Clarks’ complaint and stated that Focus should compensate them to the effect that they would be put back into the position they would have been in had they not received the advice from Focus - i.e. an amount exceeding the maximum award of £100,000.

The Clarks accepted the decision of the FOS. However, on the final form decision after the words, “our acceptance of the decision,” the Clarks wrote, “WE RESEVE THE RIGHT TO PURSUE THIS MATTER FURTHER THROUGH THE CIVIL COURT,” before signing it.

Focus did not act on the FOS recommendation to provide further compensation and in June 2010, the Clarks issued county court proceedings for their alleged losses in addition to the £100,000 that they had already received. Focus successfully struck out the Clarks’ claim on the basis that by accepting an FOS award, they had lost their right to pursue a civil claim. The judge applied the decision in Andrews v SBJ and held that the doctrine of merger of causes of action precluded the claim. The Clarks appealed the order to strike out the claim.

The High Court disagreed with Andrews on the basis that the doctrine of merger did not apply to FOS decisions. The High Court judge made specific reference to Rix LJ’s comments in Heather Moore and Edgecomb Limited v Financial Ombudsman Service [2008], namely, that the Ombudsman dealt with complaints, not causes of action. The judge noted that the doctrine of merger cannot apply if there is no determination of a cause of action. The judge also considered whether the Ombudsman can be considered to be a tribunal, outlining the considerable differences between a typical court tribunal and the Ombudsman, who deals with disputes informally and without necessarily applying the law.

On the basis that the Ombudsman cannot be considered a tribunal of competent jurisdiction, the doctrine of merger cannot apply. He concluded that the FOS decision was not a binding determination of the Clarks’ cause of action, meaning that they were able to bring a claim at court for the same remedy.

Notwithstanding the above, the judge also considered the effect of the Clarks’ note on the FOS final decision form and found that it was insufficient to show that they had not considered the decision of the Ombudsman as final. It was held that:

1. The doctrine of merger does not apply to determinations of the Ombudsman, which have been accepted.

2. Complainants are not prevented from claiming damages in court that exceed the FOS award received as a result of accepting a FOS decision.

Focus has now appealed to the CoA and the judgment is expected to be handed down within the next few weeks.

Impact on insurers

The Andrews case had previously been a relief to companies (including insurers) in that claims could not be made through both the FOS and the courts. However, following the Clark matter there is now a degree of uncertainty. If the CoA decide that Clark is the preferred case (over Andrews) then there are significant implications for insurers as they could be left exposed to ‘top up’ civil actions even where a decision has been made by the FOS and accepted by the complainant. The policyholder could then utilise any award as a fighting fund for the balance of their claim in the civil courts.

Clark does seem to go against the rationale of the FOS in providing an alternative to litigation. Now it seems that complainants, irrespective of claim value, can have the option of litigating in addition to referring a dispute to the FOS. However, it should not be forgotten that an award from the FOS does not mean that a court will necessarily reach the same outcome. The application in Clark was to determine whether the application to strike out should be successful. No determination has been made as to the damages that should or should not be awarded to the Clarks. The FOS considers a claim by what is “fair and reasonable” whereas a court must apply the legal principles.

It is clear that the ramifications of Clark could be far reaching but little is known yet until the eagerly awaited judgment is handed down. Watch this space.