Clark v In Focus Asset Management & Tax Solutions Limited

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In the wake of the Jackson reforms we analyse the potential consequences for financial professionals and their professional indemnity insurers should the Court of Appeal uphold the decision concerning Financial Ombudsman Service (FOS) awards in Clark v In Focus Asset Management & Tax Solutions Limited .

The Court of Appeal judgment in Clark v In Focus Asset Management & Tax Solutions Limited is eagerly awaited by financial professionals and their professional indemnity insurers. The outcome will determine whether a complainant can accept an award from the Financial Ombudsman Service (FOS) up to the statutory maximum of £150,000 and then bring an action in court for additional loss and damage in respect of the same complaint.

The facts

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. They alleged losses of £500,000.

The FOS upheld the complaint and awarded the Clarks £100,000 (the then maximum statutory award). The FOS also made a recommendation that In Focus pay compensation to put the Clarks back in the position they would have been in had the alleged inappropriate advice not been given. The Clarks accepted the FOS award inserting the words “we reserve the right to pursue the matter further through the Civil Court”.

In Focus paid the FOS award to the Clarks but rejected the FOS’ recommendation to pay any additional compensation. The Clarks then issued county court proceedings in June 2010 against In Focus to recover the balance of their alleged losses.

Relying on Andrews v SBJ Benefit Consultants, In Focus successfully applied to strike out the claim. However, this was overturned on appeal to the High Court which disagreed with Andrews on the basis that the doctrine of merger did not apply to decisions of the FOS. In other words, it was held that when the Clarks accepted the FOS award their cause of action was not extinguished, even when the acceptance was final and binding. It was, therefore, open to the Clarks to bring a civil claim in respect of the same subject matter in order to recover losses over and above the FOS cap.

Conclusions

In Focus had argued that the statutory provisions governing the FOS stated that accepting an award from the FOS was final and binding, thereby bringing an end to any further route of compensation for the same complaint. It added that the purpose of these provisions is not to enable someone to use the FOS as a “stepping stone” to fund further redress.

If the High Court decision in Clark is upheld, the FOS procedure is unlikely to be seen as an alternative to court proceedings and as a means of resolving disputes quickly and with minimum expense, but as an attractive forum for obtaining funding for subsequent court proceedings. In all likelihood, complainants will be encouraged to have their cake with the FOS and eat it too with court proceedings.

What this means for financial professionals and their insurers is a potentially drawn-out process to resolve disputes that might have otherwise been quickly (and cost effectively) dealt with under the FOS regime. Unless claims are resolved by way of a formal all encompassing settlement following a FOS award, it may be difficult for professional indemnity insurers to close their files. Further, financial professionals may face increased insurance premiums as a result of the additional costs incurred where both a complaint to the FOS and court proceedings are pursued.

The picture is however, not all one of doom and gloom as: 

  • It is open to financial professionals to persuade the FOS to dismiss complex high value claims under DISP 3.3.4R(10), on the basis that such claims should more appropriately be dealt with by the courts. This is particularly relevant in a FOS dispute where a parallel claim has been brought under the Professional Negligence Pre-Action Protocol for the same subject matter and where litigation may have been threatened.
  • Unlike the FOS’ broad remit to deal with claims by reference to what is considered “fair and reasonable”, a court will apply strict legal principles that may threaten the success of the claimant’s court action, leaving the claimant vulnerable to a losing claim and potentially significant cost consequences. Claimants may also face the prospect of action by the financial professional to repay any FOS award if a court later finds wholly against the claimant. 
  • Whatever the outcome, the Jackson reforms ought to provide financial professionals with some degree of comfort. In all likelihood the courts will be unsympathetic with claimants (and their legal advisers) incurring wholly wasteful costs shopping in two forums and then seeking to recover costs in both. If claimants have a meritorious claim for substantial damages then the claim should be dealt with exclusively by the courts.

The Court of Appeal judgment is expected to be handed down shortly and we will report further then.

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