Consumer update

This update considers the recent judgment of the Court of Appeal in Clark & Another v In Focus Asset Management & Tax Solutions Ltd & Financial Ombudsman Service (Intervener) [2014] EWCA Civ 188. In this case, the consumer was prevented from obtaining the full value of their compensation due to the limits of the Financial Ombudsman Service (FOS).

Financial advice

These can be set out briefly. The claimants were dissatisfied with the financial investment advice and claimed they had lost £500,000 as a result of it. FOS agreed. They ordered the advisers to pay the maximum under the statutory regime (then £100,000; now £150,000) and recommended that the firm pay the balance.

This all seems perfectly reasonable. However, the firm refused to pay up and proceedings were issued. The defendant applied to strike out proceedings on the basis that the matter had already been judicially determined by the FOS.

The judge at first instance agreed: the doctrine of merger applied and he was bound by the High Court's decision in Andrews v SBJ Benefit Consultants [2011] PNLR 577. The claimants appealed and Cranston J distinguished this case from Andrews, holding that the FSO's decision did not merge with the claimants' causes of action for breaches of contract, statutory duty, fiduciary duty and/or negligence.

This created the unhappy situation of competing High Court decisions on similar facts and the defendant appealed, seeking clarity.

Ambiguous powers

The central issue is that the provisions giving the FSO its powers is ambiguous. The Financial Services & Markets Act 2000, s228(5) does not address whether or not making an award precludes legal proceedings. The words 'final' and 'binding' may simply conclude the FOS's involvement once the financial adviser pays the amount of the FOS's award but it does not necessarily follow that this precludes further proceedings. That was clearly what the FOS had intended in this case.

However, s228(5) does not exclude the common law doctrine of res judicata applying. Accordingly, if it could be shown that the ombudsman had determined the facts constituting the cause of action and then the claimants later relied upon the same facts in litigation, the FOS' intention would be defeated.

In giving the leading judgment, Arden LJ explains that the key point is whether a complaint could ever be a cause of action. As a complaint can include the same facts as a cause of action, it can. It is sufficient for the ombudsman to decide a question posed by facts which do constitute a cause of action, and then to decide whether this gives rise to a cause of action between these two parties with an available remedy to the complainant. If so, then the decision creates cause of action estoppel irrespective of whether or not the remedy in court proceedings is different.

Judicial decision

The ombudsman's award is a judicial decision because it involves giving the parties an opportunity to state their case - it is not simply the product of the ombudsman's own enquiries. Secondly, it is more than administrative in nature. The right to a fair hearing (under the European Convention of Human Rights, Article 6) applies to the process. Whilst not determinative by itself, it is strongly indicative that the process is judicial and not administrative (Heather Moor & Edgcomb Ltd v UK (App no 1550/09). Thirdly, the FOS accepted that it was making a judicial decision.

However, not all awards under s228(5) are excluded by res judicata. Cases where the facts considered by the ombudsman differ to those set out in the court proceedings. Accordingly, there is a need for solicitors to consider this when advising their clients. The burden of proof lies with the financial adviser.

The question of whether s228(5) excludes res judicata from applying was one of statutory interpretation. Arden LJ found that a purposive interpretation of the provision (in order to promote consumer protection) was not a reasonable course of action. She found that the express purpose of resolving disputes quickly and with the minimum of formality (under s225(1)) supervened any implied purpose of allowing consumers a second bite of the cherry by commencing proceedings simply to increase the amount of money being awarded to them.

Parliament would have set this interpretation out in the Act had it intended it. The necessary degree of certainty is provided by finding that the common law provides general clarification by applying res judicata in these circumstances and parliament had not specifically excluded it in s228(5). Where a statute is silent on an issue, the common law still applies to it unless it has been expressly excluded or can be impliedly so.

It is not open to either a litigant or the ombudsman to try to exclude the operation of res judicata because the doctrine operates irrespective of any contractual agreement or an express statement by the ombudsman. Accordingly, the fact that ombudsman had recommended a higher award be made was effectively irrelevant.

The error made by Cranston J was to find that the purpose of the FOS was to provide consumers with speedy, free dispute resolution and give that purpose primacy over parliament's right to remain silent on matters knowing that the common law operates to fill in the legislative gaps. If parliament had intended to allow additional compensation to be awarded by the courts, it would not have imposed the financial award limit.

Both Davis and Black LLJ also highlighted that they had sympathy with the claimants and their legal advisers because they had attempted to preserve their rights. However, both stated that they had the choice of whether to accept the ombudsman's decision or issue proceedings. They could not have their cake and eat it.

Difficult position

The Court of Appeal has told us that the FOS's award is a judicial decision. This judgment, whilst clearly reasoned, does put advisors in a difficult position. There is a very considerable chance that advising the client to pursue their case through the FOS may preclude them from getting the amount of compensation that they are entitled to. Alternatively, the damage may already have been done by the time we see them for the first time.

Each case now must be assessed on its own facts. If the ombudsman decided the complaint on a set of facts which constitute a cause of action then cause of action estoppel applies. It does not matter whether the award made was too low. Can you genuinely find a different cause of action on the same set of facts at the start of the case?

How much evidence would you be satisfied with before advising a client to elect to accept the ombudsman's award or risk litigation? Can you be certain that litigation will get your client more compensation at a reasonable cost? This decision certainly takes away the screening safety net that practitioners previously had.

One also has to question whether this decision really does promote consumer protection. There are signs that the FOS will decide not to deal with complaints which they feel are valued at more than their award limit of £150,000. To paraphrase Hamlet, consumers need to decide whether it is better to bear the risky burden of litigation or to accept an award that they know is too low. To be, or not to be? Now that really is the question.