Professional negligence update

The rise of complaints schemes, such as the Legal Ombudsman (LeO) and its better-established counterparts the Financial Ombudsman Service (FOS), the Pensions Ombudsman and the Property Ombudsman (TPO), has given professional advisers and their insurers growing cause for concern.

At the heart is an admirable intention that complaints should be dealt with “quickly and with minimum formality”. However, they are consistently the source of wide professional frustration, from concerns about a light approach to analysis of liability and evidence, to an overgenerous treatment of questions of causation and a worrying flexibility over periods of limitation. As a result, a frequently reported perception among many professionals is that the various ombudsman schemes’ focus seems weighted (sometimes heavily) against them.

Schemes in practice

The breadth and scope of the ombudsman schemes are wider than some may realise. For example, LeO’s remit covers many legal services professionals, including barristers, notaries and legal executives, rather than just solicitors. It is also due to take over responsibility for complaints against claims management companies. Similarly, the FOS will consider complaints about banking, insurance, mortgages, pensions, savings, financial advice and many specific products, loans and credit cards.

The range of complaints that LeO can cover is broad too, from financial losses to distress and inconvenience, and poor service to offensive staff. And it has extensive powers to demand documents, information and assistance, with the ability to impose sanctions for non-compliance via a referral to the regulator, which could, in exceptional circumstances, lead to an individual being held in contempt and facing a fine, or even imprisonment. For example, French in 2012.

Most ombudsman schemes operate on a similar principle: to consider what is “fair and reasonable”. Although the FOS must also take into account relevant law and regulations, it retains a wide discretion in decision-making, with the result that very few determinations are successfully challenged. Hence, it is not very difficult to see why using such schemes is likely to grow. This is particularly so where the limits of financial compensation available from the ombudsman schemes continue to rise (for example, LeO can now order compensation of up to £50,000).

Trouble ahead?

The schemes are having a significant impact on the way in which professional negligence is being prosecuted and managed; the High Court’s decision in Clark v In Focus Asset Management & Tax Solutions Ltd (2012) illustrates this with a brief reminder of the FOS ‘rules’:

• where a complaint is upheld, the FOS may make a money award for a sum, which it considers to be “fair compensation” for financial loss, up to a limit of £150,000 (prior to 1 January 2012, the limit was £100,000).
• If a complainant accepts a FOS determination within the specified time, it is “final and binding” for both the firm and the complainant. If the complainant rejects it (or makes no response), the determination is not binding on anyone.
• In contrast, the firm has no ability to reject it, other than by way of an application for judicial review.
• Furthermore, if the FOS considers that “fair compensation” requires the payment of a sum in excess of the maximum limit, it can also recommend that the firm pays the balance.

Fortunately, for those subject to the FOS regime, neither the FOS nor a complainant may compel the firm to pay any recommended further amount. However, the issue that arose in Clark was whether, having accepted a maximum award, a complainant could go on to seek to recover the balance in court proceedings.

Decision in Clark

The case came out of an underlying complaint made against In Focus, an IFA, for alleged unsuitable investment advice. The FOS upheld the complaint and awarded the statutory maximum (£100,000 at the time), which was said to be “final and binding”. Mr and Mrs Clark accepted the full amount, but sought to reserve their right to claim more, and went on to bring a civil claim for the balance of their alleged losses.

At first instance, the claim was struck out on the basis that accepting the FOS award precluded any further claim. However, on appeal, the High Court disagreed. Controversially, Mr Justice Cranston ruled that a complainant should not be prevented from pursuing further recovery, as the functions of the FOS were different to those of a traditional tribunal and the FOS was considering complaints, not causes of action.

The judgment thereby allowed a complainant not only the ability to sidestep the doctrine of merger and to bring a civil claim in relation to the same subject matter, but also to do so with the benefit of a fighting fund provided by the initial FOS award.

While only a very small percentage of determinations involve recommendations in excess of the statutory maximum (only around 0.5 per cent in 2013), the decision raised significant concerns for professionals. In particular, it was feared that it would lead to an explosion of complaints to the ombudsman. It also created uncertainty for firms and their insurers and advisers in forecasting exposure to FOS complaints, given the loss of finality and the risk of further civil litigation with much larger liabilities, over potentially much longer periods.

Silver lining for professionals

Mr Justice Cranston’s judgment was reversed on 14 February 2014. The Court of Appeal effectively rejected the notion that differences between the procedures and functions of the FOS and the courts should permit multiplicity of actions, where the facts of a subsequent formal claim were the same as those constituting the original complaint, i.e. the doctrine of res judicata
should apply.

Fortunately for professionals and other organisations subject to the FOS, they are not left with a situation in which further advantage is given to complainants who might otherwise have used a complaint to the ombudsman merely as a financially useful (in creating a fighting fund) stepping stone to civil proceedings.

There are limits to the decision in Clark and complainants, professionals, regulated firms, insurers and their advisers need to understand these (see box).

Where complaints give rise to reasonably complex issues and potentially large sums, there is unlikely to be any advantage for complainants in having such matters adjudicated by an ombudsman.

However, there may be a rise in ombudsman complaints being used as a “sounding board” by complainants seeking an independent view as to the merits of higher value complaints. In such cases, professionals and their advisers should
give early consideration to requesting that the matter is more appropriately dealt with by the courts and inviting the FOS to refuse to deal
with it. If proceedings do follow a FOS complaint there needs to be careful consideration of the scope of the new claim and the facts upon which it is based.

There can be little argument that the FOS and similar complaint schemes do have a place in resolving disputes, ideally reflecting a “horses for courses” system, with the aim of balancing the expertise and role of the courts in dealing with professional negligence claims, with the expertise of ombudsman schemes, particularly in handling increasingly large volumes of predominantly lower value complaints.

As Lady Justice Black put it, in her judgment in Clark, “[if a complainant takes an award] he has benefitted from a practical scheme, which he has been able to use without the risk of costs”.

However, the increase in the limits of financial compensation that the ombudsman can award tends to undermine that distinction and this, coupled with the “free to complainant”, procedurally straightforward nature of ombudsman complaints, may encourage complainants to pursue increasingly
complex claims, better suited to the courts, before the ombudsman.

Furthermore, it is expected that limits will continue to rise and we may see the LeO limit increase to match that currently available from the FOS. Given that three areas of professional legal practice (conveyancing, wills and probate and family) provide both the majority of professional negligence claims and the majority of referrals to LeO, it is to be expected that, in the future, more claims will be pursued through LeO, rather than through the Pre-Action Protocols and formal proceedings.

Finally, the process of making a complaint may also be taken online, and become correspondingly easier, with the result that the ombudsman schemes become yet more attractive to consumers.

For professional advisers and insurers, the final decision in Clark is a welcome one in that it confirms the finality of the FOS scheme. Whether the decision does much to stem the growing popularity of this jurisdiction is another matter. What is clear is that across the board, better awareness and understanding of ombudsman schemes is going to become increasingly important for professional firms and their insurers, as they adapt to deal with their procedures, flexibility and cost neutral environment in the most efficient way. SJ

Philip Evans is a senior associate at Clyde & Co

---