Out-Law News 3 min. read

'Topping up' of compensation via court following financial ombudsman settlement prohibited, rules Court of Appeal

Individuals who claim they are owed compensation from financial services companies cannot 'top up' the money they are awarded via an order by the Financial Ombudsman Service (FOS) by bringing additional claims for compensation against those companies in court, the Court of Appeal has ruled.

The Court overturned a previous judgment of the High Court in 2012. The High Court had granted permission to investors to pursue, via court, losses they claimed to have sustained due to negligent investment advice from a financial adviser that exceeded the maximum level of compensation awarded by the FOS.

Barry and Julie Clark claim that they lost out on more than £300,000 as a result of advice provided by In Focus Asset Management & Tax Solutions (IFAMTS). They lodged a complaint with the FOS about the advice they were given and the watchdog awarded £100,000 in compensation. At the time the FOS could only issue awards of up to £100,000, although that maximum threshold has subsequently been extended to £150,000.

However, the FOS recommended to IFAMTS that, even though the company was only obliged to pay £100,000 to the Clarks, it should pay the full compensation owed to the couple. The Clarks accepted the FOS' award, but IFAMTS only paid them £100,000 in compensation, rejecting the watchdog's recommendation to pay an additional amount.

The Clarks subsequently launched legal proceedings to recover from IFAMTS the additional compensation they claimed they were owed and won the right to claim that money from IFAMTS at the High Court in 2012.

However, the Court of Appeal has now ruled that individuals cannot accept an award by the FOS and then launch subsequent court proceedings in an effort to top up the compensation awarded where the claim is based upon the same complaint.

"Parliament did not manifest any intention that complainants to the Ombudsman Service should be in any different position from other claimants who have taken their claim for compensation through a tribunal for dispute resolution and obtained a decision, and then sought to litigate the same grievances again in the courts," Lady Justice Arden said in the judgment, seen by Out-Law.com.

The Court considered the wording of the Financial Services and Markets Act (FSMA), which sets out the procedures for FOS complaints, the right of individuals to have access to court under the European Convention on Human Rights, as well as common law doctrines when reaching its finding The common law bars individuals from bringing a claim before a court or tribunal if they have already obtained a decision relating to that complaint from another court or tribunal. .

Lady Justice Arden's leading opinion in the judgment was supported by Lord Justice Davis and Lady Justice Black.

"Although there may, at first sight, appear to be an unfairness in preventing a claimant from taking legal proceedings to recover the balance of his loss over the award made by the ombudsman, it is important to remember that the claimant himself holds many of the cards," Lady Justice Black said. "He can consider the award issued by the ombudsman and any recommendation that the ombudsman makes for additional compensation and, with the benefit of that independent evaluation of his claim, decide whether to take the award or to reject it."

"If he rejects it, his right to bring proceedings in the courts is untrammelled. If he takes it, he has benefited from a practical scheme which he has been able to use without risk of costs. One can have sympathy with the Clarks and their advisers who sought to preserve their position by accepting the award on terms, but that does not determine the outcome of the appeal," she said. 

Insurance and litigation expert Ravi Nayer of Pinsent Masons, the law firm behind Out-Law.com, said: "IFAs and their professional indemnity insurers will today breathe a sigh of relief since there is no longer a risk that they will be re-joined into potentially lengthy and costly court proceedings, and thereby avoiding the knock on effect of increased insurance premiums, after settling a claim in full and final satisfaction. Equally, over-ambitious complainants will be prevented from using FOS compensation as a springboard for funding further court proceedings and therefore getting 'a second bite of the cherry'."

"Whilst it remains to be seen whether the Investors will seek permission to appeal to the Supreme Court – plainly the matter is of great significance to the FOS’ jurisdiction – such permission would not be easily given in light of the Court of Appeal’s findings and the difficulty of dislodging the seemingly common-sense finding that the FOS is a judicial body," he added.

"There is nothing to stop Parliament legislating for the outcome argued for by the investors, which would likely be by express carve-out. However, as the Court of Appeal noted, there is no evidence to show that this was the Parliamentary wish, i.e. to expressly exclude the common law doctrine of res judicata and allow for additional compensation in the provisions of the FSMA," he said.

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