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Clark & Anr v In Focus: warnings for complainants and advisers

Important warnings for advisers and complainants underlying the decision in Clark & Anr v In Focus Asset Management & Tax Solutions

Advisers and, perhaps more so, their professional indemnity insurers will be breathing a sigh of relief in light of the eagerly anticipated judgment of the Court of Appeal which was published on Friday. Lady Justice Arden gave the leading judgment, the gist of which is that “it is unjust for a man to be vexed twice with litigation on the same subject matter”.1

As a result of advice relating to an investment in a unsuitable endowment plan, Mr and Mrs Clark claimed in 2008 they had lost £500,000. At the time, the limit of enforceable compensation that the FOS could award was £100,000, only a fifth of their loss. In upholding their complaint the Ombudsman did however recommend that In Focus pay more compensation, but such recommendations are not enforceable and, therefore, very rarely paid. The Clarks sought to recover the excess over £100,000 through court proceedings. However, In Focus argued that they were not able to do so after accepting an award from the FOS. The court initially held that the Clarkes could pursue the remainder through the court but the adviser was successful in overturning that decision in the Court of Appeal.

The appeal was allowed on the basis of the doctrine of res judicata – meaning ‘a matter judged’. Essentially, under this doctrine, complainants cannot have a second bite of the cherry if another court or tribunal – in this instance, the Financial Ombudsman Service (‘FOS’) – has already given them a decision in respect of the complaint. This overturned a decision from the High Court and, absent an appeal to the Supreme Court, the situation has now reverted back to its previous position who accept a determination of the FOS will be barred from pursuing a claim through the courts for any excess over the maximum award.

As well as clarifying that accepting an award from the FOS is the end of the road in terms of recouping one’s losses, the decision highlights some very important considerations for advisers and complainants alike.

What is the loss?

It remains crucial that a complainant gets a firm grasp on what their loss actually is before deciding whether to pursue a complaint to the FOS or a claim through the courts. The same is true, of course, before deciding whether to accept a FOS determination and award, or rejects it. What one has lost may seem straightforward to the lay person, but it is in fact one of the most complicated, and fiercely contested, issues in financial services disputes. Contrary to what many may think, it is not usually the case that an investor’s loss is simply the fall in value of their investment. Rather, loss will usually be determined by comparing the actual value of the investment under scrutiny, with the notional value of investment(s) which ought to have been recommended in its place. The difference between the two represents the complainant’s loss.

Advisers and complainants should exercise extreme caution before concluding that the loss is below £150,000 and therefore suitable for the FOS. This is true, even if one calculates, with exemplary accuracy, what the loss would be following the methodology and calculations that the FOS use routinely to assess loss in similar cases. Take, for example, the AIG Premier Access Bond Enhanced Variable Rate Fund (‘EVRF’). The FOS has now upheld numerous complaints in respect of this product and has, historically, compensated each successful complainant on the exact same basis. The FOS uses the exact same notional instant access cash deposit rates to calculate the difference between the complainant’s actual position, and the position they ought to be in, had they invested in those deposit accounts instead of the EVRF. The difference between the two positions is the investor’s award. However, consider this: what if the specific investor in question was prepared to commit a large proportion of their funds to term deposits, thereby gaining a higher rate of interest which, in turn, would result in a higher loss? What if the rates used by the FOS are, in fact, not a representation of the best rates available on the market? What if the specific investor could have, and should have, been advised to, embark on a entirely different course all together? Worst of all, what if an adviser did not consider these points before advising a client to go to the FOS, and the client accepts a determination resulting in little or no compensation. What horror to then discover that, in pursuing a claim through the courts, he was likely to have obtained very substantial damages? Using AIG as an example, very generally speaking, compensation offered by the FOS is around 25 – 30% of losses calculated which a person might claim through the court. There will be many who have accepted an award from the FOS who now have no recourse to the courts if they have been under-compensated. Simply because the FOS is a free service, should not make it the first port of call. That is now a more dangerous presumption than ever.

The FOS or the courts?

The complainant could, of course, make his complaint to the FOS and reject the determination and award if it transpired that his loss was above £150,000. However, most complainants will not be aware that it can take several years for the FOS to make a determination. During that time, the period within which the complainant must issue court proceedings, the ‘limitation period’, is ticking way. This is usually 6 years from the cause of action arising e.g. the date that an investment is made. If that period expires whilst the complaint to the FOS is in progress, the respondent would then have an absolute defence to a claim made by the complainant through the courts. For that reason, a complainant should always take legal advice as to the appropriate route to take and/or how to protect his ability to make a claim should he wish, or need, to do so in future.

Complainants are often deterred by the costs associated with legal proceedings. There is no denying that litigation is, indeed, a very expensive process. However, despite the changes which took place on 1 April 2013, there are still affordable ways to finance a claim through the courts. Most importantly, complainants with legal expenses insurance may have sufficient cover to fund their legal costs entirely. A solicitor will be able to talk you through the options.

Those who are not successful in their complaint to the FOS should not formally accept the determination – they should reject it, even if there is no intention at that time to pursue a claim through the courts. It now clear that those who accept a determination of the FOS cannot then pursue that complaint in court. Whilst not explicit in the judgment, this will include acceptance of the Ombudsman’s decision to not uphold a complaint. Complainants should therefore, as a matter of course, reject a negative decision and preserve their ability to make a claim in future. The determination is, however, presumed to be rejected if not explicitly accepted.

One option if the FOS does make an award in excess of £150,000, is to enter into a settlement agreement with the firm as opposed to accepting the award. There is little prospect of a respondent paying anything above that which is enforceable in court. A settlement agreement however, would be enforceable in respect of the full amount. Alternatively, court proceedings may be justifiable.

For further information about this issue please contact Laura Hazell in our Financial Services Litigation team.

1Sir Nicolas Browne-Wilkinson V-C Arnold v National Westminster Bank plc [1983] 3 All ER 977 at 982