Clark v In Focus: There is only one cherry, and no second bite at it

Summary

Financial advisers across the country will be breathing a sigh of relief as they digest the Court of Appeal’s decision in Clark v In Focus, meanwhile consumers which have suffered losses in excess of the statutory limit of the Financial Ombudsman Service’s scheme have been given a stark warning: by all means accept the Ombudsman’s award, but the Courts will give you no second bite at the same cherry.

The facts and the decision

Mr and Mrs Clark claimed that they had lost in excess of £300,000 as a result of negligent investment advice.

They initially pursued their complaint through the Ombudsman. The Ombudsman was established under the Financial Services and Markets Act 2000 (“FSMA”); the rules under which it operates are fleshed-out by the Financial Conduct Authority’s Handbook. It was intended as a fast, cheap and relatively informal dispute resolution service, which at the time of the Clark’s claim had the power to award a consumer compensation against a financial services provider / adviser, up to a maximum of £100,000 (the limit is now £150,000).

In resolving disputes, the Ombudsman has to give each side the chance to put their case in writing; additionally, there may or may not be an oral hearing and oral evidence taken. The Ombudsman then has to determine the complaint “by reference to what is, in the opinion of the Ombudsman, fair and reasonable in all the circumstances of the case”. That will include taking proper account of the law, but may encompass other factors as well. If the Ombudsman believes that more than the statutory limit should be paid, he can recommend that an adviser pays a higher amount. When the Ombudsman makes a decision, the consumer has a choice as to whether or not to accept it. If he rejects it, it doesn’t bind the consumer or the adviser. If he accepts it, he can enforce any award up to the statutory limit as a county court judgment, but cannot enforce the Ombudsman’s recommendations above that limit.

In the case of the Clarks, the Ombudsman ordered that they be paid £100,000, and recommended additional compensation. They accepted it, but expressly made their acceptance subject to their ‘right’ to bring court proceedings for the balance. Their adviser paid the award, but no more. True to their word, they commenced court proceedings for negligence, giving credit for the £100,000 already received.

Cranson J, disagreeing with an earlier High Court decision in Andrews v SBJ Benefit Consultants [2011] PNLR 477, held that the Clarks’ causes of action did not merge with the Ombudsman’s award. They could bring their claim.

The Court of Appeal have now overturned that decision: it has held that the Ombudsman service makes final judicial decisions for the purposes of res judicata, and that therefore where the facts giving rise to a complaint before the Ombudsman also give rise to a cause of action, and the Ombudsman decides a relevant question arising out of those facts, then the acceptance of the Ombudsman’s award will preclude a court action such as the Clarks’; the cause of action will already have been adjudicated upon.

The fact that res judicata was not mentioned in the relevant parts of the FSMA or the Handbook did not mean that it did not apply; quite the contrary, clear language would have been needed to exclude it. Neither did it matter that the Ombudsman could take into account factors which the courts could not.

Once it was established that the Ombudsman’s decision was a judicial decision on facts giving rise to a cause of action, the Clarks’ reservation of their ‘rights’ to commence legal proceedings for further damages was meaningless, because they had no such right. Res judicata operates irrespective of the wishes of either or both parties.

As the Court noted, the Ombudsman scheme was intended to resolve disputes, rather than be just the first stage in a longer process.

Implications

Whether or not res judicata applies in a given case will depend upon the facts of that case and how the complaint, award and the subsequent claim is framed. The question is whether the cause of action in respect of which the later claim is brought has already been adjudicated upon by the Ombudsman.

The onus of proving that it is will be on the party alleging that it is (the adviser) and Arden LJ indicated that doubt would be resolved in favour of the consumer.

Still, wherever a person’s loss exceeds the statutory limit (now £150,000), then that person would be well advised to seek legal advice on their particular situation: depending on their prospects of success and the likely value of their claim, they may well be giving up a substantial amount of money by accepting the Ombudsman’s award.