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Common sense prevails

14 February 2014

The Court of Appeal has overturned the High Courts decision that the doctrine of merger does not apply to final decisions of the Financial Ombudsman Service (FOS). This means that once claimants accept a FOS final determination, it is final and binding such that they cannot pursue civil proceedings for losses over and above the current £150,000 redress limit of FOS jurisdiction.


Mr & Mrs Clark originally raised a complaint through FOS against In Focus Asset Management & Tax Solutions Ltd (In Focus). It was alleged that In Focus had provided poor investment advice, which had caused Mr & Mrs Clark to suffer losses of over £500,000.

FOS upheld Mr & Mrs Clarks complaint in January 2010. FOS awarded the maximum redress amount within its jurisdiction (£100,000 at that time, now increased to £150,000). In accordance with the statutory regime governing the FOS process, the final decision was given as final and binding on the parties and FOS also made a recommendation that In Focus pay redress over and above the FOS redress limit.

Having asked FOS to clarify the meaning of final and binding and whether Mr & Mrs Clark would be able to pursue a civil action for loss over the FOS limit, on their solicitors advice, they accepted the FOS decision by way of the usual acceptance form but added the following wording: "We reserve the right to pursue the matter further through the civil court".

Following conclusion of the Clarks FOS complaint, the case of Andrews v SBJ Benefit Consultants LTD, was considered by the High Court. The court confirmed that FOS award limits cannot be sidestepped by a separate court action. By applying the doctrine of merger of causes of action, the court held that a complainant who accepts a FOS final decision is bound by it and cannot then bring a civil claim in relation to recover any sums the respondent firm is recommended to pay above the FOS redress limit.

Mr & Mrs Clark issued proceedings in the county court seeking to recover the balance. At first instance the claim was struck out as the judge held that the decision in Andrews was binding.

On appeal, the High Court was asked to consider the question previously addressed by the High Court in Andrews.

Cranston J held that the judge at first instance was wrong to treat the Andrews decision as binding and determinative. In doing so he found that FOS deals with complaints and not causes of action. As such, the doctrine of merger, being concerned with causes of action, did not apply to FOS final determinations and complainants are not precluded from pursuing civil actions for recovery of losses over and above the FOS redress limit. Cranston J further held that the statutory scheme established under the Financial Services and Markets Act 2000 Pt XVI (FSMA) did not preclude claims for damages from a financial services provider.

The insurers of In Focus appealed that decision.

The outcome on appeal

The Court of Appeal has today handed down its judgment. The good news for all FCA regulated entities who routinely deal with consumers and small businesses is that the High Courts decision has been overturned and the situation has reverted to that established by the Andrews decision.

The position is, once again, that FOS complainants cannot pursue court proceedings in respect of the same facts that had formed the subject matter of a complaint to FOS. In contrast to Cranston J, Arden LJ reached the view that the doctrines of merger and res judicata can apply to FOS decisions because complaints can constitute a cause of action to which those doctrines apply. Arden LJ also concluded that because FSMA was silent on the question of further rights of recovery, the common law doctrines were not displaced.

This is a welcome decision for many businesses that are subject to FOS jurisdiction. It provides increased certainty for FCA regulated entities and their insurers, where a FOS final determination has been accepted by a complainant. Had the appeal not been allowed, FOS complaints could have been used to seek to build a litigation fighting fund.

This article was first published in New Law Journal.

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