Thu, 25 Apr 2013
Does the public interest in finality in determination of disputes under res judicata apply to claims for compensation before the financial services Ombudsman?
An article by Paul Marshall of No5 Chambers published in the April issue of Butterworths Journal of International Banking and Financial Law
The full article may be downloaded by the link below. In Summary:
- The Financial Ombudsman Service (FOS) can direct that compensation be paid to a person making a complaint up to a maximum (since January 2013) of £150,000. The Ombudsman may recommend that a greater amount be paid but it cannot direct a sum in excess of that amount. The FOS complaints scheme established under the Financial Services and Markets Act 2000 is intended to be quick and economical for complainants. The scheme deals with around a million inquiries and settles some 150,000 complaints a year. A key feature of the scheme is that the Ombudsman deals with complaints, not with legal claims (causes of action) in a technical sense. It goes without saying that there is a strong incentive to bring a complaint before the Ombudsman in preference to issuing legal proceedings with their attendant costs risk.
- Res judicata is the Latin name for what is no more than a principle of public policy to which the law gives effect, namely that once a dispute has been considered by a relevant tribunal that is an end of it. There should be an end to disputes - subject to appropriate protections such as an avenue for appeals and protection against fraudulent claims. In short, a person shouldn’t be entitled to ‘two bites of the cherry’. (There is a corresponding principle that a person (respondent) should not be vexed in the same cause twice.)
- The question arises as to why a person who succeeds in recovering an award from the Ombudsman might want to make a claim by way of legal proceedings against the firm against which a complaint has been upheld. There are at least two good reasons:
• Where the respondent individual or firm in question turns out to be insolvent and unable to satisfy the award (a not uncommon circumstance). The law since the 1930s has provided redress for persons who make claims against those who are insured (as individuals and firms providing financial services advice are – or should be) but unable to pay. The present mechanism is provided by the Third Party Rights Against Insurers Act 2000. The snag is that in order to recover against an insolvent person’s insurers it is necessary first to establish that the insured person is liable in law to pay. An Ombudsman’s award does not satisfy this requirement for the purposes of the TPRAI Act. This means that in order to recover against an insolvent firm’s insurer a claimant in receipt of an unsatisfied Ombudsman’s award must bring their claim by way of legal proceedings - if this is can be done.
• Secondly, where a person makes a complaint to the Obudsman and the losses in fact exceed, by some margin, the Ombudsman’s compulsory jurisdiction,, the Ombudsman recommends that an amount greater than £150,000 be paid but the firm or individual disregards the recommendation (as they are entitled to do). The complainant may wish to recover the balance in legal proceedings (on the assumption that a judge would reach a similar conclusion to the Ombudsman on the evidence).
- In Andrews v SBJ Benefits Consultants  EWHC 2875 (Ch) (Chancery Division of the High Court of Justice) His Honour Judge Pelling Q.C. held that once an Ombudsman’s determination had been accepted by the Claimant, the door, that was otherwise open to bring legal proceedings on the same grounds, upon acceptance is thereafter shut to a complainant. If the decision is correct there is no prospect of recovering the balance of a greater amount recommended by the Ombudsman in legal proceedings. The same conclusion applies even if the firm had been insured. On Judge Pelling Q.C.’s analysis, if an individual or firm subject to an Ombudsman’s award is insolvent, but at the material time was covered by insurance, that is simply tough luck. That unsatisfactory conclusion, and the doubtful reasoning underlying it, were the subject of criticism in an earlier article by Paul Marshall published in Butterworths Journal of International Banking and Financial Law in February 2011 (2011) 2 JIBFL 69: “The Financial Ombudsman Service and claims against insovlent respondents, a problem exacerbated by Andrews v SBJ Benefits Consultants?” One criticism made of the judge’s reasoning was that the FOS and a court are dealing with things that are essentially different.
- In an interesting development, at the end of 2012 Mr Justice Cranston, a judge of the High Court, Queen’s Bench Division, in Clark v In Focus Asset Management and Tax Solutions Ltd  EWCH 3669 (QB) rejected Judge Pelling Q.C.’s analysis for being in the judge’s view flawed. (While judgments of collateral jurisdiction are not binding, for very good reasons judges are reluctant to depart from decisions on similar facts in the absence of compelling grounds for doing so.) The main, though not only, reasons for the judge considering Andrews to be wrongly decided were (i) that the judge considered that the FOS was not, “a tribunal” in the relevant sense for the purpose of res judicata, and perhaps more importantly, (ii) following a dictum of Lord Justice Rix, he concluded that the FOS and a court were not dealing with the same things. The FOS, the judge observed, deals with complaints and determines (but only upon acceptance by a complainant) what is fair between the parties, whereas a court deals with causes of action in a technical legal sense. These are not the same. The principle to which the technical legal doctrine of res judicata applies is relevant only to legal causes of action that have been the subject of a ruling of a tribunal. It follows that, on Mr Justice Cranston’s analysis, a successful complainant can have a second bite of the cherry – or where an individual or firm is insolvent, may issue legal proceedings to recover against the insurer. As to the first of these, Mr Justice Cranston did not consider that there was anything unjust in this outcome, or that, to the discomfort of insurers and their advisers, an Ombudsman’s award may form a ‘war chest’ with which to pursue litigation.
- In April 2013 the Court of Appeal gave permission to appeal, as it was virtually bound to do, given two first instance decisions to precisely opposite effect. The financial services industry on the one hand, and its customers and clients on the other, have considerable, but opposite, interests in the outcome. Paul Marshall suggests that Cranston J’s analysis in Clark is to be preferred to SBJ Benefits Consultants.