Issues of pursuing a claim via the FOS or litigation

02/02/2011

By James Ward, Associate in Dispute Resolution. First published in New Model Advisor in February.

Should you claim or complain?

Investors who have suffered a loss as a result of poor financial advice or being mis-sold a financial product have several options available to them if they wish to seek financial redress: as well as taking legal action and seeking compensation through the courts, if necessary, as an alternative they can also complain to their financial advisor directly and - if their complaint is not resolved to their satisfaction - refer it to the Financial Ombudsman Service ("FOS"). But although this second option may be appealing for investors who would prefer to resolve matters informally and without having to incur legal fees, in the light of a recent High Court decision it may not be the most suitable avenue for those who have suffered a significant loss and are determined to recoup as much of this as they can.

 Advantages of complaining to the FOS

The FOS is an informal dispute resolution service which is able to consider complaints which are referred to it about firms which carry out activities which are regulated by the Financial Services Authority.  If an ombudsman determines that a complaint should be upheld, he or she has the power to award the party complaining ("the complainant") compensation of up to £100,000 plus interest (although the FSA has indicated recently that this statutory limit is to be increased to £150,000).

At first sight, pursuing compensation through the FOS has many features which make it more attractive than seeking formal legal redress: its service is free to use and, because its procedures are much more informal than court proceedings, it is designed to be one that complainants can utilise without needing to seek legal advice or the assistance of a lawyer; equally, it extremely rare for it to make costs awards against an unsuccessful party, so a complainant is able to seek redress safe in the knowledge that there is no risk that they will have to meet their opponent's costs if their complaint is not ultimately upheld; it determines complaints according to what it considers to be "fair and reasonable" and may therefore find in favour of complainants when the strict application of legal rules and principles may result in a different outcome in the courts; and, unlike a court judgement,  a complainant is not bound to accept the FOS's decision if they disagree with it.

Limitations

With these attractions, referring a complaint to the FOS may well be less costly and less cumbersome than taking the same dispute to court.  But is it a suitable forum for investors whose losses exceed the statutory limit? The answer is possibly not. Although the FOS can still consider their complaint, where an ombudsman considers that a complainant should receive compensation exceeding £100,000 he or she can only recommend that the relevant firm pay an additional sum in excess of £100,000. This recommendation does not, however, bind the firm and it is free to disregard it if it wishes. So a complainant whose loss extends to £300,000 might find that they recover only a third of their losses, even if they have a very strong case.

Until recently it was unclear whether it was open to a complainant in this position to accept an ombudsman's award and then try to pursue the balance through the courts, possibly using part of the compensation awarded by the ombudsman to fund that litigation.  However, in November the High Court answered this question in the case of Andrews v. SBJ Benefit Consultants, deciding that once a complainant accepted an ombudsman's award, their right to commence court proceedings founded upon the same facts and to recover the same financial loss was extinguished. 

Ihe implications of Andrews v. SBJ

Going forward, this welcome clarification of a complainant's rights has important ramifications not only for investors who might be looking to hold their financial advisors to account after suffering heavy losses but also for the providers of financial services themselves.  Whilst the latter will be relieved to know that once an ombudsman's award is accepted they cannot have any further exposure or, indeed, have to divert further time and resources to assisting their insurers and/or their lawyers in dealing with a legal claim, investors themselves will need to think very carefully about whether they wish to complain to the FOS.  If they feel their case is not that strong or they are unable to afford to instruct lawyers, they may of course have nothing to lose; but those with stronger cases and, more importantly, those who would not be prepared to compromise their claims for the maximum amount that an ombudsman could award, may find that there is little to be gained by referring their complaint to the FOS. At best, they may end up with a decision which supports their position but which they do not wish to accept for purely financial reasons; at the same time, an ombudsman may make any adverse finding against them, which although not binding upon them,  may serve to harden the resolve of the firm involved if they do decide to subsequently pursue court proceedings instead, reducing the prospects of an early settlement.

Investors should therefore decide at an early stage whether an ombudsman's maximum award would sufficiently compensate them. If they find the prospect of limiting their recovery to £100,000 to be unpalatable, court proceedings or some other form of alternative dispute resolution may still be the better forum for obtaining redress.