Loophole means you could pay Fos redress and still be sued

Advisers who settle complaints at an early stage could be sued for additional compensation above the maximum limit, according to a law firm which claims to have uncovered a loophole in a landmark Court of Appeal ruling upholding the binding nature of Ombudsman awards.

In February, advisers were effectively saved from the threat of being pursued for substantial additional compensation through the courts on top of that awarded by the Ombudsman, following a landmark ruling in the Court of Appeal.

The decision overturned a previous High Court ruling that opened the door for a couple to pursue their former adviser for £500,000 in damages after they had already accepted the maximum £100,000 Financial Ombudsman Service ‘final’ award. The maximum final award has since risen to £150,000.

Many interpreted this as meaning the law lords had finally ruled you don’t get “two bites of the same cherry”.

However, law firm Reynolds Porter Chamberlain has warned having looked through the detail of the ruling there is a whole swathe of Fos redress to which the principle will not apply and a complainant might be able to sue in court if redress exceeds £150,000.

The problem lies in the word “award”, which specifically applies to final and binding orders issued by an ombudsman reviewing a case.

In order to go before an ombudsman, a Fos complaint will first be reviewed by an adjudicator which would recommend a resolution. It is only passed on if either party rejects the recommendation.

Crucially, lawyers at the London-based firm point out adjudicator recommendations are not an “award” but a “commercial settlement.” Whether or not a complainant can sue for the balance of their redress will be governed by the settlement agreement.

To avoid getting two bills for compensation, even if a firm wishes to accept the recommendation of an adjudicator to avoid increasing the final payout RPC states advisers should reject the award and have it reviewed and upheld by an ombudsman.

“Most are agreed that having adjudicator decisions rubber stamped by an ombudsman in this way is an unhelpful drain on an ombudsman’s resources, however the reality is it will ensure that Clark v In Focus applies.

“That, of course, carries risk, since with the finality of a binding ombudsman’s decision comes the adverse publicity of having the decision published on the Fos website and heightened obligations to take the decision into account in the handling of other, potentially similar, complaints.”

Alternatively, RPC states firms should ensure that any settlement reached at the adjudicator stage is documented in the settlement agreement. This will ensure that the complainant cannot sue and will keep a firm’s name out of the spotlight, but would require the consent of the adjudicator.

“The Fos adjudicator – if keen to preserve the complainant’s rights – may take some persuading but the firm must be sure not to enter a settlement agreement with the complainant that contradicts anything the adjudicator has put in place.”