Customers have been advised that they cannot subsequently pursue a legal claim over the same issue if they accept compensation from the Financial Ombudsman Service (FOS). However, any customer who uses the FOS services and then rejects their offer of compensation still has recourse to the courts.

The FOS is an independent body that adjudicates on consumer complaints where the financial institution and the customer cannot reach agreement on how to settle the complaint. Several million people have had to resort to the FOS to receive compensation for mis-sold financial products in recent years, after the banks and other firms rejected large numbers of apparently legitimate complaints.

Today, the maximum sum the FOS can instruct a financial institution to pay in compensation is £150,000 per case. Normally, any such instruction from the FOS is binding on the firm. But if a customer deserves a higher amount of compensation, the FOS can recommend that the firm pays this higher sum, but cannot compel them to do so. Previously, some customers had accepted compensation via the FOS route, and had then gone to court in an attempt to secure additional redress, but this ruling will prevent that happening in future. In many cases it was believed that the claimants were using their FOS award to partially fund their legal fees.

Final judgement on this matter was given by the Court of Appeal in February 2014. The landmark case concerned a claim by Barry and Julie Clark of Portsmouth, who alleged losses of £500,000 as a result of inappropriate advice given by In Focus Asset Management and Tax Solutions. The couple were awarded £100,000 in compensation by the FOS – the maximum it could award at that time – and then commenced court proceedings to recover the remainder. Their claim was rejected, but in December 2012 the High Court subsequently ruled that it was permissible to pursue additional compensation in court having accepted compensation via the FOS route. In Focus appealed this ruling, and has now been successful.

Summarising the appeal ruling, Lady Justice Arden said: “If the Clarks succeed, a complainant may be able to use an award as a fighting fund for legal proceedings. On the face of it this result would be for consumers’ interests, but that is not necessarily so. If they lose court proceedings, it may lead to them losing all that they have gained through the FOS. It may also lead to the development of a claims industry in this field that increases the costs of obtaining financial advice.”

Customers who believe they have lost more than £150,000 due to the actions of a financial institution are thus faced with a difficult choice. Do they go down the FOS route, in the expectation that their compensation will be capped, or do they commence legal proceedings, which are much more complex and potentially expensive? There is no charge for consumers to use the FOS, regardless of the final outcome, whereas losing legal claimants can expect to have to pay sometimes significant legal fees. Furthermore, in court the claimant will be required to demonstrate that the firm has broken the law, whereas the FOS can find against a firm simply because it believes it has not acted in a ‘fair and reasonable’ manner.