Financial Advisers face compensation claims over FOS limits following shock court decision

SHARE

Financial advisers who compensate clients for negligent advice following a Financial Ombudsman Service (FOS) award could find themselves sued for additional compensation following a shock High Court ruling.

It had generally been accepted that a FOS award prevented claimants from pursuing their financial advisers for additional compensation through the courts.  In a new case, Clark & Clark v In Focus Asset Management & Tax Solutions Ltd, Mr Justice Cranston ruled that the claimants, a Mr and Mrs Clark, could sue their adviser for additional compensation.  His decision ran contrary to an earlier High Court case, Andrews v SBJ Benefit Consultants, which ruled that accepting a FOS award prevented a claimant from making a further claim through the courts.

The decision could have a further serious impact on the professional indemnity insurance market for financial advisers, with their insurers facing potentially larger claims for negligent advice.

This is another worry for financial advisers facing Financial Ombudsman arbitration.  It now appears that their clients can sue them for any losses over and above the FOS compensation cap of £150,000 in the courts,” said James Burgoyne, Director, Brunel Professional Risks.  “Many commentators are predicting that an FOS award in the future may effectively provide a claimant with a war-chest to fund further legal action. We have always advised our clients to put effective risk management procedures in place to minimise the potential for unsafe financial advice.  Recent cases including Keydata and Arch Cru amply demonstrate that advisers need to completely understand the underlying details of products and potential investment risks before recommending them to their clients.

At present the decision in Clark & Clark does not overrule the Andrews case as both were heard in the High Court.  This creates significant uncertainly for financial advisers and their insurers facing FOS claims which will not be resolved unless the Clark & Clark case is challenged in the Court of Appeal.  “We really need an appeal in the Clark case to clarify the position on FOS compensation,” said James Burgoyne.  “We will have to hope that an early appeal is forthcoming.”

In the Clark & Clark case, In Focus had advised Mr & Mrs Clark to invest the proceeds of sale of a family business in a geared traded endowment plan. This proved catastrophic and resulted in the Clarks losing more than £500,000.  Mr Justice Cranston’s ruling in the case is available here.  A summary of the case by law firm Fishburns LLP, published in Money Marketing is available here.  Details of the earlier Andrews case from Out-Law are available here.

Menu