Dr Wassim Dbouk and Dr Johanna Hjalmarsson- University of Southampton- Written evidence (CIR0014)


Commercial insurance and reinsurance regulation


Executive summary:

In response to this call for evidence on Commercial insurance and reinsurance regulation by the House of Lords Industry and Regulators Committee, we provide evidence and policy recommendations in relation to the following questions:

This evidence concerns a short point on the lack of opportunities for the law to develop, where there are insufficient avenues to bring court claims that also fall within the jurisdiction of the Financial Ombudsman Service (FOS). It is argued that one simple legislative change would enable the legal and regulatory framework for insurance and reinsurance to continue to develop in a market-adapted and balanced manner.

We recommend that the Financial Services and Markets Act 2000 be amended with one section or sub-section to reverse the Court of Appeal’s judgment in Clark v In Focus Asset Management.[1] Reversing that decision would permit claims to be brought to court, where the claimant has first successfully sought an adjudication from FOS. As a result, issues where the law needed to develop would see the light of day.


Response author: Dr Johanna Hjalmarsson, Associate Professor in Maritime and Commercial Law, Southampton Law School, University of Southampton

This submission has been developed in collaboration with:

Dr Meixian Song, Lecturer, Southampton Law School, University of Southampton

Dr Wassim Dbouk, Marine and Maritime Policy Research Fellow, Southampton Marine and Maritime Institute & Public Policy|Southampton, University of Southampton

Dr Konstantinos Serdaris, Lecturer, Southampton Law School, University of Southampton


The views expressed in this submission are those of the authors.

Citation: Hjalmarsson, J. et al (2022), A response to: commercial insurance and reinsurance regulation – a call for evidence from the House of Lords Industry and Regulators Committee


Question: Is the UK regulatory framework appropriate for the commercial insurance and reinsurance sectors?

1.1.      The Financial Ombudsman Service (FOS) was established in its current form by the Financial Services and Markets Act 2000 as part of the regulatory framework governing financial services, including the commercial insurance and reinsurance sectors. FOS fulfils the important function of providing an accessible and often fast dispute resolution service. It decides individual claims brought before it by consumers and – importantly for present purposes – small and medium size enterprises (SMEs). It deals with all forms of financial services disputes, including those arising from retail insurance. In deciding cases, FOS is not bound by the law but decides according to what it considers ‘fair, just and reasonable’ in the circumstances. FOS decisions are binding on the financial services provider (by industry agreement), but the claimant has the option of accepting or rejecting the decision. If the claimant accepts the decision, it becomes binding. If a claimant chooses to reject the decision, it may bring its claim to court, which will decide the claim according to the law. There is an upper limit to the size of sum that FOS can award on a claim.[2] Any larger claims will be lost in part, even with a successful FOS claim. FOS may recommend that the financial services provider pays the excess, but the recommendation is not binding.

1.2.      FOS helps keeps claims out of the courts, reducing their caseload. It settles claims cost-effectively and can contribute to law reform, as it did to the development of the Consumer Insurance (Disclosure and Representation) Act 2012. However, the law also develops through decisions by the courts. It is therefore important that novel issues can be brought before the courts to develop the law and settle the approach and position under the law. That route is currently effectively blocked for financial services claims. Claimants seek redress from FOS, and if they accept the awarded decision, the law is never considered or developed. Financial services providers are bound by FOS decisions. For a case to arrive in court, a claimant must either take the risk of entirely side-stepping the (arguably more favourable and cost-effective) FOS process and go straight to court, or reject the FOS decision and therefore also the sum awarded to it.

1.3.      The question of whether the claimant could accept the award while also reserving the right to bring a claim before the courts was in fact open until 2014. In that year, the English Court of Appeal held in Clark v In Focus Asset Management that a claimant could not accept an award and go on to have its case heard by the courts.[3] The claimants in the case had wished to do that, because their claim exceeded the FOS limit of awards. FOS had awarded them the sum claimed, and had recommended that the financial services provider also pay the exceeding amount.

1.4.      The Court of Appeal held that a FOS decision made the claimants’ cause of action res judicata; that is, a matter already decided by judicial authority. The decision is open to criticism. FOS lacks some of the hallmarks of judicial authority and crucially is not obliged to follow the law in deciding cases. It must consider what is fair, just and reasonable. The Court of Appeal’s reasoning was essentially that if the legislator had not intended for FOS decisions to make a cause of action res judicata, it would have said so. It is submitted that it is now time for the legislator to say so, for important policy reasons.

Policy reasons to allow claims in court


2.1.      If a claimant considers that the law would give them a greater sum than that which FOS is able to award, its options are currently to:

-          Not pursue a FOS award in the first place, but head straight to the courts, or

-          Give up on the part of their claim greater than what FOS can award.

Neither of these options is good. FOS serves an important purpose and should not be circumvented. Claimants should have a good route to obtain the whole of their claim, if deserving. The law should be given an opportunity to develop to cope with novel financial products and practices.

2.2.      Claimants should have the option of first obtaining from FOS an award for the partial sum, and then to use that sum as a litigation fund to pursue the remainder. The Court of Appeal considered this point, and said that claimants should not have this option. The Court’s reasoning here was arguably paternalistic. It limits what claimants are entitled to do with the money they have won through the award. The current position does not allow the consumer or SME to make independent choices and risk assessments about litigation. If the SME or consumer wishes to use the FOS award to fund further litigation in the courts for sums beyond what FOS can award, it should be entitled to do so. What is more, well resourced claimants are well positioned to present good, persuasive litigation before the courts and achieve a full and fair argument on the law. This benefits not only the claimants, but also the wider financial services industry, including insurers and reinsurers, who will have increased clarity on the law.

2.3.     Any increased workload on the courts would be negligible, given that FOS can award sums that cover most consumer claims and many SME claims.

2.4.     The effect of a reversal of the position would be to redress the litigation balance between financial services providers and consumers and small and medium-size enterprises (SMEs). In general terms, the latter do not have the litigation power that some financial services businesses can muster, and are therefore at a disadvantage in litigation. However, the partial award from FOS would permit them to litigate and, if successful, obtain the full sum of their claim. It would also permit the courts to consider cases and develop the law based on the arguments of consumers and SMEs and financial services providers, including retail insurers and brokers.



3.1.     As a result of Clark, the UK regulatory framework for the insurance and reinsurance sectors is inappropriate, in the limited and specific point that it does not enable judicial consideration of current and novel legal issues. Enabling litigation by reversing Clark by legislation would place courts in a position to hear cases brought by consumers and SMEs. In turn, there would be scope for the law to consider their issues and settle appropriate rules in deserving cases. Where the aim is to improve the regulatory framework, the opportunity for courts to review and determine the legal position is an important contributor to a strong as well as agile regulatory framework that responds to current needs and supports a well-functioning market.

11 February 2022





[1] [2014] EWCA Civ 118, [2014] Lloyd's Rep IR 437.

[2] The limit is currently £355,000, meaning that most consumer claims can be fully awarded by FOS. Some consumer claims and claims by SMEs may well be larger. See for the limits https://www.financial-ombudsman.org.uk/consumers/expect/compensation (accessed on 11 February 2022).

[3] Until the Court of Appeal’s decision in Clark, there were conflicting decisions at first instance. In Andrews v SBJ Benefit Consultants Ltd [2011] Bus LR 1608, the judge’s decision was the same as in Clarke (CA) but with different reasoning. The judge at first instance in Clarke, [2013] Lloyd's Rep IR 430, thought that the claim could be brought.