Sir Christopher
Kelly, chairman of the Financial Ombudsman Service gave a speech at the Association of Finance Brokers (AFB) annual
dinner on 2 July 2007.
He used it as
an attempt to refute the barrage of criticisms hurled at the FOS in recent
months. As is usually the case the answers fall some way short of reality and
the real truth of the situation is shown beside the text of his speech.
“Eight out of
ten businesses covered by the Financial Ombudsman Service did not actually have
complaints referred to us by their customers last year. As these
businesses have little or no direct contact with us, many therefore tend to
rely on what they hear about us from others – rather than asking us direct.
This means that myths can circulate – often promoted by third parties with
their own particular interests – which may be several steps removed from the
actual reality.
Here are some
of the myths – and the answers straight from the horse’s mouth. “
myth: the ombudsman service is a regulator
truth: the Financial Ombudsman
Service is part of the statutory arrangements designed to underpin consumer
confidence in financial services. Our role is to resolve individual disputes,
as a quicker and more informal alternative to the courts. We are no more a
regulator than the courts are.
REALITY: Whilst not
formally a regulator the FOS is able to make ‘law’ through precedential
adjudications. In resolving disputes they make subjective decisions informed by
bias and a tendency to give credence to supposition and the dubious memories of
complainants. As Walter Merricks once said ‘We unashamedly make new laws’.
myth: the ombudsman service is a consumer
champion
truth: like the courts, the
ombudsman service is entirely impartial. In about one third of the cases we
settle, we conclude that the consumer was right. In another third of the cases,
we conclude that the business was right. And in the final third, we conclude that
the business was right – but explained things so poorly, that it was hardly
surprising the consumer didn’t understand.
REALITY: The format of the FOS allows opportunists and
chancers to level complaints in the knowledge that it costs them nothing and in
the hope that they might gain a windfall payment. FOS says it has no powers to
report cases of attempted fraud and in so doing not only condones such attempts
but encourages them. In this sense it is a ‘consumer champion’. We have
evidence to show that the FOS is influenced by members of the Treasury Select
Committee and the Committee itself, we can show that the FSA has attempted to
influence the FOS.
myth: the ombudsman service is an external
imposition on the financial services industry
truth: it was the financial
services industry itself that invented the concept of the ombudsman for the
financial sector – through the industry-created Insurance Ombudsman,
established in 1981, and the industry-created Banking Ombudsman, established in
1986. Credit is due to those industry figures who – back then – recognised that
consumers were more likely to have confidence in the industry, and do business
with it, if they were guaranteed redress if something went wrong.
REALITY: It is true that the industry originated the
Ombudsman schemes however the formation of the FOS by the Financial Services
and Markets Act 2000 empowered it beyond any previous Ombudsman body. The 15
year longstop on stale claims was recognised by all previous Ombudsman bodies
but not the FOS. Previous bodies could only order compensation where there was
a ‘loss’ whereas the FOS rewards complainants who have potentially suffered a
loss. Under the PIAOB any complaints about performance were not within its
remit, a complaint about any contract in mid term is just such a complaint yet
IFAs are expected not only to make up for a mythical shortfall but also the
shortfalls ceated by the regulator.
myth: the ombudsman service has unprecedented
powers
truth: the key features of the
Financial Ombudsman Service are exactly the same as those features agreed by
the industry itself for the Insurance Ombudsman back in 1981:
·
an
independent service, free to consumers;
·
resolving
disputes informally on the basis of what is fair and reasonable in the
individual case;
·
the £100,000
limit for awards.
REALITY: As already stated, the FOS is far more powerful
than previous Ombudsman bodies. It is even more poweful thean the Judiciary,
this was admitted by Walter Merricks.
myth: resolving cases on the basis of fairness
undermines people’s rights – and ombudsmen ignore the law
truth: it is the law, laid down by
Parliament, that requires the ombudsman to decide cases on the basis of
fairness – whilst complying with the Human Rights Act. And fairness is the
principle which lies at the heart of modern consumer-protection legislation
applied in the courts – ranging from the Unfair Contract Terms Act, through the
Unfair Terms in Consumer Contracts Regulations to the “unfair relationships”
test in the recent Consumer Credit Act.
The majority of the disputes we handle turn on
disputes about what actually happened – or on the application of general legal
principles. In most cases, our approach is based on what the courts would be
likely to do in similar circumstances – though in some areas, the industry has
voluntarily imposed on itself (through codes of practice) standards which
exceed the law’s requirements.
REALITY: The industry codes of conduct are set out within
the FSA’s Handbook and within the nebulous realms of the ‘Treating Customers
Fairly’ requirements. FOS does not work within the law and by refusing to allow
the protection afforded by the 15 year longstop on stale claims – enacted
within the Limitation Act 1980 – the point is proven. However the FOS argues
that its remit allows it to deny firms the following opportunities which are
available within the UK legal system.
· The ability to cross examine the
complainant
· The ability to see and examine the
‘evidence’ used by the FOS to determine culpability
· The opportunity for a personal hearing
· The right to an independent appeal system
All of the
above mean that the FOS is in breach of Section 6 of the European Convention on
Human Rights.
myth: ombudsman decisions are inconsistent and
unpredictable
truth: we have stringent internal
quality-assurance systems – including quality-checking a sample of cases on a
routine basis – by which we can be assured that the decisions we make are in
accordance with our powers and the approach we have published.
We set out our procedures and approach in a wide
range of publications
– and on our website, which has more than a thousand pages of information. This
includes a dedicated online
resource for businesses – answering the hundred questions we are
most frequently asked by smaller firms.
We publish case studies and articles monthly in ombudsman
news. And we run hundreds of events for businesses every year – from
roadshows
and seminars to conferences and exhibitions. Businesses can also
contact our dedicated technical
advice desk for free advice. It handles 20,000 calls a year from
industry practitioners – and deals with technical queries across the whole
range of financial products and disputes we cover.
REALITY: The FOS continues to confound firms and consumers
with its variable service. The July 2007 edition of Money Management magazine
highlighted the stream of inconsistencies which has and still continues to pour
from its offices. In making such decisions, sensible or otherwise, it continues
make new law. Indeed, Chief Ombudsman Walter Merricks has publicly stated that
the FOS “Unashamedly makes new law”.
myth: the ombudsmen use hindsight and apply
today’s standards to yesterday’s events
truth: our rules require the
ombudsmen to take account of the law, regulators’ rules and good practice in
the industry as they were at the time of the events concerned. They recognise,
for example, that the Financial Services Authority’s ICOB rules were preceded
by GISC standards, which were in turn preceded by ABI codes.
REALITY: The FOS constantly bleats that it works within
the Dispute Resolution Rules (DISP) as set out in the FSA Handbook. The DISP
rules contain rules and ‘guidance’. Let’s be clear on this – rules are rigid
and inflexible whereas ‘guidance’, according to Websters Dictionary, means “advice given to help make educational or personal decisions”. The FOS chooses to use the ‘guidance’ to
override the rules thereby disadvantaging firms which look to use the DISP
rules as intended. Retired advisers have little chance of fending off
determinned and devious FOS staff who use a smokescreen which is made up of
‘rules’ ‘law’ (when it suits them) and page after page of nebulous scribblings
to hide the truth.
myth: the ombudsman service is forever imposing
decisions on the industry
truth: in reality, very few of our
cases result in a binding ombudsman decision. 94% of our cases are resolved by
both parties accepting mediation or an adjudicator’s recommendation about the
outcome of their case. Though either the consumer or the business can ask for a
final decision by an ombudsman, this happened in only 6% of the cases that we handled
last year.
Unlike the courts, the ombudsman service actively
engages with the financial services industry and consumer bodies – to help
resolve disputes without their ever coming near the ombudsman service, and to
identify ways to prevent disputes arising in the first place. In fact, only 15%
of the complaint enquiries received by the ombudsman service ever turn into
cases.
Of course, this approach relies on the parties
being open to such processes. Our experience of some smaller businesses, in
particular, suggests that this is not always easy. Occasionally, the
proprietors of some small businesses let their emotions run away with them. We
can appreciate why this might happen. But it doesn’t help. It is the facts of
the case that count, not the strength of feelings on either side.
REALITY: FOS figures show that 95% of Ombudsman Decisions
uphold the adjudication without contradicting the adjudicator who said as much
in the decision. Firms, and possibly the consumers, realise that there are
vested interests at work. FOS cannot denigrate adjudications by upholding too
many ‘appeals’. As for ‘facts’ counting…too many adjudications ignore
factuality with their suppositions based on inferences, hearsay and prejudice.
myth: the ombudsman service makes insufficient
allowance for smaller businesses
truth: we try very hard to be
sensitive to the position of businesses who have seldom or never dealt with us
before. An internal task force – led by our decisions director and working across
all areas of the ombudsman service – has specific responsibility for focusing
on the needs of smaller–user businesses and encouraging initiatives to improve
the service we offer this key stakeholder group.
For example, when a case is opened, our computer
system automatically flags up if the business is one that is not a “regular
user” – so we can deal with them appropriately. And we have a special quick
guide for businesses who have not had a complaint with us before –
which we send out automatically as part of our process.
REALITY: All very encouraging until the realities hit the
smaller business. Not only does the firm have to negotiate the maze of DISP
rules and guidance but they have to understand and confront the views and
prejudices of individual adjudicators. Retired advisers are lost in this maze.
The FOS and the
FSA are inextricably linked and like conjoined twins they share the same
mindset and are ruled by political considerations which influence the
interpretation of rules and guidance.
myth: the funding system is unfair, and
consumers should be required to pay
truth: Parliament required us to
recover our costs from the financial services industry. We do not have power to
routinely charge consumers a fee or deposit.
Part of our funding comes from a levy. This is
paid by all the businesses in the industry – to recognise that the existence of
the ombudsman service gives consumers confidence to deal with financial
services businesses – and is based on market share. Consumer credit businesses
pay this as part of their five-yearly licence fee collected by OFT.
But most of our funding comes from case fees, and
so is based on the amount of disputes we settle. At £400, these case fees are
many times less than the amount a business would have to spend in court. Each
business’s first two cases per year are “free”. So only around 5% of businesses
covered by the ombudsman service currently pay case fees, and they are almost
exclusively the larger businesses.
The case fee is payable irrespective of the
outcome of the cases. Our focus on mediation means we can resolve many
complaints without needing to apportion blame. And in many cases there is no
clear-cut “winner” and “loser”. Arguing whether a case fee should be payable
would only increase costs all round.
If we only charged the business a case fee when
the consumer clearly “won”, the fee would have to be much bigger – and it might
then appear that the ombudsman service had a financial incentive to uphold
complaints.
REALITY: The consultation held in 2006 allowed interested
parties to make a choice from a number of fee models which had been costed by
the FOS. The most popular model was one which allowed each firm 10 ‘free cases’
each year. In other words, the major ‘offenders’ would shoulder the bulk of the
cost whilst smaller firms would only be subject to the annual FOS levy. Early
in 2007 it was announced that it was too difficult to accurately forecast the
numbers of complaints (mainly due to the end of the endowment complaints gravy
train). Currently there is no indication of what if any changes will be
adopted.
The only fair
system would be one where a fee is paid by each complainant which would be
refundable if the complaint is upheld. Such a system would reduce the
unacceptable burden on firms and also discourage vexatious and opportunistic
complaints. Of course, such a system is deemed politically unacceptable as we
live in the age of the consumer champion. Also, if claims were discouraged in
sufficient numbers it would pay havoc with the FOS funding figures. Heaven
forbid, they might have to reduce staff and move to smaller premises!
Dear Sir
Christopher
You are
evidently unaware of what is going on at the FOS. We would be only to happy to enlighten
you with the TRUTH.
Kind regards
IFADU