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.