Are the procedures of the Financial Ombudsman Service (FOS) fair and reasonable? Is it a workable adjunct to an already creaky legal system or is it a monster, out of control and careering across the financial services landscape doing immeasurable harm? The answer is likely to depend on whether you are an adviser, a consumer or a regulator. This article aims to highlight adviser concerns about FOS fairness and accountability.

     “FOS is an unusual creature. One that I suggest Parliament would not have dared to create had the groundwork not been laid by a series of voluntary initiatives. It is a one-sided scheme offering an unlevel playing field broadly supported by those playing up hill” – these are the words of Chief Ombudsman Walter Merricks.1

    Regulated firms are likely to have their own descriptive terms for FOS, which is increasingly being used as a last resort tactic by claims management firms and complainants who often view it as a consumer champion.

    FOS is, “not accountable to ministers

    Walter Merricks admission1 will dismay advocates of democracy. FOS derives its powers from the Financial Services Authority (FSA) which sets out the parameters within the Dispute Resolution Rules (Disp.2). FOS is not subject to the Freedom of Information Act and, apart from acts of ‘bad faith’ and a breach of the Human Rights Act (HRA); it enjoys immunity from legal action. “Accountability is extremely important to me”.2

    Does FOS disregard the law?

    The dictum ‘he who asserts must prove’ forms the basis of English Law and was also established within the procedures of predecessor body, the Personal Investment Authority Ombudsman Bureau (PIAOB). Thanks to the Financial Services and Markets Act 2000 (FSMA) FOS allows no such proximity to the law as is evidenced by the current standard adjudication response - “Where there is a dispute about what happened, we base our decisions on the balance of probabilities - in other words, on

    what we consider is most likely to have happened in the light of the evidence”.3 This fundamental change enables FOS subjectivity to replace any previous vestiges of objectivity.

    FOS also ignores a firm’s right to cross-examine the complainant and evaluate all evidence as sanctioned within the court system. It is proud of its ability to cut through

    what it considers to be irrelevancy. “Our authority entitles us to go straight to the evidence we know to be relevant”.4

    However not only are established legal procedures ignored but also the law itself.  Individuals and firms enjoy protection under The Limitation Act 1980, as amended by the Latent Damage Act 1986. This provides a 15 years longstop after which claims for negligence cannot be pursued. Unlike its predecessor, FOS denies this legitimate protection arguing that FSA time-barring rules take precedence, although it then confesses to being unsure. “There is no such limitation in the rules that the FSA made for the ombudsman and the FSA has recently made it clear that it has no intention of altering that”.5 Conversely, FOS has no compunction in quoting the relevant Partnership Law when chasing the spouses of deceased advisers to recover case fees even when they have been exonerated from mis-selling claims. 

    FOS contends that the FSMA makes no reference to the 15 years longstop. The FSA concedes that it is subject to English Law yet the provisions within Disp 2 clearly show that it is able to create new law without reference to parliament or the courts. Both the FOS and the FSA can ignore statutory law and generate new law, or apply variations of existing law, at their behest.

    Anthony Speaight QC affirmed, “there is an authority from a Lord Chancellor that an arbitration clause that permitted arbitrators to disregard the law would render them arbitrary in their dealings with the parties”.6

    Simon Orton, partner at Freshfields Bruckhaus Deringer, was more pointed, "it is one thing for the FOS to depart from the law where it is unclear or does not properly address a situation, but the proposition that it can simply ignore an important legal principle - and, significantly, that there is no check on it if it does so – is quite concerning. The benefits of the FOS come at the expense of depriving the defendant firm of the procedural and substantive protections it would have under the formal court system. It is therefore particularly important that the system should be reasonably predictable and be subject to appropriate checks and balances. The principle of legal certainty requires that firms should be able to manage their customer relationships and their risks in a reasonably predictable legal and regulatory environment. This may be difficult to achieve where the Ombudsman can, in effect, disregard the law”.7

    Are FOS procedures fair and reasonable for firms and consumers?

    In determining complaints FOS should take into account legal rights and industry codes, but should decide on the basis of what is fair and reasonable”.1 FOS revels in

    its ability to work outside the parameters and principals of established law, asserting, “we comply with the rules of natural justice”.8

    FOS was established as an efficient and cost-effective alternative to the courts, but efficiency and cost-effectiveness suggest hurried conclusions and corner-cutting. Both of these may serve to deliver injustice and injustice is never fair and reasonable.

    Precedent or President?

    History points to the erosion of law and the creation of new non-parliamentary, non-judicial law, as the first stumbling steps down the road to oligarchy.

    FOS not only imposes law via precedent but also alters its stance as and when it deems it appropriate. “We do not have to pretend to ‘find’ what the law is. We

    unashamedly make new ‘law’”, boasted Walter Merricks1 in a June 2001 speech to the Financial Regulation Industry Group. Revealingly, an identical speech given to

    the Cardiff Faculty of Law, in 2002, found this astonishing admission expurgated. The Financial Services Practitioner Panel has also expressed its unease. “The panel has repeatedly pointed out the concern over the FOS’s quasi rule-making abilities and the often blurred line of demarcation between the FOS and the FSA”.9

    Are personal hearings cumbersome, expensive and wildly uneconomic?

    Walter Merricks believes so, which is a major shift from the views he expressed in 1999. “As a result of Article 6 of the European Convention on Human Rights, and the HRA, we shall be obliged to offer hearings if parties wish it where their civil rights and obligations are at stake”.10

    FOS rarely allows personal hearings, only eleven were heard in 2005 from nearly 111,000 cases. Lack of accountability and the refusal to allow personal hearings no

    longer concern Walter Merricks, however, when a practicing solicitor in 1986 and an unashamed advocate of the jury system, it troubled him greatly. “To entrust this judgment to experts I find dangerous. There is the problem that currently, as a matter of law, the standards to be applied in assessing honesty are those of ordinary people. Experts are by definition not ordinary people and they may find it difficult, not to say impossible, to envisage that the standards by which they must judge the

    accused are not those they would normally apply to themselves or their colleagues”.11

    The lack of an appeals process exposes FOS to being in breach of Article 6 of the HRA. Speaking with regard to the Pensions Ombudsman, Mr Justice Lightman

    observed, “it is troubling that the Ombudsman as the investigator sets the standard and as judge rules on compliance and decides the remedy. Since the decision of the Ombudsman is final on questions of fact, there is likely to be an entitlement to an oral hearing and the examination of witnesses…though he recognises the right to both the Ombudsman has had very few such hearings”. 12

    The lack of a personal hearing disadvantages the firm but serves to lessen the burden on the complainant. After all, it easier to contrive imaginative reconstructions of historic conversations, develop selective memory syndrome, exaggerate or lie when using a remote paper process.

    Should FOS decisions be subject to appeal?

    FOS believes that it offers an adequate appeals system, that by enabling an Ombudsman to review the adjudication it meets the appeals requirement of the HRA. It suggests that remedies are also available via the FOS Service Review Manager, the Independent Assessor and, ultimately, a judicial review. Regrettably, not one of these processes allows an appeal against the merits of the decision. “In a judicial review a court would overturn an Ombudsmans decision only if he or she had

    committed such errors as to deprive the decision of logic, making it legally irrational. As an appeal, judicial review is likely to be of very little use to firms in practice”.13

    The Government believes the existing appeals arrangements to be broadly proportionate

    Such reviews do not re-examine the decision, rather they focus on whether or not the matter has been handled with de process, has applied the law correctly, has taken the right things into account and has acted rationally”.16.

    Is FOS a ‘no lose’ situation for consumers?

    FOS allows a firm two ‘free’ complaints each year before applying a £360 case fee. A fee is levied whether the claim is genuine, opportunistic, malign or fraudulent. The firm pays whether innocent or guilty. “The person who has a complaint can approach the ombudsman, without fear of having to pay more, or of forfeiting any legal rights – a real ‘no lose’ situation”.1 When it determines a claim as fraudulent FOS refuses to upset the fraudster with any implication of deceit, preferring to invest the rejection letter with euphemisms suggesting the matter should be dealt with through the court system.

    FOS derives its rules from the FSA which has, as one of its statutory objectives, the reduction of financial crime. It is therefore incumbent on FOS to report fraudulent tactics to the authorities in the same way that it reports ‘problem firms’ to the FSA.

    Is the adjudication system balanced and logical?

    The vast majority of cases are determined by an adjudicator without an Ombudsman being involved. Unlike financial advisers FOS adjudicators do not have to pass examinations and nor do they have to be licenced. Attempts to extract details of how many adjudicators are FPC qualified have been unsuccessful. However we know

    that most adjudicators have little practical experience with 25% having less than one years service and 75% less than two years. “It appears that training provision has developed in a somewhat ad hoc manner14

    FOS is currently looking to implement a ‘specific software-based skills set’ which will work in conjunction with the existing Knowledge Information Toolkit, an intranet based series of guidance notes. Given the numerous examination passes, training and experience required to become a qualified licenced adviser it poses the question, how can a firm expect an inexperienced and less knowledgeable individual to competently assess a complex, historic situation where there is often a contrasting account of what, when and why? Both the author and other advisers have encountered examples of FOS illogic which would not have survived a courtroom scrutiny.

    An adjudicator’s decision can be ‘appealed’ to an Ombudsman but only 5% of adjudications are overturned suggesting flawless, high quality adjudications or, alternatively, a cynical rubber-stamping exercise. Interestingly, the attentions of a rampaging MP seems to act as an effective appeals method.

    How do false re-projections impact on FOS deliberations

    I do believe that generally within the UK there is a growing culture of compensation whether they perceive they have been treated unfairly or not”.15 Endowment policies currently generate the majority of complaints to FOS – 63% during 2005. The catalyst is usually the annual re-projection letter mandated by the FSA. My article in Money Management (August 2005) explained how and why such re-projections often veer from reality proving highly misleading. “There are more spurious than valid

    complaints going in”.16

    In 1999 the regulator reduced growth projections and instigated the mandatory sending of re-projection letters and until then few policyholders had suggested rule breaches. Had the re-projection been truthful the ‘red’ letter might have been ‘amber’ or ‘green’ and no complaint would have eventuated.

    Investment performance is not cause for a complaint but it is clear that the re-projection letters have launched an avalanche of dissatisfaction. The mathematical illogic of projecting future maturity values using surrender values is unacceptable. To then find that this nonsense has stimulated complaints is beneath contempt. “Some firms’ complaints systems are currently snowed under by indiscriminate claims for compensation by endowment mortgage policyholders”.17

    Regardless of the specific complaint FOS assumes its inquisitorial role and assesses ‘suitability’. Suitability is subjective and offers infinite scope for absurdity as the adjudicator takes a view regarding some historic action.

    What is the impact of bogus LAUTRO charges?

    Between July 1988 and January 1995 the Life Assurance and Unit Trust Regulatory Organisation (LAUTRO) insisted that providers use fictitious low charges when providing illustrations for endowment and pension plans. Money Management campaigned against this practice on the grounds that it misled the buyer. Something not fully realised at the time was the impact that the false charges had on the potential for these plans to hit their targets.

    One example, supplied by Standard Life (before it reconsidered and refused to divulge further information), highlighted an endowment based on a 7.5% p.a. growth assumption. The effect of false LAUTRO charges pushed the plan off-course and reliant on annual growth of 8.4%. The true premium should have been 11% higher. The plan was never on course from the outset. Standard Life knew this, LAUTRO/FIMBRA/PIA and the SIB all knew this, only the adviser and the policyholder remained unaware’. LAUTRO’s actions ensured considerable consumer detriment.

    This is extremely significant because it is reflected within the re-projection shortfall figures which then prompt the complaint. FOS and the FSA consider this a ‘red herring’ and FSA redress guidance ignores the impact of LAUTRO’s false expense charges. Ludicrously the FSA also argues that LAUTRO was a non-connected body and therefore it bears no responsibility for its predecessor’s initiatives. Perhaps, like FOS, we should ignore law and look at what is ‘fair and reasonable’.

    The recent case of Seymour v Ockwell & ZIFA Ltd highlighted the concept of shared liability due to malfeasance. I suggest that the FSA, as the current regulator, should be liable for a substantial portion of redress for the majority of investment contracts purchased between 1988 and 1995.

    Why are redress calculations unfair and unreasonable?

    A firm adjudged guilty of mis-advice has to abide by FSA rules regarding redress. This involves calculations to determine whether there has been a financial loss. Such a calculation will use the surrender or transfer value to arrive at a conclusion.

    This again promotes injustice as the surrender or transfer value involves a financial penalty, sometimes ferociously high. Indeed, the annual Money Management with profits endowment surveys highlight the disparity between surrender and maturity values. “The standards prescribed for compensation on a mass basis may not be those that a court would use in a single case”.1 If the successful complainant retains the tainted endowment it further inflates the injustice to base redress on the penalised surrender value when the ultimate maturity is penalty-free. After all, if the surrender value is representative of the true value why are so many companies clamouring to buy them?

    At the beginning I asked if FOS procedures were fair and reasonable. I believe this not to be the case. The FSA/FOS axis has contrived a system which mitigates

    against fairness, justice and accountability, in each instance factored against the firm. “An unappealable, compulsory, summary jurisdiction against small traders

    making awards as great as £100,000 is, in my view, both wrong in principle and producing injustice in practice".7

    The FOS case fee structure is currently being consulted on, but even if the current one-sided system is altered it is akin to applying a small bandage to a massive area of infection. Powerful medicine is needed in the form of changes to FSMA 2000, which is only likely to be achieved by application to the European Court of Human Rights in Strasbourg.

    On its face, the entire scheme is hopelessly non-compliant with European Court of Human Rights (ECHR) requirements”.18  The Ombudsman procedure clearly does not comply with Article 6 (1) of the ECHR”.19


    1   Walter Merricks speech to Cardiff Faculty of Law October 2002

    2   Andreas Whittam Smith when Chairman of FOS April 1999

    3   FOS adjudicator standard paragraph

    4   Walter Merricks speech to British & Irish Ombudsman Association May 28

    5   Walter Merricks speech to the Council of Mortgage Lenders December 2003

    6   Anthony Speaight QC

    7   Simon Orton of Freshfields Bruckhaus Deringer re. Judicial Review, IFG Financial Services Ltd v FOS Ltd May 20052   

    8   Walter Merricks in evidence to Treasury Select Committee June 8 2004

    9   Financial Services Practitioner Panel 2003 Report – March 2004

    10 Walter Merricks address to The British Insurance Law Association December 1999

    11 Walter Merricks in a response to the Roskill Report 1986

    12  Mr Justice Lightman speech to the Association of Pension Lawyers march 2001

    13 Building Societies Association response to FSMA 2 year review September 2004

    14 An Assessment of the FOS by Personal Finance Research Centre University of Bristol July 2004

    15 John Goodfellow Chairman of the Building Societies Association on Moneybox 13 April 2004

    16  FSA spokesman Rob McIvor

    17  Sir Howard Davies July 2003

    18 Philip Parish of Linklaters and Alliance in the Journal of International Business Law 2000

    19 Tim Pinto of Taylor, Johnson Garnett in the International Company and Commercial Law Review 2001