In just three years since its inception, the Financial Ombudsman Service (FOS) has dealt with thousands of consumer complaints against financial services businesses and awarded compensation totalling millions of pounds in respect of almost every ‘scandal’ that has hit the industry. Pensions, endowments, split capital investment trusts and precipice bonds have all attracted their fair share of FOS complaints, to the extent that in 2003-04 the service dealt with almost 100,000 complaints. The FOS is now the largest ombudsman scheme in the world.
Yet some professional advisers seem to know comparatively little about it, despite the fact that their clients either are, or shortly will be, subject to its jurisdiction and its extensive powers.
The FOS was established under the Financial Services & Markets Act 2000 (FSMA) to assist in the resolution of disputes between consumers and financial services businesses. ‘Consumers’ include businesses and charities with a turnover or income of less than £1m and trustees where the trust has an asset value of less than £1m. The FOS adopted its full powers upon N2 on 1 December 2001, replacing the eight ombudsman schemes that previously operated across the industry.
The FOS hears complaints about all FSMA-regulated activities. More than 30,000 businesses will be subject to its jurisdiction when mortgage and insurance intermediaries become subject to Financial Services Authority (FSA) regulation in January 2005. The FOS will also hear consumer credit disputes from April 2006, becoming the single port of call for all personal financial complaints.
The FOS is in fact the second stage in the complaints-handling process relating to financial services businesses. It comes into play only when a complaint cannot be satisfactorily resolved through the company’s own complaints-handling procedure. FSA rules impose requirements for these procedures and companies are encouraged to resolve complaints before they are referred to the FOS. For example, customers must be treated fairly, and if after investigation the company decides that redress is appropriate, it must provide a complainant with compensation that is fair.
The FOS will not generally accept a complaint unless a company has rejected it or handled it unsatisfactorily. It will also accept a complaint only if it is made within six months of the company’s final response.
Main features of the FOS’s processes
The FOS has power to award compensation by issuing money awards of up to £100,000 per complaint. It is free to complainants.
The FOS determines a complaint by reference to what is, in the ombudsman’s opinion, fair and reasonable in all the circumstances of the case. Therefore, it does not determine a case solely according to strict legal rights and wrongs. The assessment is wider and can have regard to criteria which may otherwise have been ignored by a court. The FOS’s investigative procedures are much more informal than those of the court.
Its decisions are binding on the company but not the complainant. Should the complainant ‘lose’ before the FOS, they can still take their case to court in the usual way.
There is no right of appeal available to the company from an FOS decision: it must pay the compensation ordered or face FSA punishment.
All this makes the FOS an attractive prospect to customers who consider they have been badly advised or missold a financial product. It is more attractive than the courts, with the complexities of litigation but also the risks of the costs consequences of losing a claim.
The rising number of complaints to the FOS reflects a combination of trends. Customer dissatisfaction with financial advice is certainly part of that, and one should not forget the decline of the equity markets in the earlier part of the decade. Also, perhaps too often overlooked, there is an increased willingness on the part of consumers to pursue complaints through the cost and risk-free environment provided by the FOS. Furthermore, the FOS has done a good job in raising its profile and promoting its services.
The FOS has said that it anticipates a levelling off in the number of complaints over the next year. However, that may be wishful thinking given the fact that the number of companies subject to its jurisdiction is set to treble.
But many in the industry complain that the FOS goes further than just being ‘fair and reasonable’ in that it is ‘claimant-friendly’ and bends over backwards to find in favour of the complainant. They also say it sets unwelcome precedents that have wider implications for the company or the industry. An example is the dual-rated mortgage decisions, which caused a number of lenders to implement a wholesale compensation package for thousands of customers in 2001-02.
One of the strands of the ‘N2+2 Review’, announced by the Treasury last year, focuses on FOS reform. Live issues include whether, in the specific circumstances, FOS decisions should be subject to some form of appeal, and how the FSA should go about bringing enforcement (or other) action as a consequence of FOS decisions. As such, Walter Merricks, the chief financial ombudsman, recently highlighted to the industry that endowment complaints currently represent almost three-quarters of all complaints referred to the FOS. His view is that the industry’s attempts to resolve the complaints without the FOS’s involvement does not seem to have been very successful: 45 per cent are still being upheld, while in relation to some types of endowment complaints, the proportion is 80 per cent. Merricks warned that the FSA and FOS will be cooperating further and companies that are mishandling endowment complaints can expect a knock on the door from the enforcement division.
Earlier this year, the FOS and the FSA jointly published a consultation paper looking at some of the live issues and proposals for FOS reform. The paper sought to clarify the differing roles and responsibilities of the FSA and FOS. It also consults on ‘wider implications’ cases, where there is a widespread issue or issues that could give rise to a significant impact on companies, consumers or a particular sector. The paper also looks at the legal and practical issues involved in establishing an external appeals system. At present, judicial review is the only mechanism to challenge an FOS decision. Many in the industry are aggrieved at the lack of an FOS appeals process for a company. Some have questioned whether that breaches the company’s right to a fair hearing, guaranteed by the European Convention on Human Rights.
Whether wider industry concerns are met with concrete reform proposals emerging from the consultation process remains to be seen. In particular, it is doubtful that any meaningful appeals mechanism will emerge. The Treasury has already said it will not favour changes that in any way undermine the FOS’s independence and that it will not support a change, meaning that the FOS would no longer be free to consumers. To that extent, the FOS may remain to some an imperfect process, but the compulsory nature of its jurisdiction means that certain businesses and advisers must become accustomed to its practices and procedures, or else face the consequences.
Garon Anthony is a senior associate in the financial services and regulatory group at Pinsent Masons