Financial Regulation Industry Group, Chantrey Vellacott DFK Annual Reception 6 June 2001
The Financial Ombudsman Service is an unusual creature. A creation of statute but founded on a voluntary initiative. An alternative dispute resolution forum optional for applicants, but with a compulsory jurisdiction over bodies complained about. A consumer service yet providing impartial adjudication. An officially created organisation but not dependent on taxpayer's money. An independent body not accountable to ministers. A jurisdiction required by law to be based not on legal rights. An adjunct to financial regulation, yet independent of it. A free service to consumers whose legal rights remain unaffected if they choose, while decisions against financial firms are legally enforceable. A jurisdiction self funding by compulsory levies and fees on the firms complained against. A mission to prevent disputes in addition to merely adjudicating on those that have arisen. A "one-sided" scheme offering an unlevel playing field broadly supported by those playing up hill.
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 showing that it can all work. In this talk I will try to flesh out how and why some of these unusual features go to make up what I believe is a successful model offering real value to the general public and to its users. In particular I will highlight some comparisons with the courts.
The idea of an ombudsman dealing with private sector disputes is relatively new. This year we celebrate only the twentieth anniversary of the founding of the office of the Insurance Ombudsman, the first of the UK schemes. It was started as a voluntary initiative by three insurance companies who realised that telling a dissatisfied customer whose complaint they had rejected to take them to court was hardly a consumer friendly act. So they approached that National Consumer Council with the idea of an independent adjudicator, and the main features of the model were settled in the discussions that followed.
So what were the main features of the model? The ombudsman must be appointed by a body independent of the industry. Before the ombudsman can entertain a complaint, the firm must have had a reasonable opportunity to consider and resolve the dispute. In other words, the ombudsman is a last not a first resort. Complainants must be retail customers whose dispute is about the service or product that they have bought, not about some legitimate commercial policy the firm has made in positioning itself in the market. There is no fee to pay, no threat of costs awards. The scheme is funded by the industry to maintain and enhance its reputation for fair dealing. The ombudsman can make an award against a firm up to a maximum - in our case £100,000. In determining complaints he should take into account legal rights and industry codes, but should decide on the basis of what is fair and reasonable in all the circumstances. While the firm complained against is bound by an adverse decision, the complainant's legal rights remain unaffected if his complaint is rejected. The ombudsman's decision is final and there is no appeal.
The model was rapidly copied by the banking and building society sectors and was then made part of the institutional arrangements for regulating investment business. Having started twenty years ago, the model then established has changed remarkably little. Now in the UK apart from the local and central government ombudsmen, there are schemes dealing with disputes about social rented housing, estate agency, funeral services, legal services, prisoners rights, and police conduct in Northern Ireland. Plans are well advanced for a scheme for the telecommunications industry and only last week the Consumers' Association called for an ombudsman to cover internet service providers.
Outside the UK the model has been taken up in other parts of the Commonwealth, in Europe and beyond. There are now Ombudsmen or their equivalents covering insurance or banking in Ireland, Australia, New Zealand, South Africa, Malaysia, India, Italy, Greece, Finland, Norway, Sweden, Denmark, Belgium, the Netherlands, France, Switzerland and Mexico.
The insurance and banking ombudsmen schemes were voluntary initiatives by their respective industries. Firms complied with ombudsman awards not because they were legally enforceable (that was never put to the test) but because that was a rule of joining the scheme. The government had nothing whatever to do with them, yet the industries continued to pay for them and to support them. Consumer organisations likewise have been enthusiastic and loyal supporters, recognising that the schemes provide real value in terms of consumer protection. And personal finance journalists, normally a cynical and hard-bitten lot, encouraged their audience to use the schemes. Further evidence of the success of ombudsmen is their endorsement by Lord Woolf in his report on Access to Justice. Indeed the field of personal finance claims the ombudsmen have virtually denuded the civil courts of any substantial volume of litigation. Nowadays if you see such a case in the courts you wonder why it hasn't been to the ombudsman - or whether perhaps it already has. One might also speculate on how the courts and the legal aid scheme would have coped if they had to deal with the volume of business we now handle.
So the Financial Ombudsman Service is simply a natural extension on a statutory basis of the schemes already established on a model the industry itself had set up. When the Government was considering unifying the arrangements for regulating financial services it was not surprising that it decided that there should be a single ombudsman scheme. So the Financial Services and Markets Act 2000 provides for a single scheme - Financial Ombudsman Service - to replace six previous schemes - the ombudsmen for banking, building societies, insurance, and three investment schemes. The novelty, if it is considered that, is that the core element of the scheme is to be compulsory for all authorised firms. Our compulsory jurisdiction will therefore cover the remit of all the existing schemes, and we are also to have a voluntary jurisdiction that would enable us to expand our service to other financial services such as insurance and mortgage broking and consumer credit, activities not presently covered by the schemes we are replacing. The Act says that the scheme should provide for disputes to be "resolved quickly and with minimum formality by an independent person".
In practical terms we have merged all the existing schemes into a single organisation, in the same way that the FSA itself has done, ahead of our legal empowerment with a view to giving consumers a single point of access straightaway. We have organised ourselves into three main specialist divisions, for banking, insurance and investment, each headed by a principal ombudsman managing teams of ombudsmen and adjudicators; and a customer contact division dealing with all initial contacts. We have a single office in South Quay in the docklands area of East London, housing our 450 staff.
Our remit covers activities where the conduct of business is closely regulated by the FSA: investment services, and in the future, mortgage lending; and those where the firm has to be authorised, such as banking or general insurance where business is subject to an industry code and not actively regulated by the FSA; and other activity subject only to industry codes.
Having merged the six schemes just over a year ago, we can now see the total aggregate of the business. We now receive an average of 1,000 new telephone contacts a day, a 50% increase compared to the same period last year and 150% increase on the volume the separate schemes were handling. Together with written enquiries we received over 400,000 new enquires last year. However only about 10% of these turn into disputes that need to be investigated and adjudicated - we estimate about 38,000 in the current year compared to the 25,000 dealt with by the schemes in 1999/2000. Over half of these will be complaints about personal investments, mainly endowments sold to repay mortgages. Of the 38,000 complaints we will probably uphold in part or in whole upwards of a third of them - say 12,000. The remainder will receive a full explanation of why we believe their complaint cannot succeed.
All this is paid for directly by the financial services industry - in the current year our budget is around £27 million. Quite a large sum for a consumer service, but a trifling proportion of the total overheads of the industry. It is not easy to quantify the benefits in terms of cash. For the 400,000 enquirers we deal with, the information we give them resolves the query and prevents a complaint to the benefit of all concerned. Unless, which I doubt, those 12,000 individuals whose complaints had some justification had pursued their grievance by taking court proceedings (of course some would have done so), the injustices they suffered would have remained unremedied and the industry would have learned nothing. 38,000 people who were rightly or wrongly dissatisfied in a major way with their financial firm would have lost confidence in the industry. This stands as a reasonable justification for requiring all firms to contribute something to the cost of the service, and, as our system will, requiring those firms that generate the most complaints to pay the most.
For the industry it has obvious side benefits: the financial contributions to the scheme are probably less than the legal fees it would pay if cases went to court, and there is probably a saving in management time. And there is an excellent answer to any approach from the media about a customer complaint: "Has the person complained to the ombudsman? If not why not?" Human error will always happen in the best of companies, and it will often be easier that redress is determined by someone independent. And every business finds that among its customers are people who become obsessive, or as it is sometimes put, "the balance of their priorities becomes disturbed". Such people will never take "no" for an answer, and it is a relief to pass them to the ombudsman. It is then our task to see whether, beneath the anger and emotion, there is a genuinely valid complaint.
For consumers the benefits are more obvious. 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. We are often described as consumer champions, which is not quite how I put it. I see it this way: in investigating a complaint we work on the customer's behalf in investigating the case, and putting our expertise to work to check facts and files. In this way we produce a "level playing field" between the customer and the institution. But when it comes to a decision, we are impartial and neutral. If the facts show that the complaint is not valid, we must reject it. But even in doing that, we add value. Our explanation is often accepted by the consumer because it comes from an impartial source, and we are often thanked by customers whose complaints we have turned down. Finally we can give to those customers who are uncertain whether the treatment that they have received is fair or not, a reassurance that no company itself can give. Because we see the whole of the market, we alone are well placed to say whether a particular transaction was fairly conducted or not.
I would also claim that our system, although it deals only with a tiny proportion of all the complaints received by financial firms, has an impact way beyond the cases we deal with. Frankly I suspect that the service given by most firms proceeds on the assumption that the fairness or legality of their actions will not be tested by consumers taking court action against them. By contrast the fact that firms all know that a dissatisfied customer can access the ombudsman free of charge conditions the way they deal with all customers and certainly with all those who complain. First because any ombudsman referral will incur a case fee, firms have a financial incentive to devote time and attention to dealing with the concerns of a dissatisfied customer, no matter how little justification there may be in the complaint. And also, knowing how we have dealt with past complaints makes them settle most similar complaints in the same way. Their assumption is that few have the will and even fewer have the means. We may not have the powers of a regulator, but it is undeniable that in some respects the effect of our rulings may have a similar impact to the rules of a regulator.
Standing outside the court system we can have a dialogue with the industry, with regulators and consumer bodies about our approach to key issues. That is not the sort of debate that the judges can be expected to undertake - or perhaps I should say that the judges do undertake. We can give guidance to the industry and consumers not only about the lessons from past cases, but even about how we are likely to react to events that have not yet happened. For instance in 1989/99 the insurance industry was anxious about the potential impact of millennium bug computer crashes affecting a variety of risks. Underwriters wanted to introduce exclusions at forthcoming renewals, but wanted some reassurance that these would not be struck down as "unfair or unreasonable". Of course, by definition we had no experience of complaints about these matters, but to decline to offer any advice at all would have been churlish. We were able to give indications as to what might be unreasonable in terms of events that might be "directly or indirectly" caused by such crashes.
Through bulletins, reports and monthly editions of "ombudsman news" published in hard copy and distributed widely, as well as appearing on our website the Financial Ombudsman Service can give further public guidance. And on a day to day basis through our technical advice centre line we offer firms and professional advisers advice about the likely approach to situations we have previously encountered.
We can also look at how our decisions will interact with those of regulators and of industry players. We can suggest how new regulations ought to be framed or where they might be needed. Our closest link is of course with the Financial Services Authority itself, but we also liaise with the Office of Fair Trading, the General Insurance Standards Council and the Banking Code Standards Board. In 2000 as a result of the dispatch by insurers of re-projection letters to the holders of mortgage endowment policies, we started to receive large numbers of complaints about potential missales. In 2000-2001, the year just ended, we received around 9,000 such complaints compared to 1,700 in 1999-2000. This necessitated an urgent dialogue with the industry, consumer bodies and with the regulator, FSA. This brought forward issues very reminiscent of those encountered when the PIA initiated the pensions review.
The regulator can use its powers to require firms to review past business - either all sales or particular blocks and to compensate customers who can be identified as having suffered loss. This of necessity means that the regulator has to set out not only those who are liable to be compensated but also a prescription for compensation. This has proved quite a contentious and difficult task, both in the pensions review and in endowment cases. The standards prescribed for compensation on a mass basis may not be those that a court would use in a single case. Courts are never presented with the full range of cases out of a mass series of wrongs. In multi-party actions the best that solicitors have been able to do is to ask the courts to rule on three or four test issues in a single action. But regulators and ombudsmen are frequently asked to contemplate a large range of issues resulting from a series of wrongs.
Similar issues are engaging us with respect to mortgage endowments. Firms can be expected to deal with complaints consistently, and to have a good idea of how the ombudsman would deal with such cases. After an initial consultation the FSA issued its finalised guidance last week, and yesterday we published the assessment manual we ourselves will be using with a view to encouraging firms also to use it. The most contentious areas are not so much the circumstances of liability for a missale, but the calculation of loss. How do you properly assess the loss that has arisen from the sale of a 25 year product after only seven years have elapsed? What factors must be brought into the calculation and what factors are irrelevant? One issue that is being litigated before the High Court as a test case, technically in a pension review case although the issues as similar in endowment cases, is whether demutualisation windfalls received by the complainant during the life of the missold pension or endowment policy should be set against compensation payable or should be seen as independent from it. Another interesting issue is the extent to which it is proper to take account of a complainant's notional "saving" (in terms of lower outgoings) when judged against the position they would have been in if not missold. A similar issue arises in mortgage cases where a lender has incorrectly under-calculated repayments, and the borrower discovers later that the balance of the loan is larger or longer than would have been expected. We have recently consulted publicly on our approach.
This demonstrates a further advantage of ombudsman schemes over the traditional position of allowing parties to litigate their disputes through the courts, particularly in an area where the law is uncertain and might take many years, and the resources of many litigants to clarify the position. We can consult, either publicly and formally, or sometimes more informally and speedily if that is appropriate, on what our approach ought to be. And having consulted we can then announce our new policy and how and when we will implement it. The courts by contrast cannot take the initiative. Neither Law Commission reviews nor Attorney-General references are as flexible an instrument as we can deploy. And if aspects of common law seem to the judges manifestly wrong, while they are bound by the doctrine of precedent, their only route to changing it is to purport to "find" what the "true" law was all along. By contrast, if we need to change, we do so openly, giving as much notice as we can and saying why. The ombudsmen are not bound by the doctrine of precedent, but we do aim for consistency. And in bringing a variety of schemes together we have to combine some consistency across the scenarios that arise in various sectors - banking, insurance and investment; between areas where the conduct of business is regulated and where it is not; and more intriguingly an approach that is founded on legal principle, but which is not bound by it.
Our "fair and reasonable" jurisdiction has attracted a fair amount of attention. It allows us to look beyond the law, beyond wording of the small print, to take into account the large print in the promotional materials, good industry practice, and, if necessary, adopt a modern and fairer approach where it is clear that the law has lagged behind. This is not dissimilar to the approach of the regulations governing Unfair Terms in Consumer Contracts, except that we can look at core terms of a contract which are specifically excluded from the ambit of the regulations. Two simple examples. Some time ago the insurance ombudsman adopted the continental doctrine of proportionality to deal with cases where the consequence of policy cancellation following a minor non-disclosure would be unduly harsh - a proposal made by the Law Commission but never adopted in English law. Where therefore a policyholder has without fraudulent intent failed to inform an insurer of a fact that would have increased his premium, the result that we apply (but the courts would not) is that his claim should not be rejected entirely, but be paid subject to a reduction proportionate to the premium he should have paid. In the credit card area, where a cardholder disputes a transaction with a merchant, it is good practice for the card issuer, when notified of the dispute, to process these as chargebacks even though there may be no contractual right to a chargeback.
As far as remedies we also look at the question of payments for distress and inconvenience on a broader basis than the courts can. The law, as one judge put it, is that: "a contract-breaker is not in general liable for any distress, frustration, anxiety, displeasure, vexation, tension or aggravation which his breach of contract has caused." He of course did add that this general rule did not apply to certain contracts where the object is to provide pleasure, relaxation or peace of mind. I have always wondered whether insurance and investment contracts come into this latter category since the much of the marketing suggests that the aim is to give the buyer reassurance and peace of mind. In any event whatever the state of the law the courts would apply, the ombudsman certainly does regard it as important that financial service providers who cause people distress or inconvenience, on top of any financial loss they have incurred, should compensate them for it. Most reputable firms offer it, and we routinely make them provide it.
We do not hesitate to require firms to take steps that courts might not have the powers to order. We often make them continue to offer insurance to parties where they have unfairly stopped their policies. Where they have wrongly put a complainant into debt and affected their credit rating, we require them to take steps to repair it. But we do not stray into the territory of a regulator by requiring firms to take action to give redress to parties who have not complained.
What the courts themselves may make of all this will be interesting. We are certainly a public body, and will be exposed to actions for judicial review. There has been much comment about the circumstances in which we will be required (following the Human Rights Act) to offer parties a "fair and public hearing". A rather gloomy prediction of how the courts might view us has recently been made by an academic commentator Richard Nobles. He suggests that the judges are jealous of or even hostile to rival dispute mechanisms, particularly ones that seek to exercise powers denied to them. "The central issue" he says "is whether it is appropriate for an official who is not a regulator to decide complaints against private parties by reference to standards and remedies that differ from those availavle in the courts. The resounding answer provided by the courts themselves is no". I hope that is too depressing a conclusion and that the judges would appreciate that the benefits of operating as alternative dispute resolvers should not be abandoned by straight-jacketing us into a court or tribunal model.
The ombudsman model operating outside the court system has received widespread support, from the financial industry, consumers and outside commentators.
We deliver value for money in supporting confidence in a much criticised, but vital industry.
We have been able to approach the dispute resolution task in a way that, interestingly, tackles some of the criticisms often levelled at the courts and the judges.
Our "jurisprudence" has developed avoiding some of the constraints of a common law, precedent based system. In particular: