London, 28 June 2011
Today I’m going to be looking at the future role of the new Financial Conduct Authority (FCA) – very specifically through the lens of “redress”.
First, however, a few words about the Financial Ombudsman Service, of which I am chief executive and chief ombudsman. As you know, we’re the statutory dispute-resolution service. We were set up – and given legally-binding powers – to resolve individual financial disputes, where the consumer has been unable to get their complaint settled to their satisfaction by the financial business concerned.
The Financial Ombudsman Service is independent of the FSA in its day-today operations. And the FSA has no involvement in the work we do in investigating individual disputes and reaching decisions about them. But the FSA does appoint our board of non-executive directors. It is also responsible for scrutinising and approving our annual plans and budget.
The intention is that the FCA will continue to do this – ensuring our continuing accountability to all our stakeholders. But it is important to stress that the ombudsman service is only a part of what could be called the redress “landscape”. And going forward, the FCA’s role in relation to redress will be a critical one.
Perhaps this is a good point for us to remind ourselves that it is the FSA today (and will be the FCA in the future) that:
It is also the FSA today – and the FCA in future – that leads separate enforcement action (both in relation to complaints handling and the issues involved in complaints). This includes being able to set over-arching redress solutions which can bind-in the ombudsman.
It’s clear that the work of the FCA is going to be absolutely critical, not only to the ombudsman service but to the entire landscape of redress. So looking at the FCA’s future role, specifically through the lens of redress – what are the major challenges it will need to tackle?
Based on the experiences of the last decade, there are two main issues I would point to around redress.
The first issue is the speed of regulatory action, once it starts to become clear that there’s a situation where potential mass detriment for consumers is building up – because, for example, of widespread mis-selling, or a problem with a particular financial product.
Now this may be an obvious point, but it’s a fundamental point that’s worth making: the longer any consumer detriment is left to build up, the harder it is to resolve. Attitudes – both on the part of consumers and of firms – become entrenched. And the scale of the costs of redress rise – hardening attitudes yet further and making resolution harder still to achieve.
I think we’d all admit that we’ve learned a lot over the past decade. And as the FCA’s approach document clearly states, “intervention has not always been sufficiently swift.” I believe the consensus is that the sooner the regulator can intervene, the better.
Turning now to the second main issue that I think the FCA will need to tackle – in relation to redress. This is the question of how “joined up” – or otherwise – the redress “landscape” is.
I frequently hear the following questions – mostly from firms – on how redress “joins up” between the regulator and the ombudsman:
So will the FCA’s new approach – and the government’s proposals for a new regulatory structure – address these issues about “joined up” redress?
I believe they will. The FCA’s approach document talks very clearly about “intervening earlier”. The government proposes a new power that will allow systemic or mass issues to be identified to the FCA by a number of designated bodies. And there will be a clear responsibility on the FCA to report back within a defined time period.
These measures should – together – make a significant difference. They will give firms a higher level of certainty about approaches to redress before levels of consumer detriment build. They will ensure consumers get redress earlier. And the measures should also help avoid some of the reputational damage for the industry that’s occurred in the past.
And for the ombudsman service – the measures should be very helpful in allowing us to avoid dealing with tens (or indeed hundreds) of thousands of cases involving the same issue.
A further change that will, I think, be of significant help is the fact that the FCA’s approach will be more risk-based – and there will be an increased focus on principles rather than on “tick-box compliance”.
Following the recent judicial review by the banks on payment protection insurance (PPI), we should all now be far more aware of the role of principles. In far too many complaints, firms focus on a defence of “we were following the rules” – when common sense tells you that what the firm has done has breached the fundamental principle of “treating customers fairly”.
However good the rules of the FSA (or FCA), they can never be so comprehensive as to be exhaustive. But a risk-based approach – and a culture within firms that puts the focus firmly on being fair to the customer – should do a huge amount to help reduce poor practice. And that – quite simply – will not only give firms greater clarity about the standards they are working to. It will also reduce the number of complaints they receive.
Another positive area I would like to highlight is the new section 404 power. This is the regulator’s power to set an industry-wide or firm-specific redress scheme, which the ombudsman is formally tied into. Strictly speaking, of course, this is not part of the new legislation – but it was only recently enacted by the government and has already been used three times.
The vast majority of the complaints the ombudsman sees involve issues that are specific to the individual concerned – and do not indicate any wider, systemic problem. But in a small number of cases we do see an underlying, systemic issue.
Up till now we’ve not had the mechanisms to tie together the ombudsman and the regulator in a “joined-up” redress scheme. Section 404 does that, and should avoid some of the past criticism of disconnected redress schemes.
But it’s important to stress that most of the complaints we see at the ombudsman service will continue to be individual ones, dealt with in our normal way.
As part of the government’s proposed new framework for regulation, we will be required to publish ombudsman final decisions – which to date, are normally only ever seen by the two sides involved in each complaint (unless they choose to make the decision public).
Making these decisions publicly available is something we very much welcome. It will help in “busting” many of the myths about decisions we have made. It will also help to give clarity to firms on what complaints-handling standards are, as we see them.
Similarly, FCA proposals around transparency and openness should also increase certainty – as well as reducing some of the unhelpful speculation which often surrounds the issue of redress.
So, in conclusion, and looking through the lens of redress, I very much welcome the FCA’s new approach. For redress, the future looks promising – for consumers and the financial services industry alike.