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PPI, mass detriment, root causes and next steps ...

Tony Boorman, principal ombudsman, speaks at the British Bankers' Association (BBA) complaints-handling seminar

London, 16 June 2011

Today's seminar is particularly timely, with the way in which banks handle complaints yet again making front-page news this week.

Regulators, consumer groups and the media are all highlighting shortcomings in the way many banks treat customers who complain. At the ombudsman service we have received record numbers of complaints from customers dissatisfied with the service their bank has provided.

Lloyds Group (Bank of Scotland), Barclays and RBS/Natwest have all been fined by the FSA this year, in whole or in part because of complaints-handling failings. We have also seen large scale redress needing to be paid by banks in relation to poor investment sales-practice and doubtful mortgage-interest terms.

And, of course, the payment protection insurance (PPI) complaints-saga has seen the banks in court attempting - unsuccessfully - to judicially review the decisions of the ombudsman service and the regulator about how those complaints should be handled. This is a process that has now led to over 200,000 PPI complaints to the ombudsman service alone - and the likely need to compensate many more customers with justified complaints about the way PPI was sold.

It cannot be surprising - in light of this - that customer confidence in the banks is widely perceived to be at a new low. So I want to spend the time today describing how we at the ombudsman service can work together with thoughtful banks to re-build confidence.

Some progress has already been made. And indeed, as I will say later, I believe the picture is far from as dark as some commentators would portray. But we all can and should do far better - not just to handle complaints well when they arise, but also to avoid complaints from arising in the first place.

I want to start by talking briefly about PPI.

payment protection insurance (PPI)

Now that the dust is settling over a disappointing chapter in our normally constructive relationship with the banking sector, I hope you will allow me to say a few words about PPI.

First, there is nothing particularly new or novel about the issues we need to determine in PPI complaints. If the customer was advised: were they advised fairly? Was the product suitable for their needs? And if information was given: was it clear fair and not misleading?

These are the basic questions that ombudsmen have been asking about insurance and investment sales disputes for 30 years.

Some sought to pursue arguments that these general "principles of conduct" were - in the jargon of the court case - "exhausted" by more detailed regulatory rules; and that narrow compliance with those more detailed rules was of itself sufficient to show that a business had acted fairly. The High Court entirely rejected any such notion.

This is not to say that more detailed rules are irrelevant. But the wider commonsense considerations that are imbedded in the regulatory principles - and in the way the ombudsman handles cases - provide a useful framework for thinking about the way customers should be treated in an environment where rule-making cannot, and should not, seek to cover every eventuality and innovation.

So I hope that businesses will now put their energies and focus on doing the right thing - treating customers fairly, and acting with integrity. These are not inherently difficult or uncertain concepts. Indeed, they underpin much of the common law framework within which this industry interacts with its customers.

I make no apologies for the fact that ombudsmen will continue to express themselves in terms of the fairness and reasonableness of each individual case. And I hope that you, as complaint handlers, will increasingly step back from "was the bank told it was not allowed to do xyz?" and think instead about "was it fair to our customer that we did xyz?"

Of course, the delays caused by the banks' judicial review - and the way customer complaints were handled during it by some banks - has now left the ombudsman service with a vast pile of cases to consider - well over 100,000 at the last count. I welcome the FSA's announcement earlier this week of a clear timetable for RBS, Barclays and Lloyds groups to work through and resolve the unresolved cases that have built up over the last nine months. We are working closely with the banks concerned to ensure that these backlogs of complaints are tackled promptly and effectively.

As the FSA announcement makes clear, there is also the challenge going forward of handling the tens of thousands of new cases that consumers are now referring to banks and other financial businesses. I hope that in keeping with the FSA's guidance, these complaints can largely be successfully resolved by you - without the need for large numbers of cases to be referred to the ombudsman service. But we stand ready to provide a service wherever you and your customer cannot agree an appropriate outcome.

mass detriment

It sometime seems as if this industry is addicted to regular "mis-selling scandals". So what lessons can we learn from PPI and from those previous cases of "mass detriment" and industry failures?

The first lesson is clearly that early and decisive action is in the interests of all parties. Too often we have seen problems that are at first ignored, then denied, then minimised, and only eventually tackled when it is too late. Tens of thousands of consumers are then drawn into protracted complaints, with all the administrative costs and complexity that this involves. It's hardly surprising that bewildered and angry consumers tell us they are confused about what went wrong - and what they need to do to, to get things put right.

Much of the focus here has been on the role of the regulator. There is a perception that too often in the past the regulator has, for whatever reason, been unwilling or unable to act - or at least to do so promptly. Whatever your perspective on the issue, I don't think any of us would disagree that earlier regulatory action on PPI would have been in the public interest.

But the industry also has a responsibility. It needs to be more open to accepting critical observations about past practices - and more ready to propose ways in which those problems can be resolved fairly, efficiently and promptly.

In cases of "mass detriment" caused to consumers, consideration needs to be given both to those who do complain and those who do not. Simply leaving the ombudsman to handle tens of thousands of individual cases cannot be the right answer for the customer, the industry or the ombudsman service.

I hope that if we are ever again in a situation where things have gone seriously wrong, there will be a clear, prompt and open debate about whether a so-called "complaints-led" strategy is the right response - or whether consumer "information-asymmetries", costs, the sometimes baleful role of claims-management companies, and the interests of resolving problems quickly, all mean that the regulator should to step in and require broader-based proactive redress. This discussion should, of course, involve both industry and consumer groups.

The new section 404 of the Financial Services and Markets Act provides an important vehicle through which that broader-based solution can be openly discussed, agreed and imposed. As you know, this provides for a redress scheme, determined by the regulator, under which both those who complain and those who do not can be compensated. In certain circumstances, it provides that the ombudsman must follow the terms of that redress scheme in considering any individual case.

As the FSA records in its recently-published annual report, section 404 is a power it has already found useful to engage - albeit, so far, on a more micro basis than perhaps the policymakers and parliamentary draftsman had envisaged. But it is still early days.

From my perspective section 404 is a welcome new addition to the regulator's toolkit. However, a question I believe is left hanging from the PPI experience is whether restricting the scheme to events after regulation started - and excluding redress stemming from breaches of principles - unhelpfully limits the scope and effectiveness of these redress schemes.

The ombudsman service will continue to play a constructive role here. First and foremost by resolving those cases that need to be referred to us by your customers.

But we will also have a role in raising openly those areas where we see significant problems arising. Together with the OFT and FSA, we have made a start through the new co-ordination committee. The process is transparent - the minutes of our meetings are published.

Each organisation represented on the co-ordination committee retains, of course, its own decision-making responsibilities. But the committee enables us to co-ordinate action where that is the right thing to do. And it helps pool information in order to identify those areas where significant customer detriment might emerge.

In this way, we can help build customer confidence that new issues are being identified and tacked early. But if significant problems do emerge, we can also demonstrate that those matters are firmly on the regulatory radar and that the necessary, proportionate steps are being taken.

"root causes" and avoiding complaints

Of course, one valuable source of information is what your own customers are telling you through complaints. Good complaints handling is not just about resolving the individual case - it is also about using the information you obtain to help avoid complaints in future.

There has been a wide debate recently about "root cause analysis" and complaints. The FSA has just confirmed that it is reinforcing the DISP handbook provisions in this area.

In some ways, I regret that this has become the subject of regulatory rule making. As businesses that are - and certainly need to be - committed to improving service to customers, it seems unarguable that there is a need to understand complaints as a way of identifying and resolving problems for others. Thinking about and tackling root causes is a core part of any quality and customer service improvement-programme.

And similarly, I hope it is unnecessary to say that you should consider what lessons you should draw from the decisions the ombudsman service makes. Most of our decisions are, of course, very individual - based on the particular set of circumstances of an individual case.

But inevitably we sometimes address areas that you will know touch on the circumstances of other customers. At a minimum, it seems to me that in those cases our decision should inform how you handle any subsequent complaints. And, of course, you may need to consider more active steps if you are to treat all your customers fairly.

But in my experience, such cases are fairly rare. Perhaps more common is misunderstanding about the intended scope and relevance of our decision in a particular case.

So my plea is that when you carry out your root cause analysis, you think carefully about what you have seen in ombudsman decisions. But before you implement any major changes as a result of any decision, please do check with us that we share a common understanding of what the ombudsman has said and what we intended.

publishing more information

I want to conclude by briefly noting where we are on complaints data and banks.

We have now been publishing complaints data for two years - showing the volume of cases and the outcome of complaints in relation to named individual businesses.

This process of increased transparency has, I believe, been very helpful. It has certainly focused minds. It is heartening to see more and more banks and other financial businesses committed at boardroom level to the better handling of customer complaints.

To ensure that we focus on the key issues, I am today confirming that we will in future separate out PPI into its own category in the data we publish. This will apply to the data we will be publishing in September 2011 in relation to complaints for the first half of 2011.

This will allow all our stakeholders to see more clearly the impact that PPI is having on customer complaints. It will give a more accurate picture of the position of each major business, as they tackle the expected continuing large numbers of PPI complaints. And it will enable a clearer focus on the complaint pictures for each business around its core insurance activities.

But I think we should go further to explain openly what we actually do when we decide individual cases. As you know, the government has suggested that we should do more to publish the decisions we make.

It's a suggestion that I welcome. First, because in a Facebook and twittering world decisions cannot in reality be kept "secret". We need a way to ensure we make information openly available in an orderly and fair way - not least recognising the sensitivity of much of the personal information which we need to handle.

But I also think greater transparency will help bust some myths about what, in reality, we actually do.

Our next steps here will be to set out for discussion later this year how we might best handle the publication of ombudsman decisions. We will want to hear the views of industry, customer groups and others before we finalise our approach.

next steps

Much remains to be done. But I believe there are steps we can take together to help re-build customer confidence. There are already positive signs.

The number of complaints referred to us about banking is now falling. And critically, uphold rates are now significantly down from a time when up to two thirds of cases resulted in a change in outcome. Indeed, for banking and credit activities, some firms have uphold rates of 25% or lower.

Many businesses are now actively engaged with us in considering the "root cause" of complaints - and not just tackling complaints when they arise, but also working on minimising the causes of complaint.

The ombudsman service will help you to achieve these goals. We won't, of course, always agree on the cases we consider. But I hope we firmly share a direction of travel: minimising the causes of complaint and re-building customer confidence.

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