skip tocontent

FSA summer school

speech by Walter Merricks, Chief Ombudsman

Cambridge, 21 August 2005

I'm very pleased and honoured to be invited to this first ever FSA Summer School. Some of you will be familiar with the work of the Financial Ombudsman Service and where it fits in to the regulatory framework. But others may not be. So you will forgive me, if I tell you something of where we come from. Like the FSA, we did not spring fully formed into the world when the Financial Services and Markets Act came into force in 2001. Ombudsmen in financial services had been around for a long time before that.

In fact, it was 25 years ago when the first ombudsman scheme was brought into being - a voluntary initiative by the insurance industry. But the insurers knew that this would have no credibility unless consumer bodies gave it their support. So they approached the National Consumer Council. And the negotiations that followed produced the first private sector ombudsman model. So the ombudsman scheme was seen as emanating from a partnership between industry and consumer interests, embodied in the form of an independent institution. And in origin, the scheme had nothing to do with the Government - or with the legal system.

Not long afterward, the banking ombudsman was born; and the building societies ombudsman a year or two later. Ombudsman arrangements covering investment services followed shortly after.

So like the FSA we are the product of a merger. Unlike the FSA, whose predecessor regulators behaved very differently, our model is almost unchanged - apart from the fact that we are now a single statutory body, dealing with virtually all the retail areas of financial services. But the key features - independent, private dispute resolution; a free service for consumers; holding a balance between consumer and industry interests; fair and reasonable adjudication outside the court system - are all the same today.

What has changed in the last four years is that we are now dealing with many more complaints. Over five times as many - from 25,000 in our first year to an expected 115,000 this year. We now employ around 1,000 staff at our offices in London's Docklands office. 60% of the cases we deal with relate to mortgage endowments. In most of our complaint areas, we uphold the consumer's complaint and reverse the decision of the firm only in a minority of cases (around 30% generally - but about 45% for mortgage endowment complaints). However, I'm pleased to say that around 80% of those who refer complaints to us say that they are satisfied with our service - as do over 60% of those who "lost" their complaint.

One of the main reasons the ombudsman is needed is that the legal system is not geared to the needs of ordinary people who have disputes with large organisations.

There is beginning to be some official recognition that the system is somewhat lacking. The recently published DTI strategy states: "We want a modern legal framework that is clear and simple so that it can easily be understood by both consumers and business". We intend to simplify our legal framework, it declares boldly. This is a pretty ambitious objective; "courageous" is the word Sir Humphrey would no doubt use.

But the success of the ombudsman begs a large question in the minds of some: is the mere existence of an ombudsman scheme encouraging an unhealthy propensity amongst consumers to demand redress for every perceived loss in a world that will never be risk-free? You will note that I have a policy of not using the words "culture" and "compensation" in the same sentence. Even though a Better Regulation task force that included Dame Deirdre Hutton, Sir Callum's Deputy Chair at the FSA, tried to explode as an urban myth the idea of a galloping compensation frenzy, the question continues to be asked. And the answer is fairly clear - at least from my perspective. I don't see that an unhealthy situation has developed - yet. But there are some warning clouds on the horizon.

Many of those who bemoan the rise in complaints and redress look back to a golden age - when with-profits policies paid out terminal bonuses three times the sum assured; when bank branch managers were respected members of the local commercial community; and when no one would have understood what you were talking about if you said the words "financial services regulation". But this was also the time you had to go down on bended knee to get a mortgage from building societies, who fixed their rates in a cartel; when investing in stocks and shares was confined to a tiny few; and business in the City after midday, if any occurred at all, was conducted in a blurred haze of alcohol and tobacco.

Crucially there was no competition, no marketing or advertising, no attempt by firms to appeal to consumers. The idea that insurance companies would advertise pensions on TV would have been laughable. But now financial firms have to set out their stall for a wide public, and the messages they give read "peace of mind", "dependable service", "solid growth", "rate-beating performance" etc. So when what a consumer actually perceives is months of worry, call centre queues, opaque charges and slumping values, complaining is not an unreasonable response.

The vast majority of those who lodge complaints with us have a real or perceived grievance that needs attention and resolution. The fact that we uphold only a minority of complaints does not mean that most of these people didn't have a genuine reason for complaining - even though we may not find the merits of the complaint compelling. There are, it is true, a small number of our customers who tend on the obsessive side and whose priorities in life have become somewhat disturbed.

The trend I do worry about is that group of complainants who now believe that you cannot get justice without a lawyer or a claims specialist on your side. This has taken solid root among consumers with accident or personal injury claims (the substantial cost of which is borne initially by insurers - and then by all of us in premiums). But it has now spread to complaints about financial services. There is only so far one can go to whip up demand for a potentially unnecessary new service. If the financial industry has allowed the reality to be that unaided consumers are wrongly turned down or short-changed, and only consumers supported by a specialist agency fighting for them get a fair deal, then the industry and its customers will have paid a very high price for this development. A legitimate and profitable business sector in ensuring that consumers are not wrongly fobbed off will be here to stay - and the profits would be made at the expense of consumers. The relationship between financial firms and their customers will turn adversarial, instead of being built on mutual trust. That would be a gloomy prospect indeed.

If we are to avoid this, then the phrase "treating customers fairly" springs naturally to mind. How often do firms, when they realise that they may have wronged some of their customers, clam up, adopt a defensive attitude, and pay compensation only when pressed to do so? How often can we instance occasions when firms in these circumstances have proactively reviewed their files and volunteered redress? How many firms would have carried out reviews of potential pensions mis-selling if the regulator hadn't insisted on it? I'm not aware of any firms proactively offering redress for mortgage endowment mis-sales before they are asked for it. So if we want to avoid consumers feeling that they will only get fair treatment if they go in to battle, it's not just the culture among consumers that has to change.

I recently had a letter from the manufacturer of my five-year old car, telling me that their quality review process had identified a potential fault in the clamp that holds the spare wheel. Please would I take it to any dealer for a check and free rectification of the problem. Two points. First, apparently if it isn't rectified I might not be able to use the spare wheel - hardly life threatening stuff. And second, the manufacturer is taking responsibility - not shuffling it off onto the intermediary/dealer who sold the car, or disclaiming responsibility if I bought it second hand.

So we can look at the reverse side of an alleged compensation culture. Many compensation claims, far from being fanciful or vexatious, are legitimate and should be seen as liabilities that should be investigated and settled as soon as possible. How many of these liabilities are not being met, because consumers have not taken the initiative to complain - with the result that the firm is enriched by funds that should properly be in the hands of others?

Well I'm told we shall all need a good night's sleep before our strenuous study day tomorrow. Enjoy the summer school - I hope you find it rewarding.

image of newspapers

useful links