skip tocontent

ombudsman news

issue 57

October/November 2006

the wider-implications process

In carrying out their different roles, both the Financial Services Authority (FSA) and the Financial Ombudsman Service become involved with how financial firms behave towards their customers. And - inevitably - issues sometimes arise that are likely to have implications for a large number of consumers or firms.

The wider-implications process provides a clear procedure to help these two organisations identify and deal with such issues - and coordinate their approach - in the light of their independent roles and legal responsibilities.

Stuart King, head of retail intelligence at the Financial Services Authority, and David Thomas, corporate director at the Financial Ombudsman Service tell us more.

why is there a need for such a process-

The FSA and the ombudsman service have different roles. The FSA regulates and supervises firms. The ombudsman service resolves individual disputes as an informal alternative to the courts.

A robust complaints regime, giving consumers confidence that individual complaints will be dealt with promptly and fairly, is a vital factor in allowing the FSA to regulate in a risk-based way - focusing its limited resources on the big risks that matter most. The ombudsman service has to consider all the cases it receives. It cannot lay some of them aside as not a priority, or wait to see how an issue evolves.

The FSA regulates mainly through rules and - increasingly - through principles. The ombudsman service is required to apply the "fair and reasonable" criterion; taking into account the law, regulatory rules, codes and good industry practice at the time. So ombudsman decisions often turn on legal principles and contract interpretation, as elaborated by courts, rather than on the detail of FSA rules or principles.

what are "wider-implications" cases-

These can arise when an issue emerges and the ombudsman service starts receiving complaints about it while the FSA is considering the potential regulatory aspects.

The FSA and the ombudsman service regularly exchange information with consumer and industry bodies, both individually and through the three liaison groups established in connection with the ombudsman service's work in the banking, insurance and investment sectors. And the wider-implications process provides the FSA and the ombudsman service with a clear procedure through which they can focus on, identify and deal with issues that are likely to have implications for a large number of consumers or firms.

how does the wider-implications process work-

The full process, together with a wealth of other information, is set out on the dedicated web pages produced by the FSA and the ombudsman service. These shared web pages can be accessed directly or by links from the FSA and ombudsman service websites.

The process is triggered when a possible new wider-implications issue is identified by the FSA, the ombudsman service or an interested party (such as a consumer or industry body). The issue is likely to be one affecting a number of consumers or firms. The process is not for one-off consumer complaints, nor for a party who is unhappy with an ombudsman service decision in an individual case.

The shared web pages explain how wider-implications issues can be raised by industry or consumer groups, and provide named contacts in both the FSA and the ombudsman service.

When a potential wider-implications issue is raised, the FSA and the ombudsman service will decide whether the issue does raise wider-implications and is suitable for the process. If so, the FSA will consider whether a regulatory solution would be more appropriate than the ombudsman service deciding individual cases.

Actions open to the FSA include taking supervisory or enforcement action, securing redress or making rules or guidance. Alternatively, the FSA may offer the ombudsman service material concerning the interpretation or application of FSA rules, for the ombudsman to consider when deciding individual cases.

If the FSA decides that a regulatory solution is not the most appropriate way forward, then the ombudsman service will consider consulting industry and consumer experts before reaching a decision on individual cases. Alternatively, if the firm agrees to pay the complainant's legal costs, the ombudsman service will consider whether the issue is more suitable for a test case in the courts.

how successful has the process been-

The current process was widely welcomed when it was introduced two years ago. And since then, it has successfully tackled nine wider-implications issues, including:

  • fraudulent diversion of cheques
    After getting customers to make out cheques in favour of banks and building societies, supposedly for investment, a fraudster then diverted the cheques into his own accounts with those institutions.

    The FSA reached an agreement with the bodies representing banks and building societies to reduce the scope for fraud in most situations by phasing out - by October 2006 - the payment into a third-party account of cheques made out simply to a bank or building society.
  • closed with-profits funds
    This case study explains how the ombudsman service and the FSA cooperate when the ombudsman service receives a complaint about the investment policy of a closed with-profit fund - in the light of the FSA's regulatory overview of whether the fund's approach to investment was a legitimate exercise of commercial judgement, aimed at the interests of its policyholders as a whole.
  • section 75 and electronic money institutions
    This examines whether section 75 of the Consumer Credit Act 1974 gives a credit-card holder a claim against the card-issuer when the card is used to fund a payment through an electronic money institution - for example, for a purchase through eBay - and the person ultimately receiving the payment details.
  • redress assumptions in certain pension cases
    For cases covered by the Pensions Review, the FSA laid down certain assumptions to be used in calculating redress (for example, the discount rate to be used to value future benefits).

    The ombudsman service, in conjunction with the Financial Services Compensation Scheme and the relevant industry body, used independent experts to establish redress assumptions for similar cases falling outside the Pensions Review - to facilitate consistency for all concerned.

Case studies are usually published once an issue has been resolved, but some issues justify an interim report. The shared web pages include interim reports on mortgage exit administration fees and contracting out of the State Earnings Related Pension (SERPS).

The shared web pages also provide information about issues which the FSA and the ombudsman service decided were not suitable for the wider-implications process. These include issues that were purely hypothetical or concerned one-off individual cases, or where regulatory responsibility lay elsewhere - such as with the Banking Code Standards Board rather than the FSA.

how do you see use of the wider-implications process developing-

The process has been successful in dealing with a number of complex issues. We encourage firms and consumer bodies to raise issues which have potentially wider implications or to raise questions about how the process works, if they are unclear.

As part of its move to a more principles-based approach to regulation, the FSA is committed to reducing the number of detailed rules in its Handbook. The FSA's approach to simplifying its Conduct of Business sourcebook, in the context of implementing MiFID (the Markets in Financial Instruments Directive - part of the European Union's Financial Services Action Plan), will reflect this approach and the FSA will be consulting on its proposed changes in this area later in the year.

The FSA and the Financial Ombudsman Service work together closely on the impact of changes to the FSA's Handbook, including considering where the removal of detailed rules may affect the approach the Financial Ombudsman Service takes to considering individual cases. The FSA recognises that, as it moves to a more principles-based approach, there is likely to be an increase in the number of wider-implications cases where it considers possible regulatory action.

image of ombudsman news

ombudsman news issue 57 [PDF format]

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.