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Financial Ombudsman Service response to FSA discussion paper (DP08/5) on "consumer responsibility"

June 2009

  1. The Financial Ombudsman Service's role is to resolve impartially disputes between consumers and financial businesses. In doing so, we take into account any existing legal rights and obligations of consumers and financial businesses. We also take into account any obligations imposed on financial businesses by the Financial Services Authority (FSA).
  2. The FSA has a number of statutory objectives, including "securing the appropriate degree of protection for consumers." In fulfilling that objective, the FSA is required (amongst other things) to take account of "the general principle that consumers should take responsibility for their decisions." But the FSA does not have power to impose obligations on consumers.
  3. As a body which is impartial between consumers and financial businesses, it is not for the ombudsman service to argue on behalf of consumers or financial businesses about whether or not there should be any change to any obligations imposed on consumers by law. But it is appropriate for us to comment on what those obligations currently are.
  4. The reason we are responding to the consultation paper is to make some points about the current position. There is a risk that aspects of the discussion paper might potentially mislead some financial businesses in relation to the existing position, and the approach they should take to cases that come to us for resolution.
  5. What are sometimes loosely described as "consumer responsibilities" refer, in fact, to circumstances in which a consumer's ability to recover compensation from a business may (depending on the circumstances) be reduced or rejected as a result of the consumer's recklessness, carelessness or failure to take reasonable steps to mitigate a loss.
  6. We take a broadly similar approach to the courts in reducing or rejecting claims where there is recklessness, carelessness or failure to mitigate loss by the consumer - save in one insurance area where the Law Commission has recommended that the courts should adopt our approach. But this is an entirely different matter from consumers owing any legal duty to businesses.
  7. The law imposes few obligations on consumers in favour of businesses. Such obligations as the law does impose on consumers in favour of businesses arise from special circumstances, such as fraud or the requirement of utmost good faith in insurance-based contracts. And, as already noted, the FSA does not have power to impose obligations on consumers.
  8. But the law imposes various legal obligations on businesses in favour of consumers. And the FSA imposes regulatory obligations on financial businesses in favour of consumers. Nevertheless, the discussion paper refers repeatedly to what it calls a "balance of responsibilities".
  9. This phrase "balance of responsibilities" might potentially mislead some financial businesses into believing that consumers owe financial businesses some form of legal duty (which is seldom the case), and that this can somehow be balanced against the legal and regulatory duties that (almost invariably) financial businesses owe to consumers.
  10. In our experience, many financial businesses forget that they owe duties to consumers under the general law as well as under FSA rules. So, for example, some businesses that sold endowment policies before investment sales were regulated appeared surprised to discover that they were nevertheless liable for inappropriate sales in accordance with the general law.
  11. Chapter 3 of FSA's discussion paper aims to describe the legal position at common law. We do not find it an entirely meaningful or balanced analysis. It omits, for example, the effect of the common-law rule (the Interfoto rule) that an unusual or onerous term may not bind consumers unless it is fairly brought to their attention - a not uncommon issue in cases we deal with.
  12. But we will not go into a detailed analysis of the position at common law, as it is largely irrelevant. It would be much more relevant to ask what the position would be in court, in the absence of FSA regulation. The court would apply a wealth of consumer-protection legislation alongside (or often in preference to) the common law.
  13. Over the last 20 years, legislation (some of it initiated in Europe) has significantly modified or excluded the common law, particularly in relation to the duties businesses owe to consumers. And many financial businesses have adopted codes of good practice, which have often been incorporated into their contractual arrangements.
  14. Although chapter 3 of FSA's discussion paper makes reference to European legislation, it is notable that the analysis fails to mention the impact of the Unfair Terms in Consumer Contracts Regulations. Not only do these feature in a significant number of the decisions we make, but also the FSA itself has a specialist unit dealing with the Regulations.
  15. The list of consumer actions is annex 1 of FSA's discussion paper is a helpful list of things which sensible consumers should, in their own interests, consider doing. But we do not consider that it should be interpreted as a list of things whose absence would automatically indicate recklessness, carelessness or failure to mitigate loss. That would have to be judged in the light of the relevant circumstances.
  16. In the light of this, we respond to the discussion paper's specific questions as follows:

Q1. Do respondents have any comments on this summary of the basic legal position?

As indicated above: we do not find the analysis of the common-law position meaningful or balanced; what is more important is what the courts would do in the absence of FSA regulation; and the courts would apply a host of consumer-protection legislation that has modified or replaced the common-law position.

Q2. Do respondents believe that the current balance of responsibilities, as defined by the common law and FSA regulation, is appropriate?

As indicated above: we question the concept of a "balance of responsibilities"; and the analysis should include statute and industry codes as well as the common law and FSA regulation. We do not consider it appropriate for us to express a view on whether or not the existing legal rights and duties of consumers should be changed.

Q3. Is there more that FSA can do to make clear how we differentiate our expectations on firms dealing with consumers with different levels of capability?

We do not consider it appropriate for us to express a view on this, save to confirm that in our experience differing levels of consumer capability are a significant feature of the cases we receive.

Q4. Do respondents have any comments on the suggestions above, or further suggestions for actions that the FSA, firms and others might take to help consumers better understand their role?

Our comments are set out above. We do not consider it appropriate for us to comment on whether or not the FSA should take further action in this area.

Q5. Do respondents have any comments or suggestions on the list of sensible actions for consumers in annex 1?

As indicated above, it is a helpful list of things which sensible consumers should, in their own interests, consider doing. But we do not consider that it should be interpreted as a list of things whose absence would automatically indicate recklessness, carelessness or failure to mitigate loss.