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Association of Finance Brokers (AFB) annual dinner

speech by Sir Christopher Kelly, chairman

2 July 2007

Eight out of ten businesses covered by the Financial Ombudsman Service did not actually have complaints referred to us by their customers last year. As these businesses have little or no direct contact with us, many therefore tend to rely on what they hear about us from others - rather than asking us direct. This means that myths can circulate - often promoted by third parties with their own particular interests - which may be several steps removed from the actual reality.

Here are some of the myths - and the answers straight from the horse's mouth.

myth: the ombudsman service is a regulator

truth: the Financial Ombudsman Service is part of the statutory arrangements designed to underpin consumer confidence in financial services. Our role is to resolve individual disputes, as a quicker and more informal alternative to the courts. We are no more a regulator than the courts are.

myth: the ombudsman service is a consumer champion

truth: like the courts, the ombudsman service is entirely impartial. In about one third of the cases we settle, we conclude that the consumer was right. In another third of the cases, we conclude that the business was right. And in the final third, we conclude that the business was right - but explained things so poorly, that it was hardly surprising the consumer didn't understand.

myth: the ombudsman service is an external imposition on the financial services industry

truth: it was the financial services industry itself that invented the concept of the ombudsman for the financial sector - through the industry-created Insurance Ombudsman, established in 1981, and the industry-created Banking Ombudsman, established in 1986. Credit is due to those industry figures who - back then - recognised that consumers were more likely to have confidence in the industry, and do business with it, if they were guaranteed redress if something went wrong.

myth: the ombudsman service has unprecedented powers

truth: the key features of the Financial Ombudsman Service are exactly the same as those features agreed by the industry itself for the Insurance Ombudsman back in 1981:

  • an independent service, free to consumers;
  • resolving disputes informally on the basis of what is fair and reasonable in the individual case;
  • the £100,000 limit for awards.

myth: resolving cases on the basis of fairness undermines people's rights - and ombudsmen ignore the law

truth: it is the law, laid down by Parliament, that requires the ombudsman to decide cases on the basis of fairness - whilst complying with the Human Rights Act. And fairness is the principle which lies at the heart of modern consumer-protection legislation applied in the courts - ranging from the Unfair Contract Terms Act, through the Unfair Terms in Consumer Contracts Regulations to the "unfair relationships" test in the recent Consumer Credit Act.

The majority of the disputes we handle turn on disputes about what actually happened - or on the application of general legal principles. In most cases, our approach is based on what the courts would be likely to do in similar circumstances - though in some areas, the industry has voluntarily imposed on itself (through codes of practice) standards which exceed the law's requirements.

myth: ombudsman decisions are inconsistent and unpredictable

truth: we have stringent internal quality-assurance systems - including quality-checking a sample of cases on a routine basis - by which we can be assured that the decisions we make are in accordance with our powers and the approach we have published.

We set out our procedures and approach in a wide range of publications - and on our website, which has more than a thousand pages of information. This includes a dedicated online resource for businesses - answering the hundred questions we are most frequently asked by smaller firms.

We publish case studies and articles monthly in ombudsman news. And we run hundreds of events for businesses every year - from roadshows and seminars to conferences and exhibitions. Businesses can also contact our dedicated technical advice desk for free advice. It handles 20,000 calls a year from industry practitioners - and deals with technical queries across the whole range of financial products and disputes we cover.

myth: the ombudsmen use hindsight and apply today's standards to yesterday's events

truth: our rules require the ombudsmen to take account of the law, regulators' rules and good practice in the industry as they were at the time of the events concerned. They recognise, for example, that the Financial Services Authority's ICOB rules were preceded by GISC standards, which were in turn preceded by ABI codes.

myth: the ombudsman service is forever imposing decisions on the industry

truth: in reality, very few of our cases result in a binding ombudsman decision. 94% of our cases are resolved by both parties accepting mediation or an adjudicator's recommendation about the outcome of their case. Though either the consumer or the business can ask for a final decision by an ombudsman, this happened in only 6% of the cases that we handled last year.

Unlike the courts, the ombudsman service actively engages with the financial services industry and consumer bodies - to help resolve disputes without their ever coming near the ombudsman service, and to identify ways to prevent disputes arising in the first place. In fact, only 15% of the complaint enquiries received by the ombudsman service ever turn into cases.

Of course, this approach relies on the parties being open to such processes. Our experience of some smaller businesses, in particular, suggests that this is not always easy. Occasionally, the proprietors of some small businesses let their emotions run away with them. We can appreciate why this might happen. But it doesn't help. It is the facts of the case that count, not the strength of feelings on either side.

myth: the ombudsman service makes insufficient allowance for smaller businesses

truth: we try very hard to be sensitive to the position of businesses who have seldom or never dealt with us before. An internal task force - led by our decisions director and working across all areas of the ombudsman service - has specific responsibility for focusing on the needs of smaller-user businesses and encouraging initiatives to improve the service we offer this key stakeholder group.

For example, when a case is opened, our computer system automatically flags up if the business is one that is not a "regular user" - so we can deal with them appropriately. And we have a special quick guide for businesses who have not had a complaint with us before - which we send out automatically as part of our process.

myth: the funding system is unfair, and consumers should be required to pay

truth: Parliament required us to recover our costs from the financial services industry. We do not have power to routinely charge consumers a fee or deposit.

Part of our funding comes from a levy. This is paid by all the businesses in the industry - to recognise that the existence of the ombudsman service gives consumers confidence to deal with financial services businesses - and is based on market share. Consumer credit businesses pay this as part of their five-yearly licence fee collected by OFT.

But most of our funding comes from case fees, and so is based on the amount of disputes we settle. At £400, these case fees are many times less than the amount a business would have to spend in court. Each business's first two cases per year are "free". So only around 5% of businesses covered by the ombudsman service currently pay case fees, and they are almost exclusively the larger businesses.

The case fee is payable irrespective of the outcome of the cases. Our focus on mediation means we can resolve many complaints without needing to apportion blame. And in many cases there is no clear-cut "winner" and "loser". Arguing whether a case fee should be payable would only increase costs all round.

If we only charged the business a case fee when the consumer clearly "won", the fee would have to be much bigger - and it might then appear that the ombudsman service had a financial incentive to uphold complaints.

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