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Council of Mortgage Lenders (CML) annual conference

speech by Walter Merricks, Chief Ombudsman

London, 2 December 2003

I would like to say something about mortgage endowment complaints; look at some of the factors that seem to be driving perceptions about the Financial Ombudsman Service two years after the Financial Services and Markets Act came into force at "N2"; and finally to say a few words about the review announced by the Treasury last month.

mortgage endowments

A few facts and figures. We started this financial year having consulted on a budget that forecast we might receive 20,000 mortgage endowment complaints - in addition to around 40,000 other complaints. How wrong can you be? Since April 2003 we have already received 32,000 mortgage endowment complaints. So it seems very likely we will receive 50,000 mortgage endowment complaints this financial year. Of those that we have completed this year, 12,500 related to sales after 1988, while 4,500 related to pre-"A Day" sales (ie before 29 April 1988 - when regulation first began) - many of them by mortgage lenders. We record the outcome of complaints according to whether we alter the firm's final decision, rather than looking at whether there was a mis-sale. So taken this way, our mortgage endowment complaints show that we alter a firm's decision in only around one third of cases - and the outcome figures are broadly comparable in both pre and post-"A Day" cases. But these averages do conceal some fairly wide variations. In the case of some firms we are upholding 60% of complaints while in others we are upholding only 15%.

I am conscious that mortgage endowment complaints are impacting on every mortgage lender as well as on other financial firms. Some are coping better than others, but there are few firms of any size that do not have significant backlogs of complaints. And of course, we have a considerable number of complaints in our pipeline. We, like many firms, have recruited extra staff - we are now nearly 700 strong, having started the year with about 550 staff. There is a widespread acceptance by customers that dealing with these cases is going to take time, and most people are prepared to be patient. It is only fair to consumers and to firms that these cases are dealt with carefully and methodically rather than in a pressurised rush. So I welcome the FSA's decisions to give certain firms extensions of the normal time limits.

Some firms have questioned whether the Financial Ombudsman Service ought to be dealing with complaints that concern matters that happened more than 15 years ago - on the ground that in law there might be a legal limitation defence to a claim. However, there is no such limitation in the rules that the FSA made for the ombudsman. And the FSA has recently made it clear that it has no intention of altering that. Of course we are now fifteen and a half years since the start of regulation in 1988. We accept that the legal obligations on firms before regulation were not exactly the same as those after - at least in terms of record keeping and procedure. But the advent of regulation did not fundamentally alter the legal standard, in terms of duties of care, expected of those who held themselves out as professional financial advisers.

So, having dealt over the past four years with over 60,000 mortgage endowment complaints, there are few variations of circumstances that we have not seen - whether pre- or post-"A Day". The time should be coming soon when firms ought to become better at predicting the outcome of our considerations and applying our approach more consistently to the complaints they receive. That would save consumers time and anxiety - and save firms the cost of having to pay us to deal with so many complaints.

perceptions of the Financial Ombudsman Service

Meanwhile, we have lots of other work to do as well. And some industry voices have expressed concern about the impact of our work on financial firms - which they did not do with the predecessor ombudsman schemes.

We are not, and have no wish to be, a regulator. Our role is to act as an alternative to the courts. We recognise that some of our decisions can have significant implications for the industry, just as court decisions can - like those court decisions on windfalls and Equitable Life. That does not make the courts or us regulators.

Our powers - and the outcome of the cases we resolve - are very much the same as under our predecessor schemes. So what has changed?

The scope of our compulsory jurisdiction is large, and growing. We already cover complaints about: banks, building societies, credit unions, general insurers, stockbrokers, investment management firms, pension providers and independent financial advisers.

From October 2004 we will also cover complaints about mortgage lenders that are not banks or building societies, mortgage intermediaries and long-term care insurers. From January 2004 we will cover complaints about insurance intermediaries.

consumer credit

The government has announced that there will shortly be a consultation about whether the Financial Ombudsman Service should deal with complaints about those consumer credit firms that we do not already cover. There would be some logic in this, as we already cover complaints about consumer credit loans and cards provided by banks, building societies and other FSA-regulated firms.

As the Consumer Credit Bill was not in the Queen's speech for this session, it seems unlikely that any such change could come into effect before 2006 - nicely timed to mop up our excess capacity as the mortgage endowment flood recedes.

One of the government's intentions in creating a one-stop-shop for financial services complaints was that a single organisation would be more recognisable than the previous multiplicity. The industry often complains about the number of different bodies it has to deal with, so I would expect it to welcome dealing with a single body for complaints. But there is no doubt that the media has taken a much greater interest in the work of the Financial Ombudsman Service than in its assorted predecessors.

It is perhaps that media interest that lies behind some industry concerns. Our decisions in individual cases are sometimes presented, not by us, as across-the-board rulings. Contrary to myth, we did not 'outlaw' dual variable mortgage rates. We merely decided which of a lender's rates certain borrowers were entitled to pay under the terms of their existing mortgage contracts - and about half of the "lead cases" we decided went in favour of the lender rather than the borrower.

wider implications

Nevertheless, decisions in cases such as dual variable mortgage rates can have wider implications for the industry - and there is a potential for overlap between dispute-resolution in individual cases and regulation across-the-board. That is recognised by our existing arrangements with the FSA for the handling of cases with "wider implications". But if the regulator does not decide to step in, we are duty-bound to decide the individual cases. Some say that the problem is that ombudsman decisions have the effect of setting policy - a function that should be carried out by the FSA. Another way of looking at the same issue is to ask whether the FSA should be setting policy across a broader territory, so that the ombudsman would be obliged to make decisions in a policy vacuum in fewer areas.

Whether the existing arrangements for cases with "wider implications" could be improved, and whether there should be some external appeal, will be key issues to be addressed in the "N2+2 Review".

"N2+2 Review"

We and the FSA are about to launch a structured dialogue with the industry and other stakeholders, to solicit proposals on any improvements that could be made within the framework of the existing primary legislation. The aim is to see if there are widely-supported proposals that could be consulted on in Spring 2004, so that any rule changes could come into effect by 1 December 2004 - "N2+3".

To demonstrate the integrity of the process, there will be a Review Oversight Group comprising representatives of key stakeholders. The group will be chaired by Colin Harris, well known to you as the chairman of the MCCB. He will be joined by Diana Wright, an experienced personal finance journalist; John Howard from the Financial Services Consumer Panel (and also a member of the MCCB); Roger Sanders, an IFA and joint chairman of the Small Business Practitioner Panel; and Matthew Bullock, chief executive of the Norwich and Peterborough Building Society, from the Financial Services Practitioner Panel. The group will guide us through the process.

This review process will give an opportunity to you, and to others, to come up with concrete ideas. We are not looking for public posturing coupled with vague and aspirational shopping lists. We are looking for constructive dialogue coupled with specific and thought-through proposals that are likely to command widespread support.

In this context, it might be a useful opportunity for industry bodies to open a more regular dialogue with those other important stakeholders - consumer bodies. The CML's joint work with the Consumers' Association on early repayment charges, and the independent review of the Banking Code, demonstrated that consensus is not always difficult to achieve.

In working up your ideas, it may be helpful to test them against the example of dual variable mortgage rate cases. Those involved a number of lenders, using different contractual terms and producing different outcomes - with some lenders winning some cases and losing others. How, in practical terms, could such a complex situation be dealt with differently in a revised "wider implications" process (or through an appeal) - within a generally-acceptable timetable?

If firms could request a special process when cases give rise to wider implications for them, could consumer bodies also request the special process when cases give rise to wider implications for consumers? Who will bear the costs? And, if wider implications are the basis for invoking the special process, will that mean that the outcome should then be applied across the board to all customers of all firms?


Trade associations are important to us. We at the Financial Ombudsman have an excellent and close relationship with Michael and his colleagues at the CML. He is not slow to tell us of concerns that you have, while he is willing to understand and pass on concerns that we have. This dialogue is vital to the effective operation of our service.

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