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Council of Mortgage Lenders (CML) annual conference

speech by Walter Merricks, Chief Ombudsman

7 December 2004

There are three topics I'd like to cover:

  • the outcome of the "N2+2" review;
  • our routine handling of mortgage complaints, together with the impact of mortgage regulation on the ombudsman service; and
  • the rather more worrying (for me) subject of the avalanche of mortgage endowment complaints with which we are dealing.


Just over a year ago the then Financial Secretary to the Treasury set the agenda for what has become known as the "N2+2" review - the review of the Financial Services and Markets Act after its first two years of operation. As part of that, we and the FSA were invited to conduct a review of how we work together on cases that have wider implications, and to consider what argument there might be for establishing an appeal mechanism for ombudsman decisions.

To help set the ground for the review, we established a stakeholder group of individuals chaired by Colin Harris, chairman of the Mortgage Code Compliance Board, to oversee the way we went about this exercise. The group included representatives from the Financial Services Practitioner Panel, the Consumer Panel and the Small Business Practitioner Panel, together with an experienced personal finance journalist. As a precursor to a formal consultation, we took soundings from all the main trade associations and consumer groups, and then launched a joint consultation in July. We are now able to take stock of the responses we received as part of the consultation. We are grateful for the time, trouble and thoughtfulness that went into them.

Everyone placed value on the role that the Financial Ombudsman Service plays. And the weight of opinion in the responses suggests we were on the right lines in proposing that any additional mechanisms should be built into our process before an ombudsman decision, rather than after it. The preponderance of views - which included a very measured and persuasive response by the Council of Mortgage Lenders - was that an appeal mechanism should not be introduced. Last week Stephen Timms, the new Financial Secretary, confirmed that the Treasury view is that an appeal mechanism is unattractive. We and the FSA will therefore concentrate on developing other arrangements to deal more effectively with cases that have wider implications.

The Financial Ombudsman Service is, for most people, an alternative to the civil courts. But as with courts, some individual decisions can have wider implications. If a case is within our remit, we have to deal with it unless there is a good reason why we should not.

We have always recognised that there is a difference between a case that involves circumstances unique to the individual and to the firm, and a case where the circumstances potentially involve many consumers or indeed many firms. There are broadly two routes we can follow in dealing with cases in the second category. One route involves the FSA accepting that an issue has regulatory importance of a kind that justifies it taking action that would, in effect, overtake and render unnecessary ombudsman decisions. The other route (where, by definition, the FSA would not be involved), is where the ombudsman service will take soundings from suitable individuals, nominated by the relevant industry liaison group and by the Financial Services Consumer Panel, as to the background and possible wider implications of the issue under consideration. We are already using this route in one case and we shall learn from the experience. We and the FSA will be fleshing out both models in the feedback statement that we shall publish early in the New Year.

mortgage complaints and mortgage regulation

Let me turn now to our current caseload of complaints about mortgages (other than about mortgage endowments). We are receiving about 60 new mortgage cases a week - that is double the figure we were getting four years ago. In that time, of course, the mortgage market has expanded very considerably, so this increase is hardly significant. We are seeing a fairly consistent range of typical circumstances:

  • mortgage underfunding (particularly after a further advance)
  • early repayment charges, where charges are supposedly linked to market rates
  • administrative mess-ups, especially after the original lender has been taken over (records scanty or absent)
  • wrong type of mortgage valuation commissioned or negligent valuation by in-house valuer.

Of course, our consideration of mortgage complaints now takes place against a new background of regulation. Thanks to the transitional regulations there is a seamless transition from the Mortgage Code Arbitration Scheme (MCAS) to the Financial Ombudsman Service. Our higher profile may attract rather more complaints than MCAS, but we are not expecting an explosion of broker-related complaints

mortgage endowment complaints

Over the last four years, complaints about mortgage endowments have risen to the point where now they constitute around two thirds of all the cases we are asked to consider. This is a vast surge of work and it represents a serious challenge for us. Last year we received 50,000 mortgage endowment complaints. This year we shall receive at least 65,000, and unless something radically changes, it is unlikely that that next year we shall receive fewer complaints than this. We shall soon have a total employee complement of 950, compared with the 550 staff we employed two years ago.

It is now over three years since May 2001 when the FSA/PIA issued its regulatory guidance on how mortgage endowment complaints should be dealt with. The guidance was deliberately set at a high level of principle and left a number of areas less specific. In the following 18 months or so we clarified our position on the application of the principles. Since then we have dealt with many thousands of cases, published case examples in our newsletter, ombudsman news, and run seminars and conferences on how to deal with mortgage endowment complaints. We have given as clear an explanation as we can (without giving unmeritorious complainants a free script) of our approach both to post-N2 and pre-N2 complaints. There can be very few firms unaware of the likely outcome of a mortgage endowment complaint referred to us. Why then do we find that we need to uphold some 45% of the mortgage endowment complaints referred to us? Why are they being referred to us rather than being settled appropriately by firms? This uphold rate is considerably worse than the average uphold rate of one third in non-mortgage endowment cases. Within these averages there is an enormous variation. In some classes of mortgage endowment complaint, from some firms, we are upholding nearer 80%. For some other firms with similar market shares we uphold only 20%, so it is possible for firms to deal fairly and effectively with large volumes of mortgage endowment complaints.

There is also evidence that some firms are, in the first instance, systematically rejecting swathes of complaints with little or no investigation of the individual consumers circumstances - citing generic arguments that they must know do not accord with the approach we take. Around 20% of all mortgage endowment complaints to firms are referred to us - a far higher proportion than in other areas. There must be some doubt that the 80% of complainants who do not refer their complaints to us have all been dealt with fairly. Are some firms just dumping the remaining complaints on us, finding our £360 case fee cheaper than the fees that outsourcing companies would charge?

Naturally, high levels of referral to the Financial Ombudsman Service combined with high uphold rates are signs of risk of consumer detriment. Earlier, I indicated my fear that next year our mortgage endowment complaint numbers might grow again, particularly when the impact of clearer time-bars, embedded in red "re-projection" letters, takes effect. I cannot face the prospect of receiving 75,000 or even 85,000 mortgage endowment complaints without feeling that steps need to be taken to prevent this. I know that the FSA shares my concerns.

Providing fair redress for customers with past mis-selling claims is never going to be an area in which the competitive forces of the market will drive higher industry standards. On the contrary, competition will drive firms towards paying out the minimum amount consistent with complying with regulatory and legal obligations. It is therefore not surprising that there are calls for the FSA and us to cooperate more closely, to ensure that the regulatory objective of seeing that customers are fairly treated is secured. We are sharing detailed information with the FSA, so that they can take appropriately-targeted action.

The growth in mortgage endowment complaints has fuelled the creation of claims management companies, pursuing complaints on behalf of consumers - and taking a slice of any compensation the consumer receives. This is a new sector of companies that are not regulated, in the main, either by professional bodies or by the FSA, and there is wide agreement that they should be regulated in some way. I hope that the newly-formed Claims Standards Council, which has applied to the Office of Fair Trading for recognition of its code, will rapidly establish itself as a robust self-regulatory body for the sector, ensuring that only responsible and well-qualified companies that offer proper regulatory protection to their clients operate in this market. As Lord Falconer, the Constitutional Affairs Secretary, indicated last month, this is a last chance for claims companies and if self-regulation is not successful, the Government will consider formal regulation. Claims companies, the Government said, should take urgent action to significantly improve the service they provide, to ensure they do not raise expectations falsely through potentially misleading advertising and sales practices, and to be more upfront about their processes and fees.

Many commentators have pointed out that consumers do not have to part with any of their compensation and that they can complain to firms and to us for free. For what it is worth, our experience is that - on average - the outcome of cases referred to us where complainants are represented by such companies is similar to others where they are not - the only difference being that those consumers who are represented, and whose complaints succeed, lose some of their compensation. Such companies justify their existence by claiming that they would not be needed or prosper if consumers had confidence that their complaints would be fairly dealt with by firms. If these claims management firms have found a market for their services, it is not because the framework within which the ombudsman service operates is lacking.


I am sorry to have had to spend so much time talking about mortgage endowment complaints, but you will understand that the subject consumes many of my waking hours. Despite this, I pay tribute to your association, its leaders and its staff, with all of whom we have an appropriately business-like and productive working relationship. Thank you for listening.

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