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"retail distribution review":
ombudsman implications

speech by David Thomas, principal ombudsman and corporate director, at the FSA's "retail distribution review" conference

London 25 November 2008

Good afternoon. The title "ombudsman implications" is deliberately ambiguous, because the FSA's "retail distribution review" (RDR) has significant implications for the work of the Financial Ombudsman Service, and the work of the ombudsman service also has some implications for the RDR.


We, at the ombudsman service, recognise that there is a public-policy objective to increase the amount which consumers save, invest and put aside for pension provision, provided this does not expose them to mis-selling. We congratulate the FSA on tackling this difficult issue, and we have been working closely together.

There are no easy or perfect solutions: rather, there is a balance of risks. But the public-policy objective is more likely to be achieved through processes which are appealing to both consumers and financial businesses.

The processes should not appear off-putting or too time-intensive for consumers, and should not expose them to undue risk. And the processes should also be commercially attractive to businesses (taking into account the resources invested, the potential profit and the potential risk).

It is for financial businesses to design their products and processes within the law and the FSA's requirements. And it is for the FSA to set the regulatory regime within the constraints of UK and European Law, including particularly the Markets in Financial Instruments Directive (MiFID).

What we, at the ombudsman service, can do - based on our experience of dealing with cases where things are alleged to have gone wrong in the past - is to point out some areas where there may be a risk of increasing complaints to the ombudsman, and also to suggest some possible ways of mitigating those risks.

In doing so, our intention is to help the RDR to succeed - not to impede it. Pointing out potential areas of risk now, before the risks crystallise, will give the FSA an opportunity to progress the RDR in ways that:

  • minimise those risks, and reduce the potential for future disputes to be referred to us; or
  • recognise the risks, but decide that they are outweighed by other considerations.

The risks we foresee lie principally in the "middle ground" between (at one extreme) what is clearly independent full advice and (at the other extreme) what is clearly "execution-only".

So, much of what follows is directed to issues connected with that "middle ground" - the potentially grey areas of "guided sales" and "non-independent advice" (which some commentators consider to be a contradiction in terms).

As indicated in the FSA feedback statement published today, we have been involved in round-table discussions with the FSA and representatives from the banks, the insurers and consumer bodies. We were heartened by the positive and cooperative way in which all parties approached the discussions.

Amongst other things, the ABI and the BBA were unstinting in sharing with us the results of independent consumer research they jointly commissioned about the sort of process which they called "assisted purchase", and to which the FSA has given the working title of "guided sales".

The ABI/BBA's experimental "assisted purchase" does not inevitably lead to an outcome where the consumer is encouraged to invest. In some circumstances, the outcome is that the consumer should not invest at all - but should reduce debt or should seek full advice.

And, outside the round-table discussions, the FSA showed us (in confidence) a few innovative prototype sales processes, with the consent of the financial businesses which had devised them. This was helpful in identifying some issues that might arise.

Meanwhile, a few other financial businesses appear to have approached the RDR as a means to reduce or eliminate their own risks of potential claims from consumers, which is perhaps ironic in relation to processes focused primarily on selling consumers risk-based products.

potential processes

We have no reason to doubt the view, expressed by many industry players, that there is unlikely to be significant take-up in the consumer mass-market unless the sales processes involve, at the very least, some degree of legitimate encouragement.

The looming recession increases the need for consumers to provide for their futures - but memories of recent financial turmoil are likely to make consumers even more reluctant to buy financial products - and financial businesses even more cautious in contemplating business risks.

Indeed, it could be argued that the public-policy objective will not be achieved unless consumers are persuaded to buy products that they will not instantly believe they need. To facilitate that, without facilitating mis-selling, will require considerable care.

Banks and insurers do not appear to have found it easy to devise potential sales processes which provide sufficient legitimate encouragement for the consumer without involving, at least, an implicit personal recommendation.

At an earlier stage in the RDR, the FSA indicated that it was prepared to consider the possibility of a modified regulatory regime, within the constraints of the law. But, as we have heard today, it has not yet been persuaded that a special regime is necessary.

It may be that this arises, at least in part, because some of the work by banks and insurers appears to have concentrated primarily on trying to devise processes that seek to exclude regulated advice, a personal recommendation and the consequent suitability requirement.

As one industry member conceded in private, it might perhaps have been more fruitful if banks and insurers had focused first on devising processes which worked well for customers and potential customers - and then considered how the rules applied (or might need to be changed).

Some of the prototype models devised by the industry, although intended to avoid regulated advice, were considered by the FSA to involve regulated advice - and were considered by us to involve what is legally advice, whether regulated or not.

As indicated in the FSA's feedback statement, the legal concept of what constitutes advice is broader than the definition of regulated advice. So, a process which avoids regulated advice will not automatically avoid what a court (or an ombudsman) would consider to be advice.

A financial business which aims to encourage the mass-market to buy investments may find it difficult to restrain its staff from providing what will be interpreted as advice. So it might be safer to accept that and develop the concept of what has been called in the past "focused advice".

Some of the prototype models devised by the industry in relation to the RDR involve identifying appropriate products as a result of mapping individual consumers, and particular products, to one of a number of "people like you" categories.

With conventional full advice, an ombudsman's decision in an individual investment case will seldom have wider-implications. That is because the case is likely to turn on suitability, and each consumer's needs and circumstances will differ.

But "people like you" processes raise the potential risk that an ombudsman decision on some future case, which turns on the mapping of an individual consumer or product to a "people like you" category, might have potentially wider implications for many other sales that employed the same process.

To reduce the risks of exposing the industry and consumers to that future uncertainty, and the ombudsman to unjustified allegations of using the wisdom of hindsight, it would be helpful to consider the possibility of some process for foresight-based validation of such mapping.

This could involve a process for pre-vetting (and periodically reviewing) the mapping. To withstand scrutiny, it would need to involve robust consumer representation. It could be a voluntary option, for those financial businesses that want to reduce future wider-implications risk.

clarity for consumers

As today's FSA feedback statement indicates, it is important for the consumer to understand the nature and extent of the service being provided by the financial business. The FSA will be conducting consumer research, which may inform the terminology that is needed to ensure consumers understand.

Many of the disputes we deal with at the ombudsman service arise because of a fundamental mismatch between the consumer's understanding and the financial business's understanding of the nature and extent of the service that was being provided.

So, in the "middle ground" between full independent advice and "execution-only", any lack of clarity about the nature and extent of the service which the financial business is providing to the consumer has the potential to increase the number of cases referred to the ombudsman service.

If a financial business intends to sell an investment to a consumer on the basis of advice that is focused on some limited aspect of their financial position and needs, or on a "non-advised" basis, it is for the financial business - as the professional - to make this clear to the consumer.

It is not necessary that consumers should understand the regulatory requirements that surround the sales process. But it is essential that they should understand the extent to which they can rely on the financial business and the extent to which it is a case of "let the buyer beware".

There is quite some way to go in achieving this. The ABI/BBA research suggested that (even in test conditions) consumers do not currently understand the distinctions between "information" and "advice", or what is meant by a "personalised recommendation".

Of the consumers who went through the pilot "assisted-purchase" programme:

  • 67% thought they had been given a personalised recommendation based on their needs and circumstances; and
  • 69% thought they had been given guidance/information to help them make their own decision based on their financial needs;

indicating that a significant number believed they had received two different types of service simultaneously.

So, there is a clear need for the consumer research which FSA has promised to undertake, to establish descriptions for different types of services that will be truly meaningful to consumers. And it should not be assumed that existing terms, such as "execution-only", are understood.

We hope that this research will also cover ways of explaining both risk and the risk/reward ratio. Our experience in the ombudsman service shows that there is currently no shared language to explain these concepts.

"Portmanteau" descriptions of products as low/medium/high risk are pretty meaningless unless they are unbundled into:

  • risk to capital;
  • risk to income/growth; and
  • risk of not matching inflation.

And, unless consumers understand the risk/reward ratio, any new processes are likely to have a bias towards low-risk savings products which may not fulfil the public-policy objective, especially around provision for retirement.

But whatever the sales process used, a commonly-used and consumer-friendly set of language - to explain clearly the nature of the service being provided, what is meant by risk, and the link between risk and reward - would facilitate matters and minimise future disputes.

guidance for financial businesses

The FSA's feedback statement indicates that it is not currently minded to create a new sales regime. But it has provided some helpful material on what existing rules do (and do not) require. Potentially, there may be scope for further clarification by guidance - in one form or another.

General (published) FSA guidance is likely to be highly influential with ombudsmen when they are deciding individual cases. And so it holds out the prospect of reducing uncertainty for financial businesses and consumers in relation to potential claims.

It is likely to be impracticable for ombudsmen to take into account a host of individual FSA guidance to different financial businesses (which will not necessarily be published). Rather, it would be better for any general guidance to be updated in the light of individual circumstances.

The FSA will not approve industry guidance which purports to affect the rights of third parties (which includes consumers taking cases to the courts or the ombudsman). This means that FSA-approved industry guidance is unlikely to reduce uncertainty in relation to consumer claims.

It might perhaps be helpful to us all for the FSA to build on the material in the feedback statement, and to explore further what is (and is not) possible in the context of "focused advice" - with particular reference to the ways in which the financial business's obligations can (and cannot) be limited.

For example, the FSA's insurance sector briefing [PDF opens in new window] of May 2007 indicated where advice could (and could not) be limited in the context of "with-profits". Something similar in the wider context of the RDR might well be helpful.

other ways to reduce risk

A financial business may hold information about a consumer additional to information obtained from any advice or sales process (for example, a bank may already hold, through other channels, information about a customer's income, liabilities, property and/or other assets).

It would be prudent, as part of the advice/sales process, for the financial business to make it absolutely clear to the consumer that it has not taken into account any information it already holds through other channels.

Additionally, consider the position of a financial business advising a 30-year-old consumer about pension provision. How far is it realistic to take account of what means-tested state benefits might be in more than 30 years time, and the tax treatment of contributions throughout the intervening period?

One possibility would be to enable the setting or agreement of a realistic "benefits/taxation horizon" - beyond which a financial business would not be required to take account of potential future changes to means-tested state benefits and taxation policy when giving advice.


We note the interesting proposals from the professionalism working group. We will need to explore with the FSA some issues raised by the reference to the role of the Financial Ombudsman Service in relation to complaints, as it appears the proposed code of ethics will only bind individual advisers.

Our role is to consider complaints against financial businesses, where there is alleged to have been loss or material inconvenience. We do not investigate complaints against individual employees - and we will not usually know their status, or sometimes even their identity.

The ombudsman service is not a disciplinary body. Where we identify a systemic problem or some other major concern about a financial business regulated by the FSA, we alert the FSA. But it is for the FSA, using its own powers, to investigate and assemble the evidence for any action it proposes to take.

RDR: ombudsman implications

I am grateful to the FSA for giving me the opportunity to explain the Financial Ombudsman Service's position in relation to the RDR. Thank you.

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