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speech to members of the PEP and ISA Managers' Association

by Walter Merricks, chief ombudsman

29 January 2007

Thank you for inviting me to say a few words about the Financial Ombudsman Service. As you know, the ombudsman service is here to settle disputes - between businesses providing financial services and their customers. We operate as an alternative to the courts for consumers. We are, indeed, often seen as part of what is called the "alternative dispute-resolution" (or ADR) scene - although I would maintain that for most consumers we are the mainstream, and that the costly and complex court system is the unloved alternative.

the ombudsman approach

The Financial Services Authority (FSA) has laid out regulatory requirements on firms to investigate complaints. And only when those complaints can't be resolved do we step in. Then the Financial Services and Markets Act stipulates our role. Unlike some of the other legislation that sets up tribunals, our law sets out the basis on which we are to decide cases: "what is, in the opinion on the ombudsman, fair and reasonable in all the circumstances". This may sound as if it could result in a free-for-all, given that we have over thirty ombudsmen and more than 500 adjudicators (who make preliminary assessments). But I see it as my responsibility as chief ombudsman to ensure that our decisions are as consistent as possible.

Just for comparison, it's worth recording that, in 2005, judges in English and Welsh county courts heard around 70,000 disputed civil claims. The average time between issue of proceedings and hearing was a year. There are no statistics on how much these disputes cost to resolve. The extent to which the decisions reached in county courts are consistent remains to be researched.

In the same period, the Financial Ombudsman Service resolved 105,000 disputed claims about financial services brought by English and Welsh consumers (together with a further 14,000 for Scottish consumers). Most of these were resolved in under six months. Our service to consumers is free, and the average cost of our resolving those disputes was under £500 per case (charged to the financial services industry). While the issue of consistency can be tricky to pin down - when you're talking about individual cases, each judged on its own particular facts and merits - we have extensive internal audit procedures and quality-control mechanisms in place.

complaints handling by financial services firms

As I just mentioned, the ombudsman service only comes into play after a consumer has first made a complaint to a firm. Firms have clear responsibilities under the FSA rules to investigate complaints. Despite heavy emphasis by the FSA on complaints handling as part of its "treating customers fairly" initiative, the picture we see is that the standard of complaints handling by firms is variable to say the least.

Earlier this month, Ernst & Young released a survey-report on complaints handling in financial services. They surveyed 44 firms, including some major groups. Some, no doubt, were clients of Ernst & Young and others may have been firms they might hope to work for. So the researchers were never going to be very harsh in their verdicts. In spite of that, however, if one reads between the lines, the report is pretty depressing about the state of complaints handling. The FSA is expecting firms to have embedded the "treating customers fairly" principle in their operations within the next two months. The message from Ernst & Young is that, as far as complaints handling is concerned, there's still an immense amount to do.

There appears to be little research into the root cause of complaints - to analyse what is generating them and what might be done better to eliminate the causes. There is little evidence of efforts to ensure complaints are handled consistently - and where issues recur, to see what is done about them. The management information that is generated by many firms seems to serve little purpose other than telling the finance director how much is being spent on complaints. Beyond that, management information about complaints seems only to focus on the ombudsman "uphold rate" - the proportion of complaints we find "against" firms - rather than revealing a more rounded picture of why people are complaining in the first place, and why they are then referring complaints to the ombudsman.

Our uphold rate normally involves our supporting consumers in around a third of the cases we deal with - and firms in around two thirds of cases. This has been a pretty consistent pattern over the last twenty years or so of ombudsmen settling financial disputes.

But let's take a moment to look at why, broadly, we might find "against" firms when we settle disputes. Sometimes a dispute turns on a complex set of facts which we have investigated more closely than the firm - meaning we arrive at a different conclusion on the evidence. And sometimes the fact that the firm will lose is a clear "no brainer" - where the firm should have known from previous ombudsman decisions and from our widely publicised approach to disputes of that type that the complaint would be upheld.

On the other hand, why, broadly, might we find "against" consumers? Of course, some complaints will be from people who will never take no for an answer. But others are from people whose complaints - though never likely to succeed - have been so derisively dismissed by the firm that it is entirely understandable that they should seek the impartial view of the ombudsman. So you can see from this, that crude uphold rates - the statistics on who "won" and who "lost" complaints - really may not mean so very much.

Of course we have other complaints-handling statistics too. We compile a benchmarking table showing the "top 12" financial firms - that together produce over half of the complaints we receive - ranked simply in terms of the number of complaints referred to us about each, proportionate to their market share. Every six months we share an anonymised version of this with the firms in question. This shows consistently that the best group is approximately nine times better than the worst. That firm knows that it is the best - and most of the others can guess who it is. But the depressing fact is that the other firms seem to have no ambition to narrow the gap, or to compete on improving this area of customer service - despite the emphasis of the FSA's "treating customers fairly" initiative. Nor does the best firm seem to want to promote its performance positively. It would be pretty worrying if the reason it doesn't want to do so is that it fears analysts would mark its shares down, on the grounds that it was a "soft touch" on complaints.

Commentators might suggest that if neither regulatory pressure nor the current state of the market can achieve improvement in complaints handling, then this is because there is little consumer pressure to drive the competition - and this, in turn, is because neither the FSA nor the ombudsman publish the comparative complaints data that we hold. In a world where schools, hospitals, rail operators, energy providers and even fertility clinics are ranked in public league-tables - I only mention the latter because I am a non-executive board member of the HFEA - I can see commentators arguing that data about the response of regulated financial firms to complaints (who are required to make half-yearly returns of this information to the regulator) should be in the public domain.

mortgage endowment complaints ...

Let me turn now to mortgage endowments which, sadly, have dominated our relatively short life. When our predecessor ombudsman schemes came together in 2000 to form the new Financial Ombudsman Service, we were 350 people dealing with 25,000 complaints a year - of which around 4,000 were mortgage endowment disputes. Within two years, mortgage endowment cases had rocketed to 14,500 a year. In our plans for 2003/2004, we forecast an increase to 16,000 mortgage endowment complaints - but were hit with no less than 52,000 cases. This figure rose again to 70,000 in 2004/05 - with a similar figure in 2005/06. Only now is the volume of these cases finally declining. This means that since 2000, we have already resolved 500,000 complaints overall - and by the end of next year, we will have settled 300,000 disputes just about mortgage endowments.

... and claims management companies

In April 2007 the provisions of the Compensation Act for regulating claims management companies will come into force. As the main work of these companies in the mortgage endowment field now appears to be nearly over, this may seem like a classic case of shutting the stable door after the horse has bolted. Many of the companies look to have had the cream of the business - and now seem either to be scaling down their operations, or at least considering where else they can turn.

For the financial services industry, the emergence of these claims management companies has been an almost unmitigated disaster. Claims management companies have probably been responsible for trebling or quadrupling the amount of endowment compensation that firms have had to pay out. With a simple business model, they have been able to build staggeringly profitable enterprises in a very short time. On top of this, millions of consumers have been schooled to believe that financial firms will not deal fairly with you when it comes to a complaint - and that to succeed in squeezing compensation out of unscrupulous firms, you need to have an expert firm on your side.

The "no win, no fee" slogan of the claims management companies has been so seductive that millions of people have been led to part with a substantial slice of the compensation they could have had in full - in return for a service that in many cases may have been negligible and that probably involved consumers still having to complete exactly the same complaint forms that they would have filled in, had they complained on their own. If these consumers - mainly middle-class home-owners of some five to twenty years standing - could not see what was in their financial interest when it came to claiming compensation, it just shows what a long way we have to go in improving financial capability in this country.

However, in a recent survey for the Financial Services Consumer Panel, most consumers who had used a claims management company pronounced themselves satisfied with the service they had received - and reckoned it to be value for money. They obviously thought that handing over a chunk of their compensation was no great loss - compared to the opportunity of some gain offered to them by a claims management company.

lessons to learn?

So are there any lessons that the financial services industry can learn from all this? With the benefit of hindsight, can we even identify what the industry might have done differently to avoid this outcome? The decision by the FSA back in 2000 that the mortgage endowment problem should not be subject to an industry-wide review - like the Pensions Review - was greeted in industry quarters with great relief. Instead, this was to be a "complaint-led" exercise, with insurers agreeing to send out so-called "re-projection" letters - giving endowment-holders the news on how their policies were performing. With a majority of these re-projections initially showing endowments on track to repay the mortgage, most financial firms sat back to see what complaints would come. No one thought that it might be beneficial to conduct a pro-active review of the mortgage endowments that weren't on track.

What happened was that uncontrollable and unpredictable numbers of complaints started arriving - coinciding with a worsening of the stockmarket that meant most endowments were no longer on track. Firms lost the opportunity to take the initiative. Worst of all, the relationship with customers was turned into an adversarial one, once the claims management company boom started.

However controversial the Pensions Review may have been, it did not give rise to a claims management company industry. Consumers received the compensation, running into billions, to which they were entitled - with perhaps fewer hard feelings towards the financial services industry in general.

On the other hand, an estimated £4 billion has already been paid in compensation for mis-sold mortgage endowments - and yet one could argue that the outcome all round has been worse for firms, for many consumers and certainly for the ombudsman. Indeed, probably for everyone except those who have made small fortunes out of running claims management companies - and the advertising outlets into which they poured money to spread their message. Admittedly, it was probably their advertising that reached more consumers than our website and the FSA's information leaflets - so we cannot say that it was worse for all consumers. I doubt you would have wanted us to use your money to advertise for complaints. But then again, perhaps with hindsight you might have preferred our advertising to that which did appear?

And it could all have been even worse for the financial services industry. Just think how it might have been, if the endowment claims management companies had adopted the business model of their colleagues in the personal injury claims industry - whose model delivers 100% of compensation to consumers, by issuing (or threatening to issue) court proceedings and making profit out of the legal costs that are added to the compensation award. In addition to paying out compensation of, say, £5,000, there might have been bills for £2,000 or £3,000 in legal costs on top.

So my plea is to learn the lesson next time. There will be plenty of people on the look-out for business opportunities. Will there be a viable mass business in helping consumers to reclaim premiums on mis-sold payment protection policies? Or alleged unlawful bank charges? Or on compensation for bad advice on contracting out of SERPS? If so, the lesson might be not to simply wait for the complaints - hoping there won't be too many or that it won't be too costly an exercise. Taking control - and planning to handle complaints fairly and pay compensation where it is due - may build better long-term customer relationships. And, in the end, be less costly.

Back to our own organisation. The ombudsman service is here to help the financial services industry and consumers by underpinning confidence. Consumers need to know that - in what we hope is the unlikely event they feel something has gone wrong - there is somewhere impartial they can go to see whether they are right or wrong. Happily, research has shown that consumers' confidence in financial services is indeed enhanced by knowing about us.

We perform our function by remaining steadfastly independent, just in the way that the courts are. But being, I hope, better than the courts in terms of process, accessibility and proximity to our stakeholders. Which is one of the reasons why I was delighted to accept this invitation to speak to you - and why I now look forward to answering any questions you may have.

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