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the future of banking regulation

speech by Walter Merricks, chief ombudsman, at the BBA seminar

London, 30 October 2008

It is kind of the British Bankers' Association (BBA) to invite me to contribute to this conference on the future of banking regulation - from the perspective of the ombudsman service.

We are some six months on from the publication of Lord Hunt's review of the Financial Ombudsman Service - and a year after he first began work. Since then, our board has published policy statements on the two main themes of his report - accessibility and transparency. And last month we published a consultation paper on how we would go about publishing business-specific data about complaints.

Lord Hunt set us a very wide agenda. And our policy statements provide us with an implementation programme that will stretch over years rather than months.

So where does the ombudsman service sit - in relation to any proposed changes in banking regulation? As a dispute resolver, rather than as a regulator, the answer must be that we will continue to operate - as we always have - with whatever regulatory framework may be in place.

We are not part of the scheme of regulation. But of course, we work with the regulators - whoever they are. The existence of an ombudsman actually predates any regulation in the field of retail banking.

The banking ombudsman was established in 1986 - as a voluntary initiative by the banking industry in close cooperation with consumer bodies. At that time there was no regulator - apart from the Bank of England which took no interest in the ombudsman scheme at all.

The emergence of the Banking Code - and its Standards Board later in 1999 - flowed from the recognition that, while the ombudsman was making decisions, it would be sensible for the industry to adopt and monitor its own set of standards.

Since then, in handling complaints about banks, we have worked with a variety of regulators and self-regulators: the Securities and Investments Board (SIB) and its self-regulated organisations (SROs); the Mortgage Code Compliance Board; the General Insurance Standards Council (GISC); the Office of Fair Trading; the Information Commissioner's Office; and, of course, the Financial Services Authority (FSA).

While our service has now been placed on a statutory footing, our function as an alternative to the courts for retail-banking customers has remained almost unchanged since the founding of the banking ombudsman. The key features of this model are that:

  • the ombudsman is free for consumers - and funded by the industry;
  • access to the ombudsman comes only after the bank has itself already had an opportunity to resolve the complaint; and
  • banks comply with decisions of the ombudsman up to a specified financial limit.

These features of the tried and tested ombudsman model were endorsed by Lord Hunt in his recent review.

This model of consumer dispute-resolution links us closely to other ombudsman schemes in the UK and abroad. In the UK there are now already - or shortly will be - ombudsman schemes (either voluntary or statutorily underpinned) in other retail sectors including:

  • energy provision
  • telephone and internet services
  • the use of watercourses and waterfront-land owned by British Waterways
  • estate agency
  • surveying
  • higher education
  • home removal services
  • the purchase of new furniture, floor coverings, bedroom/bathroom/kitchen fittings
  • legal services
  • postal services.

And looking outside the UK, there are banking ombudsman schemes using a similar model in most EU countries: Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Lithuania, Luxemburg, Malta, the Netherlands, Poland, Portugal, Spain and Sweden.

In addition, there are banking ombudsmen in the non-EU territories of Liechtenstein, Norway, Iceland, the Isle of Man and Switzerland.

And outside Europe, there are banking ombudsman schemes in Canada, Australia, New Zealand, India, South Africa, Pakistan, Botswana, Trinidad, Mexico, Peru and the United States - with plans for schemes in countries as far apart as Romania, Japan, Armenia and Swaziland.

So how do we in the UK relate to the various regulators I mentioned earlier?

We have official memoranda of understanding with the main four relevant bodies: the Information Commissioner, the Banking Code Standards Board, the FSA and the OFT. In relation to the FSA and the OFT, we also have specific arrangements for the handling of matters which appear to have "wider implications".

These arrangements recognise that the main purpose of the ombudsman is to deal with the facts of individual one-off complaints, rather than systemic issues that might be suitable for rectification in other ways.

It is worth recollecting how this "wider implications" process came about. Its origins lay in discussions we had with industry bodies in 2001 - shortly after what some will remember as the "dual variable mortgage-rates affair".

We all agreed that there should be a structured process for identifying issues that involve either industry-wide issues or issues that affected large numbers of customers of one institution - and drawing these issues to the attention of the regulator. This process was reviewed and endorsed in the "N2+2" Government review of the Financial Services and Markets Act in 2004.

While any party is entitled to start the "wider implications" process, the irony, given that it was the financial services industry that pressed for it, is that no individual firm or industry group has sought to take the initiative to do so. And I fear we may have a structured process which still leaves few entirely happy.

So some thoughts on how the "wider implications" process might be developed or reformed may be appropriate.

Let me start with what Lord Hunt said:

The Financial Ombudsman Service does not operate in a vacuum and some of the challenges it has faced necessarily emerge from the action (or inaction) of regulators.

He went on to say:

I stress the need for prompt regulatory action to find generic regulatory (or if necessary statutory) solutions to future issues that have the potential to generate complaints in large volumes. Mass-produced alternative dispute resolution is rarely if ever a satisfactory and sustainable solution.

I imagine he had uppermost in his mind the experience of mortgage endowment complaints - where the ombudsman service was required to handle nearly 300,000 complaints.

Or perhaps the 40,000 complaints about unauthorised-overdraft charges that we have received. Or the growing number of complaints - now running at 500 a week - that we are now receiving about payment protection insurance (PPI), where we started the "wider implications" process four months ago.

It is no coincidence that each of these areas of complaints presented an attractive business opportunity for claims-management companies.

From the PPI complaints we have seen - and continue to see - the sales models and practices of many firms have not seemed so very different from those that the FSA itself saw in its mystery shopping exercises - which it graphically described in its regulatory notices accompanying fines against HFC, Liverpool Victoria, Alliance and Leicester and other firms.

From what we see, malpractice and detriment have clearly not been confined to those particular firms. So we could see a widespread systemic problem.

In our referral of this issue to the FSA under the "wider implications" process, we pointed out that individual consumer complaints were not the appropriate way to deal with such a problem. This approach meant that the many consumers who had suffered detriment would have to make individual complaints in order to receive redress - unless firms voluntarily undertook proactive reviews to identify and rectify areas of detriment.

In order to bring about the reforms that Lord Hunt wanted to see, there needs to be some creative thinking all round.

I recognise that industry bodies are going to find it hard to accept publicly that their members have ever been - or will ever be - responsible for producing widespread customer detriment of the kind that might need widespread redress.

But this complex fast-changing world will never be characterised with clear bright lines for the future and safe havens for the past. The decisions that ombudsmen have to take are, by definition, about the past. If we knew in advance what these were going to be, there would be no need for us, or for our many counterparts here and overseas.

Action to remedy past detriment (often wrongly characterised as "unfair retrospectivity") will inevitably turn out to be necessary from time to time. And the question is whether the current machinery is capably of generating it on the right scale - and in the appropriate cases.

In any discussion about these issues, the role of the courts cannot be ignored. The ombudsman is designed as an alternative to the courts. However, at least as many people took bank-charges claims to court as complained to us.

The "bank charges affair" shows that "buying off" consumers who go to court may be a short-sighted policy in this internet age, when news travels fast.

It also reminds us that the business of the courts is about examining the past as well - and potentially providing redress. Any reform of the "wider implications" process that ignores the capacity of consumers to test claims in court will not be very effective.

So I would sum up the objectives of any reform of the "wider implications" process in the following way. It should:

  • lead to the timely resolution of an issue;
  • resolve the issue generically for all affected consumers, not just for those with the initiative to make a complaint to a firm, let alone the persistence to take a dispute all the way to the ombudsman;
  • avoid offering easy business opportunities to claims-management companies to take unduly large slices of the redress belonging to consumers;
  • involve a process which is transparent and open to reasoned input - from both industry and consumers;
  • provide incentives for consumers to accept fair redress rather than pursuing individual court claims; and
  • lead to solutions that provide sufficient economic drivers to deter future detrimental behaviour.

This is a challenging agenda, but one in which I know that banks and other financial firms want to be engaged.

It may feel like a minor sideshow compared to the seismic events of the past months concerning banking liquidity, solvency and the role of central banks and taxpayer support.

But I also know that banks want their ombudsman scheme (a phrase I hope I use unashamedly) to operate effectively - to underpin confidence in the fair treatment of their customers.

That is what you and your predecessors set out to do in setting up the banking ombudsman scheme 22 years ago. And we intend to carry that proud inheritance forward for the benefit of banks and their customers - I hope for at least another 22 years.

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