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The Financial Ombud - an international perspective

speech by Walter Merricks, chief ombudsman of the UK Financial Ombudsman Service, at the fifth-anniversary seminar of the South African Ombud for Financial Services Providers

South Africa, October 2008

I am honoured and pleased to be in South Africa at this important time in the development of the South African Ombud for Financial Services Providers (the FAIS Ombud) - and to be present to celebrate the fifth anniversary of the founding of this office.

While this is a short time in the history of South African public institutions, it is clear that the institution of the financial ombud (or ombudsman as we say in Northern Europe) has taken root and is here to stay - both in South Africa and in the wider world.

This is also a somewhat momentous time in the international financial markets and in the global financial system. Citizens the world over are reading about the vulnerability of their financial institutions. There is no doubt that we ombuds of the financial world have an important role to play in offering vitally needed confidence to consumers.

But rather than concentrating on today's market turbulence, I would like stand back to place the FAIS Ombud into the wider international context.

As far as we are aware, the first institution in the world to take the Swedish word ombudsman (hitherto applied only to an official appointed to investigate complaints about public administration) - and to apply it to the creation of an institution to handle complaints about private-sector contracts between consumers and businesses - was the Swiss Insurance Ombudsman, which was established in 1972.

A Norwegian board for insurance complaints had been established a year earlier. But the Scandinavians only use the word ombudsman in the context of the public sector.

To penetrate the English-speaking common-law world, the ombudsman idea perhaps needed to take some root in the UK. It was the brainchild of one man - Mike Harris, a manager with the Guardian Royal Exchange insurance company.

Earlier in his career, Mike Harris had been posted to set up an insurance office in Caracas, Venezuela, and one of his first tasks was to have all its standard documentation - policies, proposal forms etc - translated into Spanish.

As Mike Harris later said:

There is nothing like translation for giving one a real insight into clauses and wording, often wrestling with the meaning - or asking is some of this meaningless?

I imagine that here in South Africa, with 11 official languages, you are familiar with the challenges that using precise definitions in contractual documents in a multi-lingual country can bring.

In any event, it was Mike Harris who first put forward the idea of an Insurance Ombudsman for the UK - in a paper he wrote in 1975. This paper put forward the basic plan for what was to become the Insurance Ombudsman Bureau in 1981.

The Insurance Ombudsman Bureau's first ombudsman was James Haswell, who sadly died only last week. The key features of Mike Harris' model have survived - a free service to consumers; access only after a complaint has been made to the firm; an ombudsman to be appointed to act independently as an out-of-court dispute-resolver; and businesses to respect the decisions of the ombudsman up to a specified financial limit.

One of the first to follow was the long-term insurance-industry in South Africa which set up its ombudsman scheme in 1985, with the ombudsman for short-term insurance not far behind in 1989. Meanwhile in the UK, a banking ombudsman's office had been established in 1985 - a South African banking ombudsman following in 1997, and the Credit Ombudsman in 2004.

Meanwhile, to ensure complete coverage, the South African Parliament passed the Financial Advisory and Intermediary Services Act (FAIS Act) in 2002. And Charles Pillai was appointed as the first FAIS Ombud a year later.

The rest of the world had been busy setting up ombudsman schemes too. By 1999 most of the developed English-speaking countries c Australia, New Zealand, Ireland and Canada - had established schemes covering insurance, banking or securities - or some combination of the three. Within the Commonwealth, these have been followed by the establishment of schemes in India, Pakistan, Malaysia, Botswana and Trinidad & Tobago.

In Europe a variety of schemes has emerged in most of the countries of the European Union. The European Commission has taken the initiative to identify all these "our-of-court consumer financial dispute resolution schemes" in a grouping known as FIN-NET. FIN-NET has its own website - aimed at ensuring that EU citizens are able to find a scheme that they might need, particularly for cross-border disputes.

The FIN-NET arrangement involves 46 schemes, with some EU states having more than one. There are schemes in 19 states: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Lithuania, Luxemburg, Malta, the Netherlands, Poland, Spain, Sweden and the UK. Romania in the process of designing a scheme. In addition, there are schemes in non-EU European countries - Liechtenstein, Norway, Iceland, the Isle of Man, and of course Switzerland.

In the United States, the Office of the Comptroller of the Currency - the regulator for the national commercial banks - has established a customer assistance program, which offers a dispute-resolution function and is now headed by the Ombudsman.

And outside Europe and the Anglophone world, there are established schemes in Mexico and Peru, with plans well-advanced to create an ombudsman in Japan. The authorities in Armenia have passed a law to set up a scheme, and in Kazakhstan an insurance ombudsman (who will be visiting our office next month) is about to begin work.

There are some common themes and trends across all these ombudsman schemes.

First - all of these schemes are of relatively recent creation. The movement for change seems to have started in the 1980s but to have really gained momentum in the 1990s. The early initiative was taken by the financial-services industries themselves, often together with consumer representative bodies.

As time went on, governments and legislatures were beginning to recognise that these voluntary bodies really had vital public benefits to offer - and to enact statutory arrangements to underpin them, and in some cases to merge existing schemes. Legislation was enacted in Australia in1998, in the UK in 2000, in South Africa in 2002 and in Ireland in 2004. Merged schemes are in place (or under way) in the UK, Australia, Netherlands, Ireland and Finland.

Second - the recognition of the imbalance of power, and the asymmetry of knowledge and information, between financial businesses and consumers has led all these countries, following a variety of routes, to agree that the law courts are not sensibly seen as the primary route for consumers to resolve disputes with financial firms.

This recognition of the inadequacy of the courts is interesting in itself. Despite the variety of legal systems represented in all these countries, most have seen the establishment of an out-of-court scheme as preferable, in terms of practicability, to reform of the courts. And the courts seem to have acquiesced in this development and approved of it.

Third - a commonality between the public-sector ombudsman and the private-sector ombudsman has been recognised. In the UK and Ireland with the British and Irish Ombudsman Association (BIOA), and in Australia and New Zealand with ANZOA, there has been a bringing together of ombudsman institutions to recognise the practical needs of these bodies - in IT systems, training of staff, operations management and investigation techniques.

In BIOA and ANZOA we have seen the development of ombuds schemes in other private sectors - energy, telecoms, real estate agency; and in other state sectors - police (in South Africa the ICD), prisons, tax authorities, universities and defence forces.

Fourth - a real commonality and community of international interest has developed among financial ombudsman schemes. Last year in 2007, we were proud to host in London an international conference of financial ombudsman schemes - that brought together representatives from over 25 countries. That conference was itself the successor to a number of annual gatherings of representatives of financial ombudsman schemes over recent years in Australia, Canada, New Zealand and, indeed, in South Africa.

It was at that point that a number of us decided that we should put a more permanent institutional framework behind this very clear interest in cooperation among financial ombudsman schemes. And so the International Network of Financial Ombudsman schemes (INFO) was created. It was under the INFO brand that we held our most recent conference two weeks ago in New York - hosted by the Office of the Comptroller of the Currency.

Fifth - we can discern some trends towards convergence of schemes. In the UK, as many will know, six schemes in insurance, banking and investment were brought together under a single statutory framework as the Financial Ombudsman Service in 2001.

Ireland followed suit in bringing its schemes together in 2004. The Netherlands and Finland are the process of doing so - as is Australia. The New Zealand Parliament's recent Financial Advisers Bill may presage moves in this direction. I will not venture into the debate as to whether South Africa would benefit by following suit. I would simply observe that as financial industries themselves converge, there has been pressure to merge consumer dispute schemes. But each country has to see its own way forward.

Sixth - there are obviously some large gaps. Even in Europe there are some EU-member states with no scheme. And clearly South America, the Middle East, South East Asia and the rest of Africa are poorly represented so far as ombudsman schemes are concerned.

But we can say that most developed countries with modern retail-consumer markets have seen the need to support confidence in financial services - by ensuring that consumers do not have to rely on the courts to resolve disputes.

My next observation is that, as ombuds, we exercise functions that have some similarity with those of judges (we deal with disputes), some similarity with elected representatives (who are expected to help their constituents with complaints) and some similarity with public administrative officials (who run government delivery programs).

Most of our constitutional-law textbooks would recognise these as distinct functions whichever country we come from. Yet we, as ombudsman, do not fit any of these models. None of us, so far as I am aware, is elected, nor are we recognised as judges within the court system.

My final observation relates to the question of legitimacy. If we do not fit the recognised or familiar models, we still need legitimacy and authority to do our work.

Consumers need to believe we have a legitimate status to be entrusted with their problems. Financial firms need to accept that we have some authority to make findings, recommendations or rulings on the merits of complaints that we see.

This legitimacy and authority can in part be derived from the wonderful word ombudsman or ombud, the meaning of which has now gained currency far beyond its original territory. But beyond the magic of the name, legitimacy has to be derived from the governance framework within which we operate.

And central to this legitimacy and authority is the concept of independence. It is one of the fundamental principles set out in the rules for the FAIS Ombud that "in disposing of a complaint he shall act independently and objectively and take no instruction from any person regarding the exercise of authority."

So this is a story of rapid institutional development in response to consumer, industry and public demand. States that have not already established schemes are rapidly planning to do so. Those that already have financial ombudsman schemes are frequently taking them to a new level, by giving them statutory recognition or new converged frameworks.

And it is a story of success and international cooperation. At a time when the international financial system is under strain, when in every country in the developed world consumers see their savings under threat, there can hardly be a greater validation of the need for institutions that can underpin confidence for consumers in financial services.

I referred earlier to the International Network of Financial Ombudsman schemes - of which I am proud to be chairman. As the Chairman of INFO, I can boast all the South African ombudsman schemes are either members or their membership is under process. And at our conference in New York, we were thrilled to announce that South Africa has offered to host the INFO conference in 2010. It may not quite rival the Football World Cup in popularity, but for some of us it will be equally exciting.

So I finish as I began - in honouring the development of the FAIS Ombud, its leader Charles Pillai, Noluntu Bam its Deputy Ombud and its dedicated staff, as it consolidates its place among its national and international colleagues, and continues its vital work in establishing itself as a landmark for fairness among South African consumers and financial firms.

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