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the FSA's move towards more principles-based regulation: the role of the ombudsman

speech by Walter Merricks, chief ombudsman, at the FSA's conference on the future of regulation

London, 23 April 2007

Thank you for the opportunity to contribute to this event.

We in the Financial Ombudsman Service have always supported the FSA's intention to move to more principles-based regulation. While interpreting FSA rules is not our daily bread-and-butter task, we, like everyone else, have to attempt to come to grips with the FCA Handbook to see whether it may be relevant to the determination of consumer complaints. By and large it isn't - but we have to be aware that it could be. In the vast majority of complaints we handle, neither the firm nor the consumer - nor the increasing number of consumer representative from claims-management companies - hardly ever refers to breach of FSA rules as a ground for a complaint.

So simplifying the rulebook - thinning it to essential principles relevant to key regulatory risks - is in our interests, and indeed the interests of firms and consumers.

Complaints are brought against the background of individual contracts, with terms and conditions largely set by firms and accepted by consumers when they take out the product or service. So when a consumer complains that his or her claim for stolen garden furniture has been rejected by their insurer, there is nothing in the FSA rules about that. It is what is in the insurance policy that counts. And the biggest single source of complaints - mortgage endowment cases - are fundamentally all about attitude to investment risk and the suitability of products for individual consumers. No amount of rules will provide the answer to these disputes.

But as Clive Briault from the FSA has mentioned, it is worth pointing out how difficult it might be for FSA to move in this direction - if the Financial Ombudsman Service did not exist as part of the regulatory backdrop.

Let me take as a recent example the issue of mortgage exit administration fees. We first identified this issue, when a number of consumers started to complain to us about these charges - claiming either that they had been charged fees for which there had been no provision in the lender's terms and conditions; or that increases in the fees since they had taken out the mortgages were not supported by valid reasons, contrary to the unfair terms regulations. As these complaints seemed to affect a large number of firms, and reflected widespread industry practices, this was a classic case for us to refer to the FSA under our "wider implications" protocol.

If the ombudsman service had not existed, one may suppose that the first the FSA might have heard about this issue might have been through the media. Or, indeed, through court cases being brought by consumers in a variety of courts up and down the land.

Having reviewed what had happened, the FSA issued a statement of principles applicable to the situation - rather than consulting on a rule-book amendment or taking enforcement action. These principles set out a broad set of considerations against which firms were asked to assess what action they should take - to bring themselves in conformity with the principles. It also made it clear that firms would remain exposed to complaints being referred to the ombudsman.

The mere existence of the Financial Ombudsman Service, therefore, was operating as a backdrop method of encouraging compliance with the principles - should any firm have been tempted not to comply - without the need for cumbersome FSA enforcement action against individual firms. And because all firms are compulsorily subject to the jurisdiction of the ombudsman service, all can be certain that their competitors will be exposed to equal impact. The result - although no doubt some would suggest it was less than perfect - was economical, principles-based and largely welcomed by firms and consumers.

The FSA could be fairly confident that any disputes resulting from the implementation (or failure to implement) the principles would be unlikely to go to court - with the uncertain, lengthy and haphazard results this might have brought. But without the Financial Ombudsman Service able to work closely with the regulator, would this result have been achievable?

If the FSA doesn't have - or need - detailed rules that indicate how complaints are to be resolved, what about the body of experience that the ombudsman service has accumulated - and uses to guide the delivery of a consistent approach to complaint outcomes? As the FSA's paper indicates, some firms are pressing us to be more transparent about this - while others fear that our publishing more would lead to back-door regulation, just at a time when the FSA is slimming down its rulebook. So we are going to be asking an independent reviewer to consider the case for making better use of the information we accumulate, for the benefit of firms and consumers. And I hope that there will be some helpful input to the review.

The outcome of ombudsman decisions can, of course, have a significant impact on firms. So would decisions by the courts, if we weren't there. But as a lawyer, I am allowed to suggest that the outcome of court involvement would be far less consistent, far more embarrassing, and far more expensive. It would also leave a large body of dissatisfied consumers without access to justice, bad-mouthing the industry at every opportunity.

We generally uphold more disputes in favour of firms than consumers. And many firms - particularly at senior level - take the view of the senior executive quoted by Clive Briault: that we add value to their business. We hope to continue to play this role - to supporting confidence for consumers - as the FSA evolves its regulatory strategy over the coming years.

So, in summary, our view is that principles-based regulation by FSA is entirely complementary to the "alternative to the courts" function that the Financial Ombudsman Service represents; and that just as the ombudsman service would find it difficult to perform as effective a role without a regulator alongside us, so in the retail sector, the FSA would struggle to move to a more principles-based approach without an ombudsman.

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