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"is the ombudsman fair and reasonable?"

speech by Walter Merricks, Chief Ombudsman

given at the FSA on 12 and 28 October 2004 part of the Canary Wharf lecture series organised jointly by the FSA and London Metropolitan University

Twenty five years ago, on 5 December 1979, at a meeting of UK general managers of insurance companies, the news was broken that three companies, GRE, GA and the Royal, planned to appoint an ombudsman to deal with customer complaints. These insurance companies recognised that there was sometimes a gap between customers' expectations when they took out their policies, and the way in which an insurer handled a claim or an investment. The companies wanted an independent element in the system, so that they would not be seen to be the final judge of their own behaviour. And they also recognised that telling dissatisfied policyholders simply to sue was hardly consumer-friendly advice.

Over a year was to pass before the Insurance Ombudsman Bureau (IOB) opened for business. By then, the initial three companies had been joined by a number of others. It is worth stressing that this far-sighted initiative was taken by the industry itself, backed by the National Consumer Council. At that time, there was no regulator for the conduct of investment or insurance business - just the DTI, overseeing the solvency of insurers. The government seems to have had nothing to do with the creation of the IOB. A few years later, the banking industry launched its own ombudsman, shortly followed by the building societies ombudsman. And when, seven years after the launch of the IOB, investment business became regulated, it was natural that the main self-regulating bodies in the retail sector, IMRO, LAUTRO and later the PIA, should also rely on ombudsmen to handle complaints.

The Financial Ombudsman Service, then, is merely the merged successor to these schemes that originated with an industry-consumer partnership. And the key features of the model that was established in 1981 for the IOB and the banking ombudsman are those found in our scheme today. These were that:

  • complaints could be examined by the ombudsman only after the firm had given the consumer a final decision on a complaint;
  • the scheme would be paid for by firms, and access to the ombudsman would be free for consumers;
  • the ombudsman would be empowered to make decisions that would bind firms if the consumer accepted them, but would not bind consumers if they did not; and finally
  • the ombudsman was enjoined to approach disputes by considering the terms of the contract, the applicable law and judicial authority, good industry practice as expressed in trade association codes and statements, and regulatory rules - and to look for solutions that would be "fair and reasonable" in all the circumstances;
  • it would be a private dispute resolution scheme, confidential between parties.

These features are to be found in the statutory scheme we have today. And, to do justice to my title, it is worth pointing out that the Financial Services and Markets Act specifically requires me and my fellow ombudsmen to decide the outcome of complaints according to what, in the opinion of the ombudsman, is "fair and reasonable in all the circumstances".

In this talk I intend to examine each of these features and how they work in practice; and to look also at a current issue - namely, the large number of mortgage endowment complaints we are receiving.

last, not first resort

It was hardly surprising that the founding firms wanted the chance to review complaints before they reached the ombudsman. So, in the IOB rules, the ombudsman was enjoined not to investigate a complaint unless "a senior officer" of the firm had considered it and the complainant had not accepted that officer's offer or observations This means that the consumer should complain to the firm first.

This does not, of course, prevent many consumers from contacting our office for help with their complaints before we can formally get involved. I think it is fair and reasonable that we should try to help them resolve their problem if we can. On an average day, we receive about 1,200 phone calls on our consumer line and 1,000 items of post. By giving these consumers information and help from an authoritative, industry knowledgeable and impartial source, we resolve around 600 potential complaints a day that we do not, therefore, have to investigate - but we still receive a further 400 complaints a day that do need investigation. These 400 complaints a day will amount to over 100,000 complaints in the 12 months ending in March next.

The fact that firms have a chance to resolve complaints first means that what we receive are unresolved disputes where both parties are already well dug in - so resolving the issue is not going to be easy.

Of course, the complaints that we receive for investigation are only a minority of those that the firms receive. In most classes of business, one might hope that firms would resolve all but a tiny minority of complaints - leaving perhaps between 2% and 5% to be referred to the ombudsman. I say most classes, because, not for the last time tonight, I have to mention a class of complaints to which this 2%-5% referral level does not seem to apply - namely, mortgage endowment complaints where the figure is nearly 20%. I will come back to this, to ask whether it is "fair and reasonable" to ask us to deal with this number.

paid for by the industry - free to consumers

There are a number of issues here. Should consumers pay something - and if so, what, and on what terms? And how should the costs be spread among the industry? And putting to one side these questions for one moment, it is clear that if the industry is to pay all or most of the costs of the ombudsman scheme, it is entitled to expect that the scheme is run efficiently and economically. I am pleased to report that our aggregated unit cost of £750 per investigated complaint in 2000 has been reduced to around £500 now. If you add in the number of potential complaints resolved before investigation, our unit cost is nearer £200.

We recover our costs by a combination of annual levies on all firms, according to their volume of business, to recover the cost of our overheads (around 30% of our expenditure) - together with case fees of £360 per case, to recover our variable costs (the salaries of our adjudicators and ombudsmen - around 70%). Income from case fees ensures that the firms that produce the most complaints pay the most. I can tell you that 15 firms alone will account for half of all the case fees in the current year. Following extensive consultation, we decided that firms that have only two cases in any one year should not pay a fee for those cases - a move that seems to have been widely welcomed.

But the question of whether the fee that firms pay should be related to the outcome of the case is often raised. At present, it is not. Is this fair and reasonable? The current arrangement follows the practice of the previous industry-led schemes. In general, we find that between 30% and 40% of complaints are upheld in whole or in part, so the fee would have to be that much greater if it were only levied on those firms where the complaint was upheld. As a matter of practice, settling disputes with firms would become a great deal more difficult if firms knew that they'd have to pay a case fee three times the size of the present one if they accepted that the complaint should succeed. And how should we deal with the complaints that should be upheld in part - such as those where the consumer claims £10,000 but we award £300?

Should consumers pay something - even a nominal fee? Some think that persistent or obsessive complainants would be put off by having to pay a fee. I have to say that from my experience this would not be the case. They would be happy to pay - and would demand commensurate service. But whatever we might speculate about the merits of a consumer fee, the government has made it plain that this is out of the question.

firms bound, consumers not

Although this might seem an unbalanced model, few commentators suggest that consumers should be bound by the ombudsman - perhaps for the reason that very few of the consumers whose cases we reject then exercise their right to take their dispute to court. This is no great surprise. The courts are off-putting enough to most consumers - even if they do not have a reasoned rejection from the ombudsman, of their complaint - that the judge would certainly see. So the right of a consumer to pursue a case in court is - theoretically - intact, but almost never used in practice.

As far as firms - and indeed, consumers - are concerned, we operate a model of "due process" that is rather different from that of the courts or tribunals. We try to resolve disputes by examining written materials submitted to us, and then forming a view of the merits of the complaint. The consumer sends us their complaint and other relevant materials. And the firm should send us the fruits of its own investigations, together with its files and the reason it rejected the complaint. We carry out a simple sift of incoming cases, trying to identify those that we can resolve rapidly through a fairly simple response - conciliating between the firm and the consumer, as appropriate. We resolve about 40% of complaints this way.

The remaining cases are assigned to an adjudicator, who will consider the papers, asking for further information as appropriate, before forming a view as to how the complaint should be resolved. This view will first be communicated to the party least likely to be happy with the proposal. If necessary, the adjudicator will send a report to both parties. A further 50% of cases are settled by adjudicators. But if either party is dissatisfied with the adjudicator's view, they are asked to set out their reasons why - and the case is referred to an ombudsman who will look at the matter afresh.

If the ombudsman is inclined to reverse, or substantially amend, the adjudicator's view, then a provisional decision will be issued, inviting the parties to make further representations before a final and binding decision is issued. And so only 10% of our cases are finally decided by one of our panel of 25 ombudsmen. And anyone unhappy with that will have had at least one (if not more) reasoned statements as to why the complaint should be resolved in that way.

We can contrast our process - where parties likely to be disappointed have the opportunity to argue the point and see reasons why the case may not be decided in their favour - with the court or tribunal model, where judicial or tribunal decisions come as a surprise to the parties, who will not know what the reasoning is until the decision is actually made. It is arguable - and, indeed, has been mentioned in the context of the recent consultation on our process - that while a right of appeal from court or tribunal decisions is normal and appropriate, adding a further appeal layer to the very different ombudsman process may not be necessary.

basis for decisions

As I have mentioned, the rules of our scheme require us, in considering what would be fair and reasonable, to take into account the relevant law; regulatory rules, guidance and standards; and, where appropriate, what we consider to have been good industry practice at the relevant time. The vast majority of our complaints are settled by reference to principles that we can derive from the law, the terms and conditions of a contract, or from regulatory rules or standards. It occasionally happens that we have to fall back on a more general view of how a fair and reasonable result can be arrived at - either because the circumstances of someone's situation is so complex (often where both the firm and the consumer have behaved inappropriately), or because the strict application of the law is uncertain or conflicts with an industry code.

Consistency of decisions, in terms of the principles to be applied, is a key content of fairness. It is a well known tenet of discretionary justice that like cases should be treated alike, and different cases distinguished. With some 100,000 cases to be dealt with each year, this is no easy task. Moreover, firms will expect the decisions we make in these cases to be consistent with the 76,000 complaints we resolved last year, and with the 56,000 we resolved in the year before. In order to arrive at consistent decisions, we have to anticipate the variety of different circumstances that might arise, and lay down what out approach should be. We spend a considerable amount of time training and mentoring our staff and providing a supportive set of "knowledge management" materials for them. Of course, in any such system there is room for error, or for subjective judgements that may appear superficially to differ. But there is no doubt of our commitment to strive for consistency.

Earlier this year, we commissioned an external reviewer to carry out an assessment of the work of the ombudsman service. Professor Elaine Kempson is a well- respected independent researcher with a wealth of experience in the financial services field.(For the second year running she is acting as the independent reviewer of the Banking Code.) She interviewed over 100 of our staff and her 46 page report (which is on our website) concluded: The quality of case-handling is high ... We found no evidence to suggest there was significant inconsistency in case outcomes. Put another way, like cases are dealt with in like fashion. Our overall view is that the ombudsman service is a thoughtful, well managed organisation doing a good job under difficult circumstances."

mortgage endowment complaints

Over the last four years, complaints about mortgage endowments have risen to the point where they now constitute nearly two thirds of all the cases we are asked to consider. I have to ask myself whether this is fair and reasonable. It is now over three years since May 2001, when the FSA/PIA issued its regulatory guidance on how mortgage endowment complaints should be dealt with. Since then, we have dealt with many thousands of cases, published case examples in our newsletter, ombudsman news, and run seminars and conferences on how to deal with mortgage endowment complaints. There can be few firms unaware of the likely outcome of a mortgage endowment complaint referred to us.

Of course, I am aware that from the viewpoint of many firms, there appear to be many complaints coming from people whose expectations have been whipped up by a so-called "compensation culture", driven by consumer bodies, newspaper campaigns, politicians and compensation-chasing firms. No doubt many of these complaints are unjustified. And if the vast majority of those reaching us were just people pushing their luck, I would have to accept that dealing with such cases is part of our lot. But this is not the position. Overall we are upholding around 45% of the mortgage endowment complaints referred to us, and in some classes of complaint from some firms we are upholding nearer 80%.

When the FSA was first faced with the problem of mis-sold mortgage endowments in 1999, its regulatory approach was based on requiring firms to give their customers performance information ("re-projections") - and encouraging them to consider complaining if they thought they had been misled; with the option, if they received no satisfaction, of referring their complaints to us. Our work in the Financial Ombudsman Service therefore supplements that of the FSA in this field - and has to be seen as a support to the FSA's regulatory strategy. Over the last three years this has been followed up with targeted regulatory action by the FSA against a number of firms that did not appear to be responding appropriately. Naturally, high levels of referral to the Financial Ombudsman Service, combined with high uphold rates, are signs of risk of consumer detriment that merit regulatory attention. The public would expect the FSA and ourselves to co-operate closely, and we do.

One may have expected that, after more than three years, our caseload of mortgage endowment complaints might have reduced - or be by now largely composed of unjustified complaints. To the extent that the complete opposite is occurring, we and the FSA will be working together even more closely, to ensure that the regulatory objective of seeing that customers are fairly treated is secured. The FSA has a number of regulatory tools available to it and nobody should be surprised if they are used.


Is the ombudsman "fair and reasonable"? You can ask this question in different ways. Is the system fair? Are the people currently in charge operating it fairly? Is there anything that could sensibly be done to improve things? I leave the answers to you.

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