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"Financial Adviser" Expo

speech by Walter Merricks, Chief Ombudsman

Harrogate , 4 October 2005

I am really pleased to be invited here today, and it is good to see lots of familiar faces. My colleagues and I have noticed that it is often the same people we meet at the intermediary events we take part in, as we travel round the country with our message - that the Financial Ombudsman Service is an organisation that wants to understand the problems financial firms face; that we want to help firms resolve their own disputes; and that, as far as is consistent with our independence, we like to engage with those who need to use our services. So the fact that you are here and engaging with us means - in the nicest possible way - that it is probably not you that I most need to speak to!

Most of you will be familiar with the work of the Financial Ombudsman Service and where it fits in to the regulatory framework. But some of you may not be. So you will forgive me if I remind you something of where we come from. Like the FSA, we did not spring fully formed into the world when the Financial Services and Markets Act came into force in 2001. Ombudsmen in financial services had been around for a long time before that.

It was, in fact, 25 years ago when the first ombudsman scheme for financial services was brought into being - a voluntary initiative by the insurance industry. But the insurance companies involved knew that the initiative would have no credibility unless consumer bodies gave it their support.

So the companies approached the National Consumer Council, and the negotiations that followed produced the first private sector ombudsman model. Schemes covering investment, banking and other financial services followed. So the ombudsman schemes were seen as resulting from a partnership between industry and consumer interests, embodied in the form of independent institutions. And in origin, the schemes had nothing to do with the Government - or with the legal system.

Like the FSA, we are the product of a merger. Unlike the FSA, whose predecessor regulators behaved very differently, our model is almost unchanged - apart from the fact that we are a single statutory body, now dealing with virtually all the retail areas of financial services. But the key features of independent, private dispute resolution - a free service for consumers; holding a balance between consumer and industry interests; fair and reasonable adjudication outside the court system - remain the same today.

So we hope that firms can see our service as potentially adding value to their own. If you are faced with a disappointed customer to whom you are trying to explain why you are not to blame for his or her disappointment, you have a real trump card to offer as to why they should accept what you say. "If you don't believe me," you can say, "you've got the right to get a second opinion from the ombudsman - an independent service that I and my colleagues in financial firms pay for, so it's completely free of charge. If the ombudsman says I'm wrong, I've got to accept it - so why should I pull the wool over your eyes now?"

What has changed in the last few years is that we are now dealing with many more complaints. Over four times as many - from 25,000 in our first year to an expected 115,000 this year. We now employ around 1,000 staff in our office in London's Docklands. Over 60% of our cases relate to mortgage endowments. In most of our complaint areas it's only in a minority of cases that we uphold the complaint and reverse the firm's decision (around 30% of cases) - although this figure rises to around 45% for mortgage endowment complaints.

On the whole, the Financial Ombudsman Service's experience tells a positive story for IFAs. We continue to see relatively low number of complaints from you, compared to those coming from other sectors. The annual levy you pay us is minimal compared to those you contribute to the other parts of the regulatory regime. An IFA firm with three partners pays a levy to us of £75 this year. And the modified case-fee structure now means that only firms that receive more than two complaints in a year pay case-fees. This means that only 5% of firms covered by the ombudsman service paid case fees in the financial year 2004/05.

The other recent change for the ombudsman service is that we now have a much wider range of small firms within our remit - not just investment advisers, but mortgage and insurance brokers as well. We understand that the complaints landscape for small firms is more complex than it is for larger firms. Those in smaller firms often feel disempowered and unable to handle a client's complaint in a way they would like, as the matter is in the control of their PI insurer and its lawyers. Even those supported by a network can feel somewhat on their own when it comes to a complaint against them.

Small firms don't have the luxury of "distance" from their customers, as larger firms with customer care departments and corporate "deep pockets" do. If a complaint is made against your firm it will feel very personal - even wounding. It's about what you have done (or not done) - not what has happened in just another department of a large organisation where staff may only feel skin-deep loyalty, and where an apology and a compensation cheque is easy to dispense.

One of the reasons why gatherings like this are such a great success is that life for those working in a small financial firm can feel quite isolated, and people like to come together to compare notes. In responding to a complaint, the majority of IFAs will not be sure how their peers were conducting business at any point in time, and find it difficult to articulate what reasonable industry practice would have been. That is one of the reasons I am happy to support the initiative that the Association of Independent Financial Advisers (AIFA) has launched under the title "stakes in the ground". If agreement can be reached and recorded on what is good industry practice today, this will help firms not only now but also in the future if it comes to responding to a complaint. It will also mean that my ombudsman successors will have solid evidence to refer to in trying to resolve disputes in five or ten years time.

Isolated IFAs are even more reliant on newspapers like Financial Adviser to keep them informed about what is going on. As a former journalist myself, I have to admit to recognising that bad news and angry people make it into print, while stories of good news and quiet satisfaction go onto the spike. Some dissenting or extreme views can be taken as the voice of IFAs because they get space in the media. But they don't seem to be representative of the many positive interactions we have every day with members of the IFA community.

All this was typified for me when a judicial review claim was launched against us earlier this year by an IFA firm. The firm challenged our decision that they should compensate clients who they admitted wrongly advising to invest in a high risk fund, which lost money as a result of a fraud by the fund managers. When the judge upheld our decision, I was prepared for the predictable criticism. But the firm's director, far from attacking us, said that he was a supporter of the ombudsman scheme and that the challenge had only been taken at the insistence of his PI insurer. His remarks, perhaps not surprisingly, didn't get much coverage.

Let me remark on another trend that I see as potentially good news. Financial advisers are becoming increasingly professional, developing long-term relationships with their clients. Clients who value personal service and advice are likely to have a better comprehension of the job of an adviser - and a better understanding of investment risk.

On the other hand, those firms whose business models are purely transaction- or sales-based operations face a far greater risk that their customers will have less compunction about making complaints against them, the moment they see a loss. The short-term profits that transaction-reliant firms generate must inevitably be set against greater long-tail liabilities arising from claims and complaints, as the larger financial institutions are discovering from their major involvement in the sale of mortgage endowments.

For us, of course, complaints arising from transaction operations are easier to determine - while those arising from the breakdown of relationships are much more difficult to resolve. We aren't divorce judges, but sometimes the work seems quite similar, with emotionally charged allegations flying in all directions!

But the growth of the ombudsman service raises a question in the minds of some: does the mere existence of the ombudsman encourage an unhealthy propensity amongst consumers to demand redress for every perceived loss in a world that will never be risk-free? The answer is fairly clear - at least from my perspective. I don't see that an unhealthy situation has developed - yet. But there are some warning clouds on the horizon.

The vast majority of those who lodge complaints with us have a real or perceived grievance that needs attention and resolution. The fact that we uphold only a minority of complaints doesn't mean that most of these people didn't have a genuine reason for complaining - even though we may not find the merits of the complaint compelling. If we don't resolve their complaints, it is fairly unlikely that they will take their case to court to have it resolved there. One of the main reasons the ombudsman is needed is that the legal system is not geared to the requirements of ordinary people who have disputes with organisations that they fear are well-resourced experts.

So these unhappy customers would otherwise be left with nowhere to go, other than telling their horror story to anyone who might listen - friends, work colleagues, journalists - only adding to the impression of an industry in which no one can have any confidence. However, if the ombudsman service can resolve the matter to their satisfaction, this must help. And I am pleased to report that over 60% of those people whose complaints we do not uphold nevertheless still report satisfaction with our service.

The trend I do worry about is the growing public notion that you cannot expect justice from a financial firm without a lawyer or a claims specialist on your side. This notion has already taken solid root among consumers with accident or personal injury claims. If you were injured in a car accident, would you expect to conduct a claim against an insurance company yourself? Probably not. But this has now spread to complaints about investment services.

There is only so far one can go to whip up demand for a potentially unnecessary new service. If the financial services industry has allowed the reality to be that unaided consumers are wrongly turned down or short-changed - and that only consumers supported by a specialist agency fighting for them get a fair deal - then the industry and its customers will have paid a very high price for this development. A legitimate and profitable business sector, making money out of ensuring that consumers are not wrongly fobbed off, will be here to stay. If you've watched daytime television recently, or flown with a low-cost airline, you will have seen the advertisements from companies offering to get you compensation for a mis-sold endowment.

Our own experience at the ombudsman service is that those consumers supported by claims companies fare no better than those who bring their complaints to us unaided. We are structured as a free service, aimed primarily at consumers who bring complaints unaided by third parties. So where we uphold consumers' complaints, we do not normally require firms to pay the legal support costs of those who choose to be represented. These costs therefore reduce the amount of compensation that consumers with successful complaints actually receive - unlike the accident injury claimants who normally recover their compensation intact.

All these developments may have a profound effect on the relationship between financial firms and their customers - instead of being built on mutual trust and fairness, they may become adversarial. This, in turn, affects the level of informality that we aim to offer in the service we provide - and makes handling disputes more legalistic and hard-fought. Already we are seeing an increase in the judicial review challenges made by firms, perhaps under pressure from the claims being made against them.

If we are to avoid this, then the phrase treating customers fairly springs naturally to mind. There appears to be some cynicism in some quarters about this FSA initiative - and also some concern about how it might affect ombudsman decisions. Let me emphasise that our role is to decide, in the circumstances of a particular complaint, whether an individual customer has been treated fairly or not - taking into account the law, the FSA's rules and good industry practice. The FSA's treating customers fairly programme encourages a firm's senior management to create systems that support fair treatment of all customers - but it does not impose any new rules.

So treating customers fairly should improve the way that financial firms intend to treat their customers, but it does not affect how the ombudsman service decides individual complaints when things have gone wrong - whatever the firm may have intended.

To conclude, then - we recognise that we have challenges across a wide spectrum of sectors and disputes. But if we can work with financial firms, and understand each other better, we will all be in a position to offer a better service to those for whom we all work - the consumers of financial services.

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