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Building Societies Association Annual Conference

address by Walter Merricks, chief ombudsman

Bournemouth, 9 May 2002


  1. Let me first say how glad I was when Adrian Coles first mentioned to me the possibility of participating in your Annual Conference. I am particularly pleased to be here as a guest of Martin Ritchley who played such a supportive role on the board of the Building Societies Ombudsman scheme during the rather prolonged period of handing the scheme over to the Financial Ombudsman Service. And I have been pleased to meet your new chairman Graham Stow a number of times, including the occasion when he was able to visit our offices in London last year.
  2. So despite some recent differences of view I feel very much among friends here. I and my colleagues Nikesh Shah and Alison Hoyland who are manning our stand in the exhibition, as well as my ombudsman colleague David Millington, all look forward to meeting more of you during the course of the conference.
  3. Two weeks ago the Treasury Minister Ruth Kelly visited our offices and when I told her I was coming to speak here she expressed some surprise - assuming perhaps that it would be like going into the lion's den. I certainly do not feel like that - you have already made me feel most welcome. I am only sorry not to have been able to get here sooner, but I had to attend a board meeting this morning. Martin kindly let me have the draft of his address, so I have some idea of what was said this morning.

process challenges

  1. If we have a difference of views I believe in tackling the issues head on. So let me make a start. We are developing our approach in the light of experience, and we don't claim to be perfect. But our position is sometimes misunderstood and sometimes misrepresented. There are three issues on which we have been challenged. First it is said that, unlike the FSA, we are not obliged to engage in open formal consultation; second that we lack accountability; third that there should be a right of appeal against an ombudsman decision. These are all rather theoretical and I will deal with them. But I see them as symptoms of unease rather than their true cause.
  2. Some of these theoretical arguments were highlighted in the lead article in February's Building Society News headed "Huge changes in Ombudsman's powers?". I hope no one was misled by that headline into thinking that changes in ombudsman powers had indeed been huge. The right headline would have been "Tiny, highly theoretical changes - ombudsman powers virtually unaltered." In practice the model set up under the Building Societies Act 1986 has been translated virtually word for word into the new scheme.


  1. First consultation. The comparison made with the FSA is simply not apt. The FSA is a regulator. We are not. The Building Societies Ombudsman scheme never provided for any formal requirements for consultation, nor did any of the other financial ombudsman schemes; nor indeed do any ombudsman schemes in the UK, Ireland or the rest of the world. Nor is this surprising. Rather than being quasi-regulatory we are a quasi-judicial body resolving complaints between disputing parties, in a similar way to the courts and tribunals. The judges don't consult before making decisions - how in practice could they?
  2. But unlike judges and courts we do talk to the industry and consumer bodies on an ongoing basis. Unlike them, we do not simply decide cases, but, as ombudsmen have always done, we feed back to consumers and the industry general lessons from the complaints we have seen with the aim of helping to reduce complaints. We do this largely through our regular publication ombudsman news which, from the feedback we get, complaint handlers in the industry find really helpful.
  3. In the run-up to merging all the ombudsman schemes we needed to harmonise and make consistent our approach to some issues that we could see on the near horizon. One concerned complaints about superseded TESSA accounts, another concerned under-funded mortgages. How should we deal with these situations? One possibility would simply have been for us to wait till cases arose and then make decisions one by one. You would gradually have found out what our approach was by seeing or hearing about decisions. We did not do that. Trying to be helpful we produced brief papers setting out our approach, and we have tried, whilst still evaluating the arguments in each case, to apply those consistently and fairly. We did manage to fit in brief discussions with the industry and consumer bodies albeit that circumstances required that these were quite hurried. We did not have to do this, but surely it is a more transparent and open way of doing business - certainly more open than you would get from the courts when they suddenly decide that some part of the law needs to be changed and proceed to surprise us all. Two weeks ago in a decision than surprised many lawyers the House of Lords judges changed the law on the limitations of actions in a major way. No warning, just a decision applied retrospectively. Is that what you would prefer?
  4. So although we cannot acknowledge a general obligation to consult in the way proposed, as I mentioned in my last annual report a "no surprises" approach is what we aim for. Our technical advice centre regularly answers queries from complaint handlers in the industry about our approach to commonly encountered complaints; our industry liaison team regularly visit firms who request it; and ombudsman news and our website carry updated information to a wider audience. We have set up a joint liaison forum together with representatives of this association, bankers and mortgage lenders to talk about issues of mutual interest. And the phone lines between Savile Row and the Ombudsman service are rarely quiet. Lack of communication there is not.


  1. Next it is said that, again by comparison with the FSA, we lack accountability. The FSA is subject to good governance requirements, Treasury reviews, and the possibility of independent inquiries. But from what I have just said you will see that the comparison with us is just plain wrong. We are set up under the same legislation, but that is all. The Building Societies Ombudsman scheme contained none of these features. Accountability is a slippery concept - sometimes people use this to mean that the body from which more accountability is demanded should be capable of being influenced and controlled. But the most important feature of the position of ombudsman is independence - that is freedom from control or influence by those who are or may be parties to disputes. In other ways of course we should be accountable for the money we spend, and we should record and be open about what we do so that people can examine and criticise us.


  1. Finally appeals. Decisions by the FSA on enforcement and discipline can be appealed to the Financial Services and Markets Tribunal. Here there is at least some degree of aptness in the comparison in that we are both decision makers. But we already build in to our process preliminary views by an adjudicator and, where appropriate, provisional ombudsmen decisions before we make final determinations. It is not uncommon for ombudsmen to come to a different view from that expressed by an adjudicator. So there are effective internal appeals. And our scheme is designed to be relatively quick and informal. Appeals would slow things up. Should both parties be able to appeal? And to whom? And why is anyone calling for an appeal avenue, unless it is because there have been unwelcome decisions.

real concerns...or a front for others?

  1. What makes me think that all these objections to our process are, to put it crudely, a front for other concerns, is that none of them were raised in the consultations on our rules and process that we and the FSA undertook over the two years before we were finally set up. In response to these consultations the BSA said that the proposed rules were "similar to those of the Building Societies Ombudsman scheme and should pose few problems in practice...The Association welcomes the proposed form of the scheme." So what changed? One word. TESSAs. To which perhaps should be added Dual Variable Mortgage Rates. When a spokesman for the association says "our concern is not so much the decisions taken by the Financial Ombudsman Service but the processes used by the Financial Ombudsman Service", I am not so sure. People I meet have been more concerned with the decisions than the process.


  1. So let me talk - as far as I can - first about TESSAs. As you know one of your members is taking judicial review proceedings challenging a TESSA decision. In a society subject to the rule of law, that is everyone's right. Naturally I do not welcome it, we think it is unjustified, and will do little to enhance public confidence in the ombudsman scheme whatever the court's decision. Fact. It was the Banking Code Standards Board that confirmed TESSAs to be superseded accounts. Your industry standards body. I am told this came as a surprise, though I find it difficult to extraordinary that no one thought that this was at least a risk worth considering.
  2. I understand how someone new to the industry would find it a little odd for someone to conclude that firm A which had set TESSA and ISA rates at an identically miserable 3% for its savers had not behaved unfairly, whereas firm B, which while setting slightly more onerous terms fixed its TESSA rates at a healthy 6.5% and its ISA rates at an even more generous 6.7%, had. But anyone familiar with our role would know that it is not the job of the ombudsman to compare rates across institutions. If we were compare rates between firms we would certainly become a regulator, and that we are not. I accept of course that some of our decisions, like decisions by the courts, can have significant implications for the industry. But that is hardly new.

superseded accounts

  1. Superseded savings accounts has been a problem the ombudsman has had to grapple with for years. Let me quote from a few annual reports:
    • "Building societies have launched a plethora of new is understandable that some savers who are locked into existing and less competitive accounts have felt that their society has in effect pulled a fast one on them." 1990-91
    • "One thing which is clear is that there is much public concern about the present practice" 1991-92
    • "Most of the complaints about investment interest rates are from people who find that their money is in an account that has been closed to new investors and pays interest at a lower rate than a similar newer account" 1993-94
  2. So where are we now? The provisions of the Banking Code intended to deal with this problem have not brought an end to complaints. A test based on the relative onerousness of the account terms has its difficulties, both for you and for us. As we continued to receive complaints and little else was happening, last August we produced a discussion paper on the subject. We were particularly anxious to avoid being wrongly cast in the role of regulator, and were wondering if changes in industry practice, particularly on personal notification of interest rate changes, might reduce the number and complexity of the complaints. I have to say we were disappointed when the industry response was that this would all have to await the review of the Banking Code, not due to come into force until 2003. If, against this unsatisfactory background, we have to make decisions that turn out to be unwelcome to some, I hope no one will complain that the ombudsman has suddenly intervened in a quasi-regulatory fashion to produce a surprise ruling.

who created the problem?

  1. I am told that societies are full of anxiety about how they can price their products in the light of all the differing regulatory and ombudsman decisions that have to be taken into account. But who has created this problem? Why is it that some societies now have up to 20 to 30 different accounts in their current range, and even more that are superseded? Are customers knocking on society doors insisting that new products be launched and added to the range? Or is it that it is easier to bring shiny new products to market than it is to think about how to dispose fairly of dusty old ones? Is the industry still relying on customer inertia for its business model?

dual variable rate mortgages

  1. Turning to the mortgage market, the principles about how to deal with superseded accounts contained in the Banking Code were clearly not uppermost in the minds of those firms who were trying to address problems in the mortgage market. So when more than one rate having the function that people associated with a "standard variable rate" appeared in the same range, there were perhaps bound to be complaints. And we were faced with decisions to make. They turned out to be of considerable impact, and to coincide with the introduction of the new ombudsman scheme. I emphasise "coincide". Some commentators seemed to think that the newly empowered ombudsman was on the look-out for a big target. Far from it. These decisions were made under the rules applicable to the previous schemes.
  2. In large measure they simply required the respective firms to adhere to the terms they had promised to those on the special deals they had made. This was not an attempt to interfere with lenders' commercial judgement, or to prevent it from having more than one variable rate. But a lender cannot make a promise to Mr and Mrs A and seek to justify breaking that promise because it believes the result will be better for Mr and Mrs B and Mr and Mrs C.
  3. But I should add that however contentious this issue became for one society, in its dealing with us it behaved in a way of which every society might be proud. It made its representations in a determined but professional manner; and when it sought a hearing and asked to bring a leading lawyer it paid for the complainant to be equally represented. And the grace with which it accepted and applied the final decision has been widely commended by commentators.

the reaction

  1. Not everyone in the industry thought the outcome of these decisions inappropriate. A former chairman of this association said that the practice of dual variable rates had been unfair to the industry and to consumers. And I was interested recently to read that a number of mortgage lenders, at the time they introduced dual rates, had consulted the Mortgage Code Compliance Board whose advice had been against the idea. So this was perhaps a business risk they had wrongly discounted, rather than a shock surprise ruling by the ombudsman.
  2. Two further points. First, we made decisions in individual complaints that we had identified as "lead cases". But how firms choose to deal with other customers, including those who have not complained, is a matter for them and not for us. I recognise that it cannot be easy for a firm to decide what is fair treatment for a class of customers. This problem no doubt arises in a number of other contexts - where a firm discovers a systemic error that has disadvantaged a group of customers, or when a court makes an unexpected ruling where there are wide implications for a firm or firms. These are matters that firms may care to discuss with the FSA, whose rules on complaint-handling require systemic problems to be remedied and which has expressed some preliminary views about Treating Customers Fairly. But it is not primarily for us.
  3. Second, it is said that the ombudsman should not be making decisions that could have major consequences or implications. We cannot shirk the task of making decisions just because we are dealing with a firm that has a large customer base rather than a small one. But, if a society feels that there are major potential implications of an adverse decision, it can communicate with its regulator. The Baird report on the Equitable saga was surely testimony to the need to keep your regulator closely in touch with impending litigation. If the FSA considers some regulatory intervention appropriate, it will be able to discuss that with the society and with us, and exercising our distinct responsibilities, we can try to ensure that customers and the society are fairly dealt with. This will not solve every problem, and we will always remain a long-stop for dissatisfied customers. But it is certainly right to try to put in place good short-stop arrangements to reduce the chances, as far as possible, of the ball getting to us.
  4. What lies ahead? Regulation of the mortgage and general insurance market will bring FSA into the frame on a more consistent basis than at present. I hope this will place the ombudsman within and alongside a more comprehensible regulatory structure. For this we have to wait two more years and in the meantime we are exploring how we might widen our coverage on a voluntary basis. But already the landscape is becoming clearer and I see every prospect of being able to work closely and harmoniously with the building society sector.
  5. I make a final point. I see the ombudsman service as one that ought to be seen by consumers and the industry as equally valuable in underpinning confidence in the products and services in the financial market. The building society sector can take pride in its association with an ombudsman scheme over the last 17 years. That scheme was the only one of our predecessor schemes that had a comprehensive statutory basis, and it is not unreasonable to claim that Parliament in adopting very largely the "building societies" model for the whole financial industry has shown its satisfaction with that scheme. Societies can take credit for having cooperated in making that scheme work so well that it became the industry standard.
  6. Thank you for listening, and I would be delighted to take any questions.
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