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annual review 1 April 2003 to 31 March 2004 - chief ombudsman's report

By any measure, this year has been one of exceptional activity for the Financial Ombudsman Service. During the year we received - and resolved - more complaints than ever before. In the four years since we brought our predecessor dispute-resolution schemes together under one roof, we have seen our workload almost quadruple. This year alone, the number of new complaints reaching the ombudsman service increased by 57% on the previous year (which itself saw a 44% annual increase).

This significant rise has been driven by the flood of mortgage endowment complaints - from under 15,000 last year to over 50,000 this year. Neither we nor the financial services industry - which we consult on our workload estimates - had forecast a surge on such a major scale. It has meant that this has been a year of dealing with big numbers and big operational challenges.

dealing with the volume

Following public consultation at the start of 2003, our budget for the financial year 2003/04 was originally set on the basis that we could expect to receive a total of 60,000 new cases during the year - including 20,000 complaints about mortgage endowment mis-selling.

However, during the late summer of 2003 we saw a doubling in the volume of mortgage endowment complaints reaching us. This pushed up the average number of new cases from around 1,000 new cases a week to almost 2,000 a week - and led us to look again at our estimates for the year as a whole. And in September 2003 we published an updated half-yearly plan & budget, to take account of this mid-year upsurge in complaints. These revised mid-year estimates proved accurate. We forecast in September 2003 that by the end of the financial year (31 March 2004) we would have received 98,000 new complaints in total, 50,000 of which would be mortgage endowment cases. The actual figures for the year turned out to be 97,901 new complaints, of which 51,917 were mortgage endowment-related.

In operational terms, this substantial increase in complaints during the year - driven largely by waves of publicity about mortgage endowment mis-selling, split-capital investment trusts (‘splits’) and so called ‘precipice’ (or high income) bonds - required an immediate action plan on our part, to deal with our rapidly increasing workload.

We introduced a range of initiatives, including:

  • adopting new case-handling procedures;
  • taking a more flexible approach to managing caseloads;
  • finding new ways of moving and re-allocating resources; and
  • recruiting almost a hundred more new staff, in addition to the hundred already recruited since the revised budget for the year 2003/04 was agreed in April 2003.

We also kept in close contact with our key stakeholders - including the Financial Services Authority (FSA) and consumer and industry bodies - to discuss the budgetary impact and operational ramifications of our increased workload.

As a result of these measures, we were able to resolve a record number of complaints during the year - completing 76,704 cases (a 36% increase on the number we settled in the previous year). We expect an even greater increase in the number of cases we resolve next year, when staff recruited during the past twelve months or so complete their intensive training and become fully productive. This should enable us to reduce substantially the amount of work-in-progress, which we monitor especially closely when unexpected surges of new complaints result in our having to re-allocate and maximise resources.

Continued flexible working, together with the economies of scale involved in dealing with large volumes of mortgage endowment complaints, resulted in a reduction in our unit cost - the benchmark against which we judge our cost-effectiveness in handling complaints. The unit cost fell during the year to £473, having been £518 last year and £684 the year before that. However, when the current wave of mortgage endowment complaints eventually subsides and our work returns to handling a more balanced range of disputes, there are likely to be fewer opportunities to benefit from the economies of scale we have experienced in recent years. This means that we are unlikely to see the continued downward trend in our unit cost.

The chapter, key facts and figures, in this review gives more details of the types of new complaint we received during the year, the outcome of the complaints we resolved, and our productivity over the year.

maintaining quality


External feedback confirms, not unsurprisingly, that consumers expect us to resolve their complaints as speedily as possible. In last year’s annual review I set out our new targets for the time it takes us to resolve complaints. These targets are to complete 45% of cases within three months, 80% within six months and 90% within nine months.

During the year, although we narrowly missed our six-month target - resolving 79% of complaints within 180 days - we slightly exceeded the three-month target, resolving 47% of complaints within 90 days. We met our nine-month target and resolved 91% of complaints within that timescale. Our board received a schedule of cases that we were not able to resolve within twelve months.

The quickest and most effective dispute-resolution tools available to us are usually mediation and conciliation. By taking a fresh look at the facts and suggesting common ground, we aim to bring together the two sides of a complaint and resolve matters at the earliest stages with an informal, mutual settlement. This can reduce the need for lengthy and time-consuming investigations and formal decisions by an ombudsman. The average time taken during the year to resolve a complaint by ‘guided mediation’ was four months.

Resolving disputes can take much longer if either the consumer or the firm requests a more formal review - especially if the dispute involves a substantial amount of paperwork, complex facts and entrenched attitudes. Cases where a detailed review is needed in order to settle a dispute - involving a final decision by an ombudsman - take nine months on average.

There is more information about the number of complaints we resolve at the different stages of our complaints-handling process, in the chapter key facts and figures of this review.

monitoring quality

We have in place a system of internal processes to monitor, on an ongoing basis, the quality of our work. Internal quality reviews - which include random sampling by management - analyse casework against specific criteria: accuracy, timeliness, thoroughness, reasonableness of outcome, and whether the customer was kept fully informed about progress.

Our customer satisfaction research provides another important input into our quality assurance work. We carry out monthly surveys to record the views of those who have used our service. We then measure this external feedback against the customer service benchmarks that we use in our internal quality monitoring.

During the year, we also carried out research to gauge the views of the firms we deal with - asking for their views on the way we handle complaints and the extent to which we accommodate their particular needs and concerns. The results of these customer satisfaction surveys are summarised in the chapter, our customers and stakeholders.

being accessible

We decide each complaint on its individual facts, not on who has presented their case best. The ombudsman service is here for people from all backgrounds. The process of bringing a complaint to us should not discourage consumers who believe they have a genuine grievance. And no-one should feel disadvantaged because of language or other difficulties.

Increasingly, people prefer to talk through their complaint with us over the phone, rather than to write us long formal letters of complaint. Over half of the consumers who bring complaints to us now register their complaint by phoning our consumer helpline (0845 080 1800). This is also more efficient for us, because we can guide people to focus on the key facts of the case. In addition, people are increasingly using our website to download and complete our complaint form - and to access information about the complaints procedure. Around 75,000 people are now logging on to our website each month.

During the year we handled phone calls and provided information in 23 languages other than English. And we continue to respond to increasing demand for help and information in formats such as Braille, large print and on audiotape.

It is important to us that people with different needs should not face any barriers to using our service. This is why our monthly consumer satisfaction surveys include demographic questions, tracking which types of consumers are using our service and what they think of it. There are more details about this in the chapter, our customers and stakeholders, in this review.

mortgage endowments

Our landscape has been dominated this year by mortgage endowment complaints. This probably reflects the position for many retail financial services firms. In order to deal with the 50,000 new mortgage endowment cases we have received this year - around half the total number of our new complaints - we have had to review and streamline our arrangements.

For example, simply coping with the vast increase in the amount of paperwork accompanying the growth in complaints has been a major challenge. We have developed new ways of managing casework, with teams of support staff carrying out more of the administrative aspects, leaving adjudicators more time to concentrate on making decisions.

To benefit from the economies of scale involved in handling large numbers of essentially similar complaints, we set up a special team during the year to work solely on mortgage endowment complaints - rather than on the range of disputes handled by the other teams. This team developed streamlined procedures with the largest firms, to make the exchange of data quicker and more effective at all stages in the process. We are now building on this work and expanding the mortgage endowment team substantially, so that the processes that this team has developed can be applied to the further 50,000 or so mortgage endowment complaints that we now expect to receive in 2004/05.

While we continue to focus resources - in the short term - on handling large volumes of mortgage endowment complaints, we also need to keep an eye, for planning purposes, on what might happen after next year. A major issue affecting mortgage endowment disputes will be the ‘time-barring’ of complaints, as the time-limits for complaining start to expire. These time-limits usually involve consumers having to complain within three years of becoming aware of the problem. This generally means three years from receiving what is known as a ‘red’ re-projection letter from the insurer - warning of a high risk that the policy will not produce enough, when it matures, to repay the target amount.

Many consumers are generally unaware of these time-limits - and of the fact that time is running out if they want to complain. However, the changes to the FSA’s time-limit rules - announced in May 2004 - now mean that people will be given a clear warning of the date on which their right to complain will expire. This should considerably ease the problem that would have faced us, in having to ‘time-bar’ many thousands of complaints from consumers who would otherwise have been unaware of the time-limits.

We may, therefore, expect to see increasing numbers of people with mortgage endowment complaints during the second half of 2004 - as consumers receive warnings about imminent deadlines for complaining. This concentration of complaints may pose further operational challenges, first for the industry and then for us. However, as the time-limits pass, and all those who wish to complain have done so, the wave of mortgage endowment cases should eventually subside - and our work patterns will need to change yet again.

When our work returns to handling a more balanced range of disputes, and - we may hope - a reduced number of complaints, there will be fewer financial benefits from economies of scale. This means that our unit cost, which has decreased significantly in recent years, may stabilise rather than continue to reduce.


During the year there has been significant interest in our handling of complaints involving split capital investment trusts and zero dividend preference shares - 'splits' and 'zeros'. Following my appearance before the Treasury Select Committee in October 2002, as part of its enquiry into 'splits', we have kept the Committee updated on our work on the 4,800 individual 'splits' complaints that we have now received.

Our work proceeds in tandem with the FSA's wider investigations and we liaise closely with the regulator, to ensure that our different focuses of work within the same area can feed into and complement each other. I am satisfied that the separate but interlocking issues of regulation and redress can be dealt with appropriately and effectively in this way.

There is a more detailed overview of the work we have done in relation to 'splits' complaints, in the chapter overview of complaint trends, in this review.

Equitable Life

Issues surrounding Equitable Life have also continued to come under intense media and parliamentary scrutiny during the year. While other investigations and enquiries - notably those carried out by Lord Penrose and the Parliamentary Ombudsman - have been ongoing, we have continued with our own work on the complaints we have received alleging mis-selling and maladministration by Equitable.

The majority of these complaints are linked to ‘lead’ cases. This is the procedure we use if we receive a substantial volume of cases that appear to involve essentially similar issues. By focusing initially on what we term ‘lead’ cases - a handful of apparently typical complaints - we are able to establish the key general principles and save duplicated effort for all concerned.

We have a page dedicated to Equitable Life on our website. We update the page regularly so that people can check developments and progress, especially on the ‘lead’ cases. A number of the legal opinions that have been sought on issues relating to Equitable and redress are also available from this web page.

'precipice bonds'

Our forecasting of complaint volumes for future years is, inevitably, an art rather than a precise science. It includes a budget contingency in case we need to handle a sudden, unpredicted flood of complaints on some topic about which we had not previously received complaints in any number.

Until two years ago, we had received only a few complaints about what have now been dubbed ‘precipice bonds’ - investment-linked products where promised high levels of income can put the capital at serious risk. In the year ended 31 March 2003, we received around 2,500 complaints about these products - which had been sold in great numbers in the late 1990s, as interest rates on ‘traditional’ savings started to fall. This year, the number of ‘precipice bond’ complaints we have received has risen to 6,000.

This includes complaints both about the financial firms that launched and marketed these products - and about intermediary firms that gave advice on them to customers. We have liaised closely with the FSA, where our work on individual cases complements the wider regulatory investigations being carried out by the regulator.

There is a more detailed overview of our work in relation to ‘precipice bonds’ in the chapter, overview of complaint trends.

the ‘N2 + 2 review’

In November 2003 - two years after the date when the Financial Services and Markets Act 2000 came into force (the date widely known as ‘N2’) - the Financial Secretary to HM Treasury, Ruth Kelly, announced details of the so-called ‘N2 + 2 review’. Ruth Kelly confirmed that part of this review would include the Financial Ombudsman Service and the FSA, and would look at how the ombudsman process interacts with the FSA’s regulatory framework. The review would also consider the case for amending the process of appeal against ombudsman decisions.

These issues - generally referred to as the ‘wider implications’ and ‘appeals’ issues - have been the subject of debate throughout the year by firms, trade bodies and consumer groups, each tending to express individual and frequently divergent views on these matters.

Following Ruth Kelly’s announcement, we and the FSA appointed a group of expert stakeholders to oversee the scope, terms and conduct of the consultation process on ‘wider implications’ and appeals. This group - the Review Oversight Group - met regularly during the first few months of 2004. Chaired by Colin Harris, chairman of the Mortgage Code Compliance Board, the other members are: Matthew Bullock of the Financial Services Practitioner Panel; John Howard of the Financial Services Consumer Panel; Roger Sanders of the Small Business Practitioner Panel; and Diana Wright, personal finance writer for the Sunday Times.

Preliminary consultation with trade bodies and consumer groups was carried out in the early spring of 2004, prior to the launch of a full public consultation. The overall ‘N2 + 2 review’ is expected to be completed by November 2004. Ruth Kelly indicated at the launch of the review that the importance of the ombudsman to consumer protection is such that any changes to the regulatory structure should be made only after careful consideration and consultation.

extending our jurisdiction

mortgage and insurance intermediaries

In our last annual review, I reported that we had opened the door to applications from mortgage and insurance intermediaries interested in joining our voluntary jurisdiction before the start of statutory regulation by the FSA - when these sectors will automatically be covered by our compulsory jurisdiction.

Over 300 firms have now joined our voluntary jurisdiction. By signing up with us at an early stage, these firms are making a positive customer service commitment, as well as gaining valuable experience of what being covered by the ombudsman service involves, so they will face less change when they become FSA-regulated. Firms joining our voluntary jurisdiction during the year have been able to benefit from our full range of services for firms - including training on complaints handling, access to seminars and workshops, and support and guidance from our technical advice desk.

Firms in our voluntary jurisdiction will also benefit from a change we have introduced to our funding arrangements, whereby we will not charge a case fee for the first two complaints we receive each year about a firm.

The dates are approaching when the FSA will begin regulating mortgage and insurance intermediaries - 31 October 2004 for mortgage brokers and 14 January 2005 for insurance brokers - and we have focused on the logistical preparations for dealing with some 20,000 of these firms that are then likely to come into our compulsory jurisdiction.

Although the extension of our compulsory jurisdiction means the number of firms we cover is set to triple, we do not expect to receive a significant number of additional complaints as a result of this wider coverage. We have based this expectation on the complaints-handling experience of the Mortgage Code Compliance Board and the General Insurance Standards Council - and also on our own experience in receiving no complaints about the vast majority of smaller firms that we already cover. (The chart how often do financial firms have complaints about them referred to the ombudsman service? in the chapter our customers and stakeholders that almost 80% of firms covered by the ombudsman service had no complaints against them referred to us.)

This, in itself, presents us with a communications challenge, in terms of keeping in touch with a large number of firms who will never - or only very rarely - have any direct contact with us. We recognise that smaller firms, currently preparing for regulation for the first time, have a lot on their plate. Many see the ombudsman as, at best, just another ‘necessary evil’ of regulation - not something to be engaged with actively, unless absolutely necessary. Unfortunately, the perceptions that these firms have of us are more likely to be based on industry hearsay and ‘urban myth’ than on the real facts.

Feedback from the many industry conferences and trade shows we take part in, together with our experience at the broker roadshows we organise around the country, certainly suggests that most smaller firms view the ombudsman as peripheral to their core business concerns - unless and until a customer actually lodges a complaint against them.

consumer credit

In December 2003, as part of its review of the regulation of the consumer credit sector, the Department of Trade and Industry (DTI) published proposals to introduce a statutory complaints-handling body as an alternative to the courts (which currently is the only recourse for many people with consumer credit disputes). One of the models suggested as an ‘alternative dispute-resolution’ scheme for consumer credit complaints is an ombudsman-type arrangement, and it has been suggested that the jurisdiction of the Financial Ombudsman Service could be widened further so that we could cover these complaints.

We already cover complaints about consumer credit provided by banks and building societies. But we do not cover disputes involving store cards or ‘non-bank’ credit. As far back as my first annual review as chief ombudsman (the review for the year 1999/2000), I highlighted our long-term objective of providing seamless, comprehensive coverage as the ombudsman scheme for financial services. We already cover disputes involving firms that, together, provide around 75% of all consumer credit by value. However, the majority of everyday smaller-scale consumer credit arrangements involve a wide range of firms that we do not cover. And for many of the consumers involved in these particular arrangements, the implications when things go wrong are proportionately just as grave as for those consumers who are currently able to come to the ombudsman service.

For these reasons, we view very positively the idea of extending our jurisdiction to cover consumer credit activities. We are in constructive dialogue with the DTI and the Office of Fair Trading about the proposals. We have also been in dialogue with consumer bodies and trade associations in this field. There are a number of practical issues to be resolved - such as the importance of consumer credit firms having proper in-house complaints-handling procedures as the first stage of the dispute-resolution procedure. And a decision is needed about which of the tens of thousands of firms currently holding consumer credit licences - from credit card companies to debt consolidation agencies - should be covered by the proposed dispute-resolution scheme, possibly with coverage being phased in over time.

We would also be concerned to ensure that any role we might be asked to take on in relation to consumer credit disputes should reflect our established position as an ombudsman scheme. We are not a regulator, nor are we a consumer champion nor a trade body. Building on principles established by our predecessor ombudsman schemes, we have well-developed arrangements for our operations and governance. In particular, we do not believe it would be appropriate, as an ombudsman scheme, to take on any quasi-regulatory functions involving issues that have a wider market effect.

checks and counter-checks

As an organisation that has grown very rapidly and that deals every day with thousands of pieces of correspondence and makes hundreds of decisions on complaints, we recognise that things can and do go wrong. When we look at complaints, a key consideration is the way in which the firms concerned have taken steps to try and put things right. In just the same way, we believe an important test by which we should ourselves be judged is the way in which we recognise and deal with any shortcomings - and learn the lessons from them.

This is why, just like the firms whose complaints we handle, we have our own formal complaints procedures to deal with expressions of dissatisfaction with our service. And a small specialist team of complaints handlers - our service quality team - handles all complaints about us that we cannot easily sort out straightaway.

Where our service quality team cannot resolve a complaint, it can be referred to our own ‘watchdog’ - the Independent Assessor. Last year, the Independent Assessor, Michael Barnes, carried out a review of 121 complaints about the service we provided. We accepted his recommendations in all 28 cases where he said we should pay compensation. The Independent Assessor provides our board with an annual report, detailing the range of issues referred to him and highlighting where we may need to look again at our procedures.

The stresses and strains of having to cope with a caseload that has grown so massively in such a short space of time will inevitably have some impact on our ability to deal with every piece of correspondence - and every decision - to the highest standards that we and our customers should expect. In recognition of concerns about the possible effect of the huge volume of work on our quality standards, we are committed to rigorous monitoring of our output. Building on various internal review processes and quality checks that we already have in place, in January 2004 our board commissioned Professor Elaine Kempson of the Personal Finance Research Centre at Bristol University to carry out an independent assessment of our process and output in terms of quality, consistency and value.

The range of new initiatives introduced to deal with the near four-fold increase in mortgage endowment complaints, in particular, has required close monitoring to ensure standards are not compromised by the need for more effective processing of cases. As part of these internal review processes, a specific number of instances were identified where cases were not being handled in accordance with our normal procedures.
We have instituted a review of all the cases involved, to take steps to rectify matters where necessary.

This is a timely reminder for us of the importance of rigorous checks and counter-checks, to ensure we arrive at an appropriate decision, having followed the right procedure.

talking and listening

Our work gives us a unique insight into how complaints arise and how they might be avoided. There are valuable lessons from this for both the financial services industry and for consumers - and we carry out a wide range of activities to share our experience and knowledge with the outside world. During the year we took part in over 650 activities involving external stakeholders. These activities included organising roadshows and conferences, and providing complaints-handling training for firms and consumer advisers. There are more details about our external liaison and communications activities in the chapter, our customers and stakeholders.

We recognise that people’s personal experience of our service is inevitably influenced by the outcome of their own complaint - and this means we cannot always please everyone. However, seeking the views of those who have used our service is an essential part of finding out where we can improve, and we bear in mind our stakeholders’ comments and concerns when we formulate our policy and operational approach. There are some examples of this in the chapter, our customers and stakeholders.

The annual review is, of course, a particularly appropriate opportunity to canvass the opinions of all those with an interest in our service. I hope that readers will continue to give my colleagues and me helpful feedback on where we need to do things better in future - or even on where we may already be getting things just about right.

Finally, I would like to express my particular thanks this year to all the staff of the ombudsman service, who have shown admirable fortitude in the face of a major increase in workload. While I hope that our incentive scheme has to some extent reflected the sheer hard work and effort put in by staff during a particularly challenging year, I recognise that this is only modest recompense for the many extra evening and weekend hours put in to keep up with the relentless tide of complaints. The board and I are grateful and fortunate to have been able to rely on the continued dedication of our staff.

Walter Merricks
June 2004

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