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annual review 1 April 2004 to 31 March 2005 - chief ombudsman's report

This document describes the work of the Financial Ombudsman Service during the last financial year - from 1 April 2004 to 31 March 2005. However, before we launch into the detailed account of another busy year for the ombudsman service, I would like to reflect on a fact that might otherwise be overlooked - that it is now just over five years since our predecessor ombudsman schemes came together under one roof to form the new single Financial Ombudsman Service.

At that point - Easter 2000 - our newly combined staff were dealing with around 25,000 disputes a year between financial firms and their customers. In this annual review, you will see that in the past year we have received over 110,000 new complaints. To keep up with this fourfold increase in workload, our staff numbers have tripled over the same period - from 350 back then to over 950 now.

The agenda we faced in 2000 looked challenging enough. The Financial Services and Markets Bill was still progressing through Parliament, with implementation predicted for the end of that year. We had to merge and re-locate six schemes and their staffs - while ensuring full continuity of ongoing caseloads - at a time when complaint numbers were starting to rise sharply. In the event, because the Act was not finally brought into force until December 2001, we had to continue to operate under the existing rules of the six separate schemes for a year longer than had been anticipated.

A key feature of those schemes had been the support they enjoyed from both industry and consumer representatives. Those representing the industry naturally had some sense of ownership and pride in the schemes that they themselves had helped initiate. There was widespread political, industry and consumer support for the notion of a single statutory scheme - based on the model of private independent dispute resolution that had been established in the insurance ombudsman scheme in 1981. But as this proposed single scheme would operate on a compulsory basis - whereas some of the earlier schemes had been voluntary - there were concerns that the level of involvement and co-operation might diminish. So an early step was to put in place liaison arrangements with the main industry sectors - banking, insurance and investment - as well as an industry funding forum to comment on our budget plans. This funding forum was particularly important in securing approval for our early budgets. In these we had to provide for the infrastructure for managing the new service. Although the overall cost to the industry would initially rise, we pledged that the investment would be repaid in lower unit costs in future years.

Early on we encountered some controversial issues. Complaints about interest rates on closed TESSA accounts and about how mortgage interest conditions were affected by the introduction of “dual” standard rates - together with concerns about the treatment of Equitable Life policyholders - all generated unexpected surges of complaints. Complaints about split capital investment trust companies, which we encountered for the first time in 2002, and then "precipice bonds" in 2003 had a similar effect. Meanwhile the numbers of mortgage endowment complaints were gathering pace. In 2000 the figures did not look unduly alarming, running at some 175 new cases a week. By early 2002 that number had risen to just under 300. Little did we know that, only three years later - in the year covered in this annual review - we would be receiving 1,300 new cases a week just about mortgage endowments.

Being able to respond to unpredictable surges of complaints has required a substantial degree of organisational flexibility. We have benefited from a number of serendipitous factors over our first five years. First, the bias in our funding towards case fees has meant that, as case volumes increased, so did our income - allowing us to recruit staff to help handle the additional work. Secondly, the depressed commercial property market where we are based has enabled us to obtain relatively economical rents for the additional floors of our building needed to accommodate these new staff. Thirdly, the employment market in the financial services sector has meant that we have been able to attract high quality people with solid relevant experience to come to work for us.

Most of all, we have benefited from the goodwill and support of a wide range of stakeholders. Despite expressing occasional concerns - sometimes in no uncertain terms - the industry, its trade associations and its principal firms see the value in an ombudsman service that can add consumer confidence in financial products and services. Consumer bodies naturally take a strong interest in the health of the UK’s largest ombudsman organisation, and we keep them closely in touch with our work. The media form an important source of information about us, and many personal finance journalists contact us on a weekly, if not daily, basis. Many parliamentarians naturally take an interest in our work, both at a general level and in relation to individual constituents’ complaints; and the House of Commons Treasury Select Committee, before which I have appeared twice, forms a channel of our public accountability. Finally, our sister organisations, the Financial Services Authority and the Financial Services Compensation Scheme, cannot avoid taking a close interest in our affairs and we benefit from the excellent working relationships we have developed with them.

We have come a long way in our first five years. We have withstood challenges that might have defeated other organisations less well supported. We have substantial challenges to face in planning for our next five years, notably in coping with unpredictable volumes in the field of mortgage endowment complaints. But our early experience has given us a sound basis on which to build and improve a service that we know is widely appreciated by consumers and firms alike.

Walter Merricks Signature Walter Merricks June 2005

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