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annual review 1 April 2005 to 31 March 2006 - chief ombudsman's report

This annual review describes the work of the Financial Ombudsman Service during the year ended 31 March 2006 - a year of record activity during which we resolved more disputes than in any previous year.

The facts and figures giving more details about this achievement - and our other complaints-handling and stakeholder activities over the year - are set out on the following pages. Rather than summarise all the statistics here, I will leave you to browse through this annual review, and see for yourself some of the results, trends and observations presented in the text and graphics.

In these few pages I take the liberty, instead, of penning a few general thoughts about the role of the ombudsman. In last year’s review, I reflected on the development of the Financial Ombudsman Service during its first five years - building on the foundations of our predecessor ombudsman schemes. This year I hope you will bear with me while I reflect briefly on the theme of the ombudsman’s role in the wider world of dispute resolution.

Twenty years ago, ombudsmen were seen - if at all - as a rather odd sideline in the British institutional landscape: a few small independent offices, headed by individuals in whom was vested a personal responsibility for responding to complaints. These officers defied easy categorisation in the usual pantheon of the British constitution - they were not judges, nor civil servants, nor elected representatives. But because the offices were small and of recent origin, recognition or classification was not obviously necessary.

Things have moved apace since then. In the public sector, the need for close working between the Parliamentary and Local Government Ombudsman has been recognised, and devolution has brought public services ombudsmen to Scotland and Wales. Ombudsmen for prisons and probation, for the police in Northern Ireland (and now for Ireland), and for the defence forces (in Ireland, and recently recommended for the UK) demonstrate how the demand for independent investigation is greater than ever. And with our own office now employing 1,000 staff, no longer can the word “ombudsman” be associated with smallness.

Like the courts, ombudsmen are clearly in the business of delivering justice. But we perform our function in a different way to the courts, generally using quicker and more informal procedures. This is what is meant when we are sometimes described as an alternative to the courts - providing alternative dispute resolution. From the consumer perspective, we are also often seen as the alternative to the complaints-handling procedure of the firm they are in dispute with.

The alternative approach that the Financial Ombudsman Service takes largely reflects the volume and specialisation of cases that are referred to us. Providing a flexible one-stop service to settle over two thousand financial services disputes every week - all under one roof - is something that logistically no single court of law could do using normal court practice.

In addition to providing a dispute-resolution service as an alternative to the courts, we are part of the statutory arrangements for underpinning confidence in financial services. Our legal powers derive from the Financial Services and Markets Act 2000. That is also, of course, the legislation that established the Financial Services Authority (FSA) as one of the world’s most powerful and all-encompassing financial regulators. But ours is a distinct role, separate from the FSA. We make decisions on one-off individual cases (like the courts) - we do not carry out regulatory functions. The FSA, on the other hand, has responsibility - as regulator - for the bigger picture.

Our so-called “compulsory jurisdiction” automatically covers most FSA-regulated firms - a population that has grown in the last few years from around 8,000 to 26,000 firms, as regulation has expanded. Our remit is due to grow further, as statutory regulation by the FSA expands to cover home-reversion plans, Islamic mortgages and self-invested personal pensions (SIPPs).

However, our “voluntary jurisdiction” also covers firms and activities that are not regulated by the FSA. For example, National Savings & Investments (NS&I) came under our remit in September 2005 - not as an FSA-regulated firm but as a result of a recent legislative change initiated by HM Treasury. And when the Consumer Credit Act 2006 comes into force in 2007, it will give us a jurisdiction covering up to 100,000 firms that have consumer credit licences issued by the Office of Fair Trading (OFT).

The development - in just five years or so - of our role as the ombudsman for the financial services sector reflects, at a more general level, the rapidly-moving world of dispute resolution, both here in the UK and elsewhere.

In the UK and Ireland our membership of the British and Irish Ombudsman Association (BIOA) provides us with a network of contacts involved in complaints handling in both the public and private sectors. Jointly through BIOA - and individually in our own right - we continue to develop these close contacts with a number of government departments, as interest in that curious creature - the ombudsman - grows, and possibilities and ideas evolve in relation to the ombudsman model of dispute resolution.

While our own sponsoring government department is HM Treasury, which is responsible for the legislative framework under which we operate, the Department for Constitutional Affairs (DCA) takes the lead role in England and Wales in encouraging the development of non-court dispute resolution. We therefore have contacts with DCA in a number of areas.

The background to DCA’s interest in alternative dispute resolution was set out by the Lord Chancellor in 2004 in his paper, Transforming Public Services: Complaints, Redress and Tribunals. This government “white paper” called for lessons - from what it described as “the success of ombudsman schemes” - to be applied more widely. We now look forward to the establishment of the Administrative Justice Council, designed to ensure that the relationships between the courts, tribunals, ombudsmen and other routes for alternative dispute resolution reflect satisfactorily the needs of their users.

Following Sir David Clementi’s review of the regulation of legal services, the Lord Chancellor has decided to establish an independent office to resolve complaints against lawyers - modelled closely on our own organisation. DCA has consulted us extensively on its plans in this area.

DCA’s interest in improving the process by which small personal injury compensation claims are resolved has also involved us, since most of these cases involve insurance companies - a sector where we have a long history of providing successful dispute-resolution services. If the policy objective here is to resolve more personal injury claims without the need for routine legal representation - and avoiding the legal costs that involves - we recognise why some in the industry are suggesting that this may be an area suited to the ombudsman’s well-established procedures for resolving insurance disputes.

Given the government’s decision to bring consumer credit activities under our remit from 2007 - as mentioned above - we have been working closely with the Department of Trade and Industry (DTI) and OFT, to ensure a smooth implementation of our new consumer credit jurisdiction. However, DTI’s consumer strategy demonstrates a wider and more determined interest in ensuring that consumers have access to appropriate sources of redress, including alternative dispute-resolution. To this end, DTI will be developing criteria for the approval of industry-based alternative dispute resolution schemes - and we will be working with our ombudsmen colleagues in BIOA to help DTI with this.

DTI has recently proposed the establishment of an ombudsman scheme, or schemes, for consumer redress in the gas, electricity and postal sectors. It is also committed to ensuring that arrangements for consumer redress are available for the users of estate agency services and the new home information packs. Again, DTI has already indicated a wish to draw on our experience in its work in these areas.

Another government department we have worked with over the year is the Department of Work and Pensions (DWP). We have hosted a number of meetings and seminars with officials from DWP and the Appeals Service, as part of their focus on improving the way in which disputes are handled, and tribunal appeals run, in relation to disability and incapacity benefits. Particular interest has been shown in how we are able to resolve large volumes of insurance disputes - which similarly involve medical evidence of disability - without the need to hold tribunal hearings. DWP and the Appeals Service have taken a close interest in the way in which we identify, at an early stage, cases that can be resolved quickly and informally, rather than being determined through formal procedures.

DWP is also the department responsible for the legislative framework under which the Pensions Ombudsman operates. We have close operational contact with the Pensions Ombudsman because of our complementary - and in some cases overlapping - remits in relation to pension disputes. This means DTI regularly consults us on how we ensure that consumers, firms and pension schemes are appropriately served by our two organisations.

Another example of our involvement in government-sponsored initiatives and research has been our close contact over the year with the Law Commission. Earlier this year the Commission published a paper on the reform of insurance contract law, which drew on our experience of areas in which the ombudsman has found the strict application of the law to produce an unfair result for policyholders. More recently, the Commission has published a paper on proportionate dispute resolution in the field of housing. This paper considers whether the experience of ombudsman schemes, including our own, could be applied to improve the resolution of housing disputes.

We are told that the Financial Ombudsman Service is the largest scheme of its type in the world. What is certain is that we are regularly asked to share our knowledge, experience and expertise internationally, as well as in the UK. In the Commonwealth countries, in particular, there is considerable interest in “combined” ombudsman schemes such as ours, which operate across a wider spectrum, such as financial services in general, rather than just in banking, insurance or investment. We are also founder members of FIN-NET, the European Commission-sponsored network of out-of-court redress bodies, designed to ease the handling of cross-border disputes in financial services.

The fact that the UK ombudsman model is finding itself increasingly the focus of interest, both at home and abroad, is not only pleasing as an endorsement of the ombudsman as an accepted mechanism for settling disputes. It is also, in the case of financial services, a tribute to the vision of a small group of insurance practitioners who, twenty-five years ago, persuaded the National Consumer Council to work with them in founding the Insurance Ombudsman Bureau. What started then as a small-scale and quite radical experiment - giving customers access to justice through an ombudsman, rather than resorting to court action - has evolved and grown over the intervening quarter-century.

Ombudsmen are now a recognised feature in the constitutional landscape - an institution in their own right. And I am very proud of my organisation’s own role in contributing to the development of that institution.

Walter Merricks signature

Walter Merricks June 2006