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annual review 2000/2001

chief ombudsman's report

As the chairman has said in the opening page of this report, for most practical purposes we are now already providing the "single port of call" for complaints, as envisaged by the legislation. So how will things change after "N2" - the date this legislation actually comes into force?

For most firms and consumers, the answer is - not a great deal, since we are already operating largely as if the legislation were in force, building on the firm foundations laid by the previous ombudsman schemes. But gradually many of the service improvements we plan should become apparent.


Over the course of the last year my colleagues and I have, for the first time, had active responsibility for handling complaints across a wide range of the financial market. It is possible to make some tentative observations on what we have seen and to consider what conclusions can be drawn.

mortgage endowments: what's next?

During the course of last year, complaints to the ombudsman about the mis-sale of mortgage endowments - which in the previous year numbered only 3,135 - reached over 9,000. We had to react rapidly to this influx of work. Once the Financial Services Authority (FSA) decided, for understandable reasons, not to order a wholesale industry review along the lines of that required for personal pension mis-sales, the burden was inevitably going to fall on the ombudsman.

Yet four or more years ago, many observers of the financial services industry had been warning that the advent of low inflation and low investment returns would surely spell trouble for holders of endowment mortgages. Many endowment holders were unaware of the situation, having been assured that their endowment would not only pay the mortgage debt but also provide a substantial nest-egg on top. Under the conditions of endowment policies, a policyholder is not legally entitled to know whether the investment is on track to repay the debt, and only on final maturity might this become apparent. After some pressure by the FSA, providers agreed to inform customers where they stood, by way of a phased programme involving the despatch of over ten million "re-projection" letters. Not surprisingly, when, on receiving their letter, some people discover that their endowment may not repay their mortgage debts, they complain.

A complaint can be upheld only if people were misled about the nature of the product and its risks. As we and the regulators have already discovered, mis-selling - in the sense of selling unsuitably risky products - turns out to have been remarkably common. Even more common was exaggerated sales talk which did not correspond with the very limited commitment contained in the written product terms. The background is all too familiar. Sales staff were incentivised with generous bonuses to sell endowments: there was no bonus for compliance with the "know your customer" and "suitability" requirements. Once again, even in a period of "conduct of business" regulation, the reward structure within the industry was totally at odds with the objectives of regulators, and has led to a debacle involving millions of pounds in compensation and an immeasurable toll of anxiety, distress and loss of confidence among the purchasers of financial services.

Most of the complaints we have upheld involved policies sold in the late 1980s and early 1990s, well within the memory of those currently in senior positions in the organisations responsible for the mis-selling. Was there collective amnesia, or did the industry hope it would all somehow go away? Did they think inflation would return to cover up the problem? Given their knowledge of the sales practices at the time, and the downturn in inflation, it is difficult to believe that no one could have predicted that an explosion of complaints was inevitable.

Are there other combinations of poor sales practices, opaque products and market factors which are liable to generate similar surges in complaints, and of which industry professionals are already aware? Or can we be sure there are no more skeletons lurking in the cupboard?

who is responsible?

One feature of the "brand driven" retail market is the practice of firms selling financial products under brands or labels other than their own. The customer has confidence in the brand name and chooses the branded product accordingly, but then discovers it is actually provided by a different firm. The firm under whose brand the product was sold disowns liability, pointing out that it merely acted as an agent. For instance, a bank sells branded home insurance or a tour operator sells branded travel insurance - and then the customer discovers the branded product is actually provided by an insurance company. Or a high-profile firm promotes and brands itself as offering keenly priced motor insurance - but is actually placing the risks and policies with a panel of different underwriters. It is usually only when a complaint is made that the reality is laid bare to the customer.

The "polarisation" arrangements that have hitherto been in force in the investment market have prevented firms selling investment products other than their own, unless they were advisers rather than the providers. This is already set to change for stakeholder pensions, and is under review for other products. Selling products under another "wrapper" or "badge" (or "white-labelling" as the industry jargon puts it) is already widespread in the general insurance field and is now on the agenda for the investment market.

No doubt this ability to brand products freely helps competition. But consumers inevitably become confused as to who is taking responsibility. The legal and regulatory structure in financial services could be said to be out of step with other areas of consumer protection. If a supermarket re-brands jars of coffee to sell under its own label, and the coffee proves to be sub-standard, the supermarket cannot avoid responsibility by telling dissatisfied consumers to complain to the firm it contracted to manufacture the coffee. Consumer protection law on physical products makes the supermarket liable for what it sells. Retailers cannot evade responsibility by use of slippery and opaque agency arrangements. The financial services world and its regulators need to take account of what consumers - not unreasonably - expect.

standards of complaints-handling

Across the range of the firms covered by the Financial Ombudsman Service, the standard of complaints-handling by firms varies greatly. Even within large groups offering banking, insurance and investment services, there are often differences between sectors.

Although banks and building societies are relatively homogeneous organisations, there are marked differences in their attitudes to complaints-handling. The experience of a consumer with a complaint will vary according to whether the firm involved has a centralised system - where problems are rapidly escalated to an authoritative unit empowered to resolve complaints - or operates through local, regional and central offices, where authority levels are less clear. The FSA's new complaints-handling rules, in force after "N2", should impact significantly on banks and building societies operating the latter, "tiered arrangements".

Most general insurance companies also have different complaints-handling arrangements in place, depending on the channel through which the insurance policy was sold - a broker, a bank or other "brand", or directly.

So far as investment firms are concerned, our impression is that the complaints-handling arrangements of most are adequate and, in some cases, have improved over the past couple of years. This is a considerable achievement, considering the disruption caused by mergers, demutualisations and staff changes. Against this background, firms have had to cope - as have we at the ombudsman service - with a rapid increase in workload relating in particular to endowment mortgages.

In terms of co-operation with the ombudsman, not surprisingly there are some considerable variations, even between large firms. One very large investment provider could be characterised as pragmatic and positive, while two others of equal size and similar market share are seen as legalistic and defensive. A prominent firm is seen as routinely argumentative, another as generally amenable but "toughening up", while yet another is manifestly unable to cope with current volumes.

Generally, firms which deal with complaints within a customer relations department, rather than in a legal department, are less defensive and usually more conciliatory. Complaints-handling standards relate directly to resources and to attitude, both of which are determined by senior management.

We look forward to the real impact that the new regulatory environment at "N2" - with its emphasis on the quality of systems and management supervision - should make on the complaint experience of consumers. Clearly the ombudsman service sees only a small proportion of the overall number of complaints. But the complaints we see sometimes reveal handling by firms which is far from exemplary.

As part of the new ombudsman process, we shall be attempting to play our part by making broad assessments of the quality of complaints-handling by firms. For example, we will assess whether, as a result of the firm's failure to give a good explanation to a consumer, a complaint was unnecessarily referred to the ombudsman; or whether the firm failed to offer redress, when it should have known clearly from previously publicised ombudsman rulings what the outcome would be. On the other hand, we will be able to judge if a firm dealt with the complaint perfectly properly, but the consumer exercised their right to refer the matter to us. In future when we publish statistics about the outcome of complaints, the figures will be less crude than has been the case in the past. These assessments should also help firms to improve their own complaints-handling.

meeting our objectives

In last year's annual report I listed some longer-term aims and objectives. This year's report provides the opportunity to review our performance measured against those objectives.

our aims are to:

  • provide consumers with a free one-stop service for dealing with disputes about financial services
  • resolve disputes quickly and with minimum formality
  • offer user-friendly information as well as adjudication; and promote avoidance of disputes as well as their resolution
  • take decisions which are consistent, fair and reasonable
  • be cost-effective and efficient; and be seen as good value
  • be accessible to disadvantaged and vulnerable people
  • be forward-looking, adaptable and flexible, making effective use of new technology
  • be trusted and respected by consumers and the financial services industry.

a one-stop service

During the year we have made substantial strides in turning the one-stop service into a reality. All phone calls and correspondence to the former complaints-handling and ombudsman schemes are now handled under one roof at our offices at South Quay in East London. We have installed modern call-handling technology and now receive, on average, 1,000 calls from new customers each day, a far greater number than the capacity of the previous schemes combined.

After extensive public consultation, carried out jointly by the FSA and ourselves, we finalised the rules which will govern both the handling of complaints by firms and the jurisdiction and procedures that we will adopt. Jointly with the FSA, in December 2000, we published the policy statement, incorporating the consultation feedback and the "final" rules. The single framework is now clear. It will cover all complaints about firms' activities which would have been covered under the previous schemes' rules.

HM Treasury has also published draft transitional provisions, allowing for a seamless handling of complaints that turn out to straddle the "N2" date. The intention is to ensure that we can deal with such cases as far as possible by using a single set of rules.

During the course of the year, HM Treasury consulted on proposals to regulate mortgages and decided that mortgage lenders (but not brokers) should be subject to regulation by the FSA (although this would come into force later than "N2").

As I indicated in last year's report, it is our intention that we should be able to bring within our remit all those remaining areas of the market which most people would classify as "financial services". The activities of mortgage brokers and of most insurance intermediaries will initially fall outside our remit, as will complaints about personal loans and credit cards unless the dispute is with a bank or building society.

As far as mortgage brokers are concerned, the Mortgage Code Compliance Board maintains a register of brokers and administers an arbitration scheme to deal with complaints. The General Insurance Standards Council (GISC) is a newly formed self-regulatory body governing the conduct of those selling general insurance, including insurance intermediaries and brokers. Customers can complain to GISC's own dispute resolution scheme. Many of the larger firms offering personal finance and consumer credit are represented by the Finance and Leasing Association which also administers an arbitration scheme. During the year, we have had discussions with all these bodies, as well as with consumer groups, with a view to keeping everyone abreast of developments.

resolving disputes quickly and with minimum formality

The rate at which complaints can be logged, checked and investigated to a fair conclusion is dependent on a number of factors. The extent to which this work is supported by efficient IT systems is a key consideration. We also have to ensure that our staffing matches the workload, and that the policies under which we resolve disputes are clear.

The volatility of complaint volumes and the changing mix of complaints - in which the impact of regulatory changes and industry and consumer practice, let alone media interest, all play a part - is a fact of life to which we clearly have to become accustomed.

During the year we have had to operate with a number of different systems, inherited from the separate schemes, while preparing to install a single process and system. Our workload rose by 25% and we had to recruit and train extra staff, our complement rising from 340 at the start of the year to 450 at its end. Some of the key areas of policy for dealing with our largest single area of work - mortgage endowments - remained subject to consultation by the FSA for much of the year.

Nevertheless, we set ourselves some speed-related targets. These were to answer 80% of initial calls within 20 seconds and to settle 65% of cases within six months and 90% of cases within 12 months. I am pleased to report that we met all these targets. As the chairman has said at the beginning of this review, we have set more demanding targets for the coming year. With the advent of a single system for recording and tracking cases, these targets can be substantially refined.

During the course of the year, the Human Rights Act 1998 came into force. Commentators had at one time expressed much anxiety that Article 6 - the right to a fair and public hearing - would seriously affect the work of our service, by requiring hearings to be held in nearly every disputed case. This has turned out not to be the position. In the two schemes believed to be affected by the Human Rights Act (the PIA Ombudsman Bureau and the Building Societies Ombudsman Scheme), only a small minority of complainants who were offered the chance to ask for a hearing actually did so. And of those cases, the relevant ombudsmen decided that hearings were necessary in even fewer instances. In only a miniscule number of cases did firms request hearings.

In the new scheme, we shall be making it clear to consumers at the outset that we do not operate like a court. We cannot offer a full entitlement to a hearing, with the attendance and cross-examination of sworn witnesses, full mutual disclosure of all documents and other court-like features. The "right" to a hearing may turn out to be more limited than at first believed, and less of a challenge to the informality of our dispute resolution process.

providing information and promoting complaints prevention

Disputes between consumers and firms frequently arise because knowledge and best practice in complaints avoidance is not being effectively communicated and shared. We recognise the importance of providing information and ensuring lessons can be learnt, and we are keen to promote complaints prevention - encouraging firms and consumers to learn to identify and minimise problem situations that can lead to disputes.

During the year we substantially enhanced and developed our website which now receives over 1,000 visitors each week. We began a regular publication called ombudsman news which provides case examples, features and reports on topical matters. On a rotating basis, each edition of ombudsman news focuses on insurance, banking or investment issues, and is principally aimed at firms and professionals working in the relevant areas of financial services and at consumer advisers.

The aim of our re-designed case-handling process is to resolve complaints at the earliest possible opportunity. While this may sound obviously sensible, it is not what was actually happening in some of the schemes we inherited - and for understandable reasons. The staff who used to handle initial enquiries were either not trained, or not empowered, to answer some of the questions and queries commonly received. Their role was merely to process complaint forms. And when a fully completed complaint form was received, firms were routinely required to answer the complaint and to send in their files, even when someone with an experienced eye could accurately predict the outcome. Too often, cases where the result was relatively "open and shut" were subject to more intensive (and expensive) scrutiny and longer delay than was merited.

Accordingly we plan to re-orientate the process with the aim of nipping potential complaints in the bud, for the benefit both of firms and complainants. Even after a complaint has formally been received, if we can resolve the matter by agreement within a day or so this will enable us to avoid charging a case fee. Special teams have been set up within the case-handling divisions to prioritise complaints and assess how they should best be investigated.

By promoting a better understanding of how and why the ombudsman service operates, and by giving information about how complaints are resolved to those who contact us, we aim to increase efficiency - minimising work that is peripheral to our core role of investigating, adjudicating and resolving disputes which fall directly within our jurisdiction.

taking consistent, fair and reasonable decisions

Although the ombudsmen within the Financial Ombudsman Service are still having to operate using different sets of rules, we have taken a number of steps to harmonise our policies. Our panel of ombudsmen meets regularly to discuss such issues. Our aim as far as the industry is concerned is one of "no surprises".

We produced two important briefing notes, one in October 2000 dealing with our approach to complaints about TESSA accounts, and another in November 2000 about mortgage endowments. In both cases we discussed in advance, with representatives of trade associations and consumer groups, what we had in mind, so that their members could be prepared. In order to harmonise policy on mortgage underfunding cases, we issued a brief consultation in the March 2001 edition of ombudsman news.

It is important to stress that in issuing briefing notes, the ombudsman is not becoming a regulator. The Financial Services and Markets Act 2000 specifically envisages that we will issue guidance containing advice and information, and this is a perfectly proper part of an ombudsman's role. Regulators make rules, monitor and enforce compliance with the rules, and can discipline firms when the rules are breached. Our briefing notes merely give external users a guide to how we are likely to consider complaints.

This is not to deny that the impact of an ombudsman ruling on a particular firm or sector may be considerable. But we deal only with individual complaints. If we decide that a customer should be given redress, we cannot require the firm to offer the same redress to customers in an identical position who have not complained. For instance, in the case of TESSAs, we do not know the extent to which banks and building societies have compensated customers who did not complain to us.

In the area of mortgage endowments, where we dealt with over 9,000 complaints last year and expect more complaints in the coming year, we have developed procedures to ensure a more consistent process and outcome. There is more information about this in the chapter on investment-related complaints on page 44 of this review.

good value

We are very conscious of just how accountable we must be to those who pay for us - both directly (financial services firms) and indirectly (their customers). Our industry funding group, consisting of representatives of trade associations, has met regularly to consider both our budget and also the fair way of apportioning the cost of the ombudsman service. During the course of the year, a team from the FSA's internal audit department visited us and was able to report favourably on the control and planning systems we had in place.

In January 2001 we published our plan and budget for the year ended 31 March 2002. Our subsequent consultation with trade associations and consumer groups involved over 15 external meetings with more than 200 individuals. We were able to explain the principal drivers of our costs, the steps we have taken to ensure flexibility in our cost-base and the control mechanism to which we are committed to ensure our unit cost is on a continuous downward path.

But I recognise that for many smaller organisations, the Financial Ombudsman Service will rarely seem good value for money, however efficiently we budget. For the senior managers of large institutions, which have professionally staffed complaints departments, the ombudsman service should assist the resolution of complaints for what must seem a trifling sum when set against overheads such as marketing and public relations. But for a small firm of financial advisers, a small building society, friendly society or small insurance business, the value of a free dispute-resolution service for its customers is more difficult to appreciate. For our part, in dealing with complaints from the customers of such firms, we take particular care to understand the background circumstances under which such disputes need to be resolved.


We are particularly conscious of the need to ensure that our service is accessible to all sections of the community. During the year we launched a programme to get "events" in our drive to be visible and approachable. Over this period our external liaison work has included:

  • Working closely with grass-roots consumer advice agencies, organising roadshows, events and training days for trading standards departments and citizens' advice bureaux across the UK.
  • Producing targeted mailings and "themed" training - for example, on the role of the ombudsman in resolving debt-related complaints.
  • Providing information in languages other than English and putting in place a phone-based simultaneous interpreting service, enabling us to take calls in other languages.
  • Providing information in different formats - for example, Braille, large print, audio-tape.
  • Developing our website for news and information - making sure all our publications are available in various electronic formats and introducing an "email alert" facility for up-to-date news about the ombudsman service.
  • Aiming to produce leaflets and complaints forms which are as clear and simple to use as possible - attractively designed and using plain English.

trust and respect

We have maintained a dialogue with key consumer and industry organisations. To ensure continuing contact with representatives from the financial services industry, we have, with the assistance and co-operation of relevant trade associations, established three liaison groups (for banking, insurance and investment). These groups provide a forum to discuss the development of the ombudsman service, changes in funding arrangements and transitional provisions in the run up to "N2", as well as topics specific to the industry sector concerned. Most important has been our relationship with the FSA. During the year we have worked closely with FSA officials on the final drafting of our rules, on our budget, on the approach to endowment mortgages, on complaints about Equitable Life, and a variety of other topics.

international links

A single market for financial services is being created in the European Economic Area - which comprises the European Union plus the European Free Trade Area. There is bound to be a growing number of cross-border complaints, where the customer dealt with a firm based in another country. The European Commission and the member states are anxious that such customers should have access to ombudsman schemes or their equivalent. We have been closely involved in helping the European Commission develop three initiatives:

  • A financial services network (FIN-NET) was launched on 31 January 2001 - signed up to by the Financial Ombudsman Service and 35 other ombudsman schemes and equivalent bodies in 16 countries. If a financial services customer in country A contacts the local ombudsman about a financial service provided in country B, the local ombudsman will refer the complaint on to the ombudsman in country B - and help the ombudsman in country B with information about local law and conditions in country A.
  • Later, FIN-NET will become part of the European Extra Judicial Network (EEJ-NET) - covering all consumer sectors. Each state will establish a national clearing-house, where customers can discover if there is an ombudsman or complaints-handling scheme, at home or abroad, able to deal with their complaint. The UK clearing-house is due to be established later this year, and will be accessible through Citizens' Advice Bureaux and local authority trading standards departments.
  • Many customers who buy through the internet will want to submit complaints to firms in the same way. If the complaints are not resolved, they will want to be able to refer them on to the relevant ombudsman, also through the internet, without having to re-enter all the information. With a small group of other ombudsman schemes, we are working with the Commission to develop ways in which this could be done.

Apart from the interchange with ombudsmen in the financial field within Europe, there is considerable interest in our scheme from other jurisdictions. During the year we received overseas visitors from 23 official bodies on fact finding missions - ranging from the Japanese Association of Consumer Specialists to the Nigerian Public Complaints Commission.

British and Irish Ombudsman Association

We remain closely involved in the affairs of the British and Irish Ombudsman Association. David Thomas, our principal ombudsman for banking and loans, has served on the association's executive committee, and other staff from the Financial Ombudsman Service are members of the association's working parties and subcommittees. I was delighted to be elected as the association's chairman in May 2001.

and finally

Thanks are due to a large number of very widely cast individuals and organisations for their understanding and support during this transitional year. The intensity of interest and goodwill towards our new service has been heartening for me and for my colleagues.

Working in an ombudsman service involves a commitment to ideals of fairness, independence and impartiality as well as efficiency, customer service and business-like performance. Maintaining these aspirations during times of stressful change has been a challenge to which everyone at the Financial Ombudsman Service has risen with energy, enthusiasm and determination. I thank them all.

Walter Merricks
chief ombudsman
June 2001

image: consumer factsheets

about us

the board

board members of the Financial Ombudsman Service

organisation chart

the structure within the Financial Ombudsman Service