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annual review 2000/2001

resolving investment-related disputes

The investment division of the Financial Ombudsman Service resolves disputes between consumers and investment firms such as life insurance companies, financial advisers, fund managers and stockbrokers.

The disputes that the investment division deals with are complaints which investment firms have not been able to resolve themselves. By this stage, the complaints will have been "screened" by our customer contact division, to check that all opportunities to resolve them at an early stage have been pursued.

The Financial Ombudsman Service handles investment-related complaints on behalf of - and under the rules of - three separate schemes:

  • the Personal Investment Authority (PIA) Ombudsman Bureau
  • the Office of the Investment Ombudsman
  • the Complaints Bureau of the Securities and Futures Authority (SFA).

These schemes were set up under the Financial Services Act 1986 and cover investment firms regulated by PIA, IMRO and SFA respectively.

When the Financial Services and Markets Act 2000 comes into force - expected by November 2001 - the Financial Ombudsman Service will handle investment-related complaints under the same single set of statutory rules that will apply to all other types of financial services companies.

The investment division of the Financial Ombudsman Service is the largest of the three case-handling divisions, both in terms of the number of staff and the number of complaints it receives. Jane Whittles is the principal ombudsman (and is also the Principal PIA Ombudsman under the rules of the PIA Ombudsman Bureau). There are six other ombudsmen (Ron Bennett, Tony Holland, Richard Prior, Philip Roberts, Chris Tilson and Ken Webb), a number shortly to rise to seven. As at 31 March 2001, there were 160 staff, but recruitment was still taking place to meet the increasing demands for our services.

During the year ended 31 March 2001, the division handled 18,633 new cases, an increase of 47% on the number of new cases dealt with in the previous year.

The majority of complaints handled by the investment division relate to advice given to consumers to buy investments. These cases generally involve having to decide whether the details of the investments were properly explained and whether the investment in question was suitable, given the consumer's personal and financial circumstances.

The sharp rise in investment-related complaints during the year is principally due to the increase in complaints about mortgage endowments, which we comment on in more detail below.

The work of the investment division is featured in the quarterly investment issues of the recently-launched publication, ombudsman news, containing case studies and commentary. The aim is to provide feedback on the types of investment-related complaint handled by the Financial Ombudsman Service and to highlight emerging new themes. We hope that

is a helpful source of reference and that our views will feed directly into firms' own handling of complaints. Please contact our communications team (phone 020 7964 0092) if you would like to go on our mailing list to receive future copies.

This chapter includes the annual reports which the Investment Ombudsman and the PIA Ombudsman Bureau would otherwise need to publish formerly as separate documents. The chapter also includes information which is published in the annual report of the SFA Complaints Commissioner.

complaints about PIA-regulated firms

Complaints in this area are growing sharply - primarily as a result of consumers' concerns about mortgage endowments. New cases involving mortgage endowments have increased steadily since the summer of 2000, from an average of 240 new cases a week at the end of 2000 to 300 cases a week by the beginning of April 2001. Mortgage endowment complaints represented just over 50% of new cases during the year ended 31 March 2001. But we estimate from current trends that this area could grow to around 60% of complaints against PIA-regulated firms during the year ended 31 March 2002.

During the year a 35% increase in the number of adjudicators has enabled us to handle 47% more new complaints and conclude 28% more cases. However, the growth in mortgage endowment complaints has required a reaction beyond just increasing the number of staff handling these cases.

We have also been working on providing information about how the ombudsman looks at mortgage endowment complaints. We have liaised with the FSA in its work on the review of mortgage endowments, to make our work more transparent to all interested parties. We issued a briefing note (including our mortgage endowment questionnaire) in October 2000, to help firms collect what we considered to be the key information from consumers with mortgage endowment complaints.

To enable us to meet our promise to provide more assistance and training to firms, we started a joint project with PriceWaterhouseCoopers immediately after the FSA published its Consultation Paper 75 (proposing regulatory guidance on handling mortgage endowment complaints) in November 2000. Our plan was to ensure that we made information available about our process immediately after the FSA published final regulatory guidance in response to this consultation paper.

Throughout this project we have been able to draw extensively on the experience gained from resolving 5,611 mortgage endowment complaints during the year to identify the major areas of concern. We have developed decision-trees that will assist firms, and those who advise consumers, to focus on the issues that have to be considered and to which judgement has to be applied. These decision-trees have been designed to help determine whether compensation is due and, if so, how it should be calculated. We will be using these decision-trees and summary-sheets to determine the mortgage endowment cases that we have to investigate.

We will keep this documentation - and all other aspects of our process - under review, so that they reflect our experience of the situations encountered.

Not all endowments are mortgage endowment policies. Where endowment and other whole-of-life-policies are not linked to the repayment of an interest-only mortgage, consumers can have very different requirements and expectations of these policies. Any compensation for a mis-sale in these circumstances is not covered by FSA's mortgage endowment guidance.

After endowment-related complaints, the next major area of grievance continues to be personal pensions.

There was a significant reduction in complaints about Free-Standing Additional Voluntary Contribution schemes (FSAVCs) during the year, due to the announcement of the FSAVC Review by the PIA.

The three main areas of our work - mortgage endowments, other endowment or whole-of-life policies and personal pensions - remained the same as the previous year but accounted for 87% of new complaints compared with 74% in the previous year.

new cases about PIA-regulated firms by subject matter
year ended 31 March 2001
year ended 31 March 2000
mortgage endowments
personal pensions

We aim to settle cases as early in the complaints process as possible, and the preliminary stages of our investigation process are designed to enable both parties to reach a conciliated or mediated settlement.

It is likely that the stage in the process at which complaints can be settled will change next year, as the effect of FSA's mortgage endowment guidance is felt and firms adapt their complaints-handling procedures to offer compensation in accordance with the new guidance.

However, although the total numbers of cases concluded has increased by 28% during the year ended 31 March 2001, there was relatively little change in the proportion of complaints resolved in the firm's favour. We found in favour of the consumer in 3% more cases, which reflects the slight decrease in the number of cases resolved through the early voluntary agreement of both parties. For the year ended 31 March 2001, 73% of cases were closed within six months; 19% took between six and twelve months and 8% took over twelve months.

outcome of cases about PIA-regulated firms*
year ended 31 March 2001
year ended31 March 2000
resolved by conciliation or mediation (agreed voluntarily by both sides)
resolved after investigation by an adjudicator
in favour (in whole or part) of the customer
in favour of the firm
resolved by the final decision of an ombudsman
in favour (in whole or part) of the customer
in favour of the firm
* In order to present statistics as consistently as possible, in a format which allows comparison with similar figures from the other complaints-handling schemes, some information which was included in past annual reports of the PIA Ombudsman Bureau is not covered in this consolidated report. However, this data can be made available on request for research purposes.

During the past year a handful of consumers and firms have indicated an intention to challenge ombudsman decisions in the courts.

In R v Personal Investment Authority Ombudsman Bureau and Goss, ex parte Royal Sun Alliance (unreported) the insurance company questioned the ombudsman's interpretation of a personal pension policy. The ombudsman said that the policy was a single premium policy with an option to make subsequent payments - not an annual premium policy. Mr Justice Langley, with the agreement of the parties, did not examine the reasonableness of the ombudsman's decision but decided that the ombudsman's interpretation of the proper construction of the pension policy was incorrect. Accordingly, the court ordered that the ombudsman's decision should be quashed and that a fresh decision in line with the court judgment should be made. Although awarded costs, the firm decided not to recover them from the ombudsman scheme.

In R v Personal Investment Authority Ombudsman Bureau, ex parte Mooyer (unreported save in Lawtel LTL 9/4/2001) Mr Justice Newman decided that, in exercising its voluntary jurisdiction in respect of complaints, the PIA Ombudsman Bureau was not exercising governmental powers. It was a voluntary adjudication service and not a statutory industry regulator. The ombudsman's decision was not binding on the complainant and was not open to judicial review. In addition, the judge said that, even if he had reached a different decision, the complainant could have sued in the courts and so had an alternative remedy to judicial review.

complaints about IMRO-regulated firms

The investment division of the Financial Ombudsman Service is also responsible for work carried out by the Office of the Investment Ombudsman, which deals with complaints against firms regulated by the Investment Management Regulatory Organisation (IMRO).

Following the retirement of Peter Dean as Investment Ombudsman in January 2001, Ron Bennett was appointed as his replacement. Ron Bennett carries out his Investment Ombudsman functions within the investment division of the Financial Ombudsman Service. The information in this section relating to complaints about IMRO-regulated firms constitutes the Investment Ombudsman's annual report.

The Office of the Investment Ombudsman started the year with 116 complaints outstanding. During the year, it received 483 new cases (50 more than in the previous year) and resolved 444 complaints (34 more than the previous year) - leaving 155 in progress at 31 March 2001. The Investment Ombudsman is currently receiving new cases about IMRO-regulated firms at an average rate of 48 a month, compared with 37 a month in the previous year. There is no obvious reason for the increase in caseload. However, it is likely to be due, at least in part, to an increase in publicity in relation to the Financial Ombudsman Service.

As at 31 March 2001, 94% of the Investment Ombudsman's caseload was less than six months old; 5% was between six and twelve months old; and 1% was more than twelve months old. The average time taken to resolve a case during the year was three months - slightly longer than last year's figure of two and a half months and reflecting changes in staffing and the increase in caseload.

new cases about IMRO-regulated firms by subject matter
year ended 31 March 2001
year ended 31 March 2000
percentage change
- 28%
unit trusts
+ 69%
portfolio management
+ 12%
+ 436%
investment trust related
+ 50%
general financial advice
+ 6%
- 12%
+ 25%
+ 8%
* There is a certain amount of overlap in the subject matter of some cases, and so the numbers shown in this table do not match exactly the total number of new cases received (483 in the year ended 31 March 2001).

The nature of cases received during the year generally continued the pattern of previous years - poor administration at the forefront (problems resulting in the main from human and/or systems error), followed once again by failure to carry out instructions (either correctly or at all). Likewise, the categories of case by product type were very similar to those recorded in recent years. PEPs once again comprised the biggest single category, followed by unit trusts, portfolio management and ISA-related complaints. The spectacular increase - in percentage terms - in cases involving ISAs, measured against the decline in PEP cases, simply reflects the supplanting of PEPs by ISAs.

Looking to the future, the recent (and very welcome) harmonisation of the PEP and ISA regulations is likely to result in a further reduction in the number of PEP complaints which we receive. In particular, the problems we have seen in the past arising from the restriction on the transfer of part of a PEP, when the manager has merged two or more years' investments into one account, should - hopefully - fall away completely.

complaints about SFA-regulated firms

The Complaints Bureau of the Securities and Futures Authority (SFA) also forms part of the investment division of the Financial Ombudsman Service. The Complaints Bureau deals with complaints about firms regulated by SFA - mainly involving share dealing or the administration of new share issues.

In the year ended 31 March 2001 the Complaints Bureau received 895 new complaints - compared with 854 in the year to 31 March 2000. The Complaints Bureau also received 477 enquiries in the period (compared with 697 enquiries received in the previous year).

At the beginning of the year, there were 317 complaints under review by the Complaints Bureau. During the year, it completed investigation of 1,044 complaints (compared with 672 in the previous year). Of these complaints, 347 were considered by adjudicators to be justified, and recompense was made in 333 of the cases. 492 complaints were not considered justified. In the remainder of the cases, it was not appropriate to make such a categorisation. At the end of March 2001, 168 complaints were still under review.

As at 31 March 2001, 87% of the Complaints Bureau's caseload was less than six months old and 13% was between six and twelve months old. No cases were more than twelve months old.

During the year, 115 complaints which the Complaints Bureau was not able to resolve by conciliation were referred to arbitration.

new cases about SFA-regulated firms
by subject matter
year ended 31 March 2001
year ended 31 March 2000
percentage change
prices dealt
investment advice
delay in receiving certificate
delay in settlement or receiving bonus
delay in receiving dividend or rights
breach of advertising rules
delay in issue of contract note
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