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a consultation paper from the Financial Ombudsman Service

Complaints-handling rules: dealing with complaints about banks and general insurance companies based outside the United Kingdom

1. Executive summary

The rules for the Financial Ombudsman Service at present exclude consideration of complaints arising from activities carried out by financial service businesses based outside the UK.

We have received representations from several overseas firms expressing an interest in joining the ombudsman scheme. Several of these firms were members of predecessor ombudsman schemes.

We believe it would be of benefit to these firms and their customers, if we allowed their voluntary participation in the scheme, subject to certain conditions. Accordingly, we propose changes to the Voluntary Jurisdiction (VJ) rules of the Financial Ombudsman Service, to enable general insurance companies and banks based outside the UK, but within the European Economic Area (EEA), to join the scheme.

We invite comments on these proposals.

2. Existing arrangements for overseas firms

2.1 Jurisdictional rules

Part XVI of the Financial Services and Markets Act requires the Financial Services Authority (FSA) to establish a single ombudsman scheme, to deal with disputes relating to acts or omissions by firms carrying out financial services activities specified in the jurisdictional rules (either the rules of the Compulsory Jurisdiction or the rules for the Voluntary Jurisdiction).

The FSA and the Financial Ombudsman Service have consulted on the initial rules for both the compulsory and Voluntary Jurisdictions. The FSA and the Financial Ombudsman Service have now made and published the rules for the scheme in the "Complaints Sourcebook". The rules also take account of the provisions for transitional arrangements from the existing ombudsman and dispute-resolution schemes to the Financial Ombudsman Service. The transitional arrangements provide, as far as possible, for a seamless transition in relation to the handling of complaints which commenced before "N2" (1 December 2001 - when the main provisions of the Financial Services and Markets Act will come into force).

The rules provide that:

"The territorial scope of the jurisdiction of the Financial Ombudsman Service covers complaints about the activities of a firm, an appointed representative or a VJ participant carried on from an establishment in the United Kingdom." (DISP 2.7.1R)

This means that the Financial Ombudsman Service covers firms or VJ participants operating from a permanent place of business in the United Kingdom, including incoming EEA firms and incoming Treaty firms which qualify for authorisation under Schedule 3 (EEA Passport Rights) or Schedule 4 (Treaty Rights) to the Financial Services and Markets Act. Complaints which involve business carried out by branches of firms or VJ participants outside the UK are not subject to the Voluntary Jurisdiction or Compulsory Jurisdiction of the Financial Ombudsman Service. However, a complaint can be dealt with irrespective of whether the customer lives or is based in the United Kingdom.

Excluded from the jurisdiction are firms based outside the United Kingdom which do not have an establishment in the UK but which direct sales into the United Kingdom. This means that these firms are not subject to the Compulsory Jurisdiction of the Financial Ombudsman Service and cannot become a VJ participant.

2.2 Requests to join the Voluntary Jurisdiction by overseas firms

The Financial Ombudsman Service and the predecessor ombudsman schemes have received a small number of requests from overseas financial service firms to join the ombudsman scheme. This is of particular concern to a number of general insurance companies which are at present members of the Insurance Ombudsman Bureau (IOB) but do not have places of business within the UK. A number of other firms have applied to join but have not pursued membership because of the territorial restriction in the jurisdiction of the Financial Ombudsman Service. The firms involved include general insurance subsidiaries of major UK firms, providing loan protection and other general insurance products, and travel insurers selling policies through retail travel agents. In total, they estimate that they will sell insurance to over a million UK residents. In the previous year, the overseas firms which were members of the scheme accounted for about 2% of the IOB's caseload. Most, but not all, of these firms are based in Ireland. A small number of cases arose from firms based in the Channel Islands, Isle of Man and Gibraltar.

In addition, the Financial Ombudsman Service is aware of interest in joining the scheme from other financial firms based overseas, including banks based elsewhere in the EEA trading into the UK over the internet.

2.3 Issues for customers and firms

Under the present rules, customers who have dealings with firms based overseas would need to raise any unresolved complaints with the dispute-resolution service in the country where the firm is based. To support this, the European Commission is developing cross border dispute-resolution arrangements. These should provide a useful safeguard when purchasing goods and services abroad. In the context of financial services, it allows complaint resolution to follow the principle of home state regulation within the European Union.

However, in most cases the products under discussion here are sold into the UK through UK-based organisations and are often designed exclusively for - and promoted solely in - the UK market. Moreover, in some cases the complaint about the overseas firm is closely related to a complaint about another firm which is within the jurisdiction of the Financial Ombudsman Service. This can occur, for example, where a complaint involves a loan from a UK bank for which a customer has purchased a loan protection policy provided by the bank's overseas subsidiary insurance company.

In addition to the consumer issues involved, it is clear that many overseas firms would prefer any customer complaint about their business in the UK to be dealt with in the UK. Several firms have been members of one of the predecessor schemes and have established arrangements to work constructively with an ombudsman.

We have concluded that the present position is not satisfactory and that a mechanism should be found to enable customers to bring complaints to the ombudsman about overseas firms which wish to be subject to a jurisdiction equivalent to the Voluntary Jurisdiction.

3. Proposals for consideration

Against this background, the preferred approach is to amend the territorial rules for the Voluntary Jurisdiction to facilitate membership to certain firms based outside the UK but trading into the UK. There would be no change in the rules of the Compulsory Jurisdiction.

3.1 Territorial restrictions

Although it is likely that the interest in membership will be limited to firms operating from Ireland - at least initially - it is probable that more wide-ranging cross-border trading will occur in future. Accordingly, it seems sensible to lift territorial restrictions more widely than would be necessary to cover the firms currently applying for membership.

However, it would not be sensible to lift all territorial restrictions. Our initial view is that the Voluntary Jurisdiction should not be open to firms based outside the EEA. Firms in the EEA are subject to a common framework of regulation, and EEA firms regulated outside the UK can trade in the UK without needing specific UK regulatory controls. Extending the jurisdiction outside the EEA would raise issues about the appropriateness of the regulatory regime for the firms concerned.

An issue for consideration is whether any special arrangements should be made for the Channel Islands and Isle of Man - which are outside the EEA. As previously noted, each have existing IOB members which give rise to a small number of complaints. It is understood that in both the Channel Islands and Isle of Man, arrangements are being put in place to deal with complaints from UK customers in those jurisdictions. Nevertheless, there may be advantage in enabling firms based in these jurisdictions to join the UK ombudsman scheme.

3.2 Restrictions on overseas jurisdiction

Additional restrictions on the overseas jurisdiction appear appropriate, to ensure that the focus of the complaints dealt with is where there is a strong UK component to the dispute. In particular, the jurisdiction should be limited to those trades directed towards the UK. This would be designed to exclude activities that did not relate to the UK market but where, for some reason, a firm and customer wished their dispute to be considered in the UK. Accordingly, we propose that to be within jurisdiction the contract on which the disputed service was based should be subject to the law of the UK (that is, the law of England and Wales, Scotland or Northern Ireland) and that the activity should have been directed to the UK market.

It is for consideration whether these two restrictions should be supplemented, to ensure that the Financial Ombudsman Service is not involved in disputes concerning parties wholly outside the UK. One option would be to require that the customer was normally resident in the UK. Whilst reflecting the general intent of the proposal, this restriction seems likely to add additional complications to the jurisdiction. Previous experience with residency requirements shows that problems arise in relation to the definition of residency and consideration of the time when residency is relevant (was the relevant time when the contract was entered into or when the complaint arose?). It should also be noted that at present there is no residence requirement in the Financial Ombudsman Service rules.

A further issue for consideration is the involvement of the home state regulator in the firm's decision to join the Voluntary Jurisdiction of the Financial Ombudsman Service. Our initial view is that a firm should alert its home state regulator to its intention to join the UK ombudsman scheme.

3.3 Activities to be covered

At this stage we suggest that the scope of the activities carried out should be limited to banking, general insurance and related activities. At present we have received no requests for membership from overseas firms relating to investment products. Life insurance is closely regulated at a national level in relation to conduct of business, and we are not aware of significant trade relating to life insurance activities that would not be covered under the Compulsory Jurisdiction. For banking and general insurance, however, arrangements for cross-border trading are well developed, and conduct of these businesses is subject to less rigorous regulatory oversight. We therefore propose not to enable overseas life insurers to join the Voluntary Jurisdiction. However, we would welcome views on this point.

3.4 Enforcement

Awards made by the ombudsman are binding on a firm (subject to various limits). The experience of the predecessor schemes was that enforcement of these awards was not a major issue for customers. The enforcement of awards in the Voluntary Jurisdiction is through the courts. The proposed restriction to cover only complaints subject to UK law should help ensure that enforcement is achieved. A failure to meet awards would be a matter to be raised by the Financial Ombudsman Service with the relevant regulatory authorities.

3.5 Funding

Funding rules are made by the FSA. Our initial view, however, is that the funding requirements for these firms from 2002/03 onwards should follow broadly the same basis as that which applies to those banks and general insurers covered by the Compulsory Jurisdiction. In particular, it would seem appropriate to levy the same case-fee for cases from these overseas firms as will apply to cases arising in the Compulsory Jurisdiction. The consultation process for the funding of the Compulsory Jurisdiction for the year 2002/03 will take place at the beginning of 2002.

3.6 Draft rules

Making rules for the Voluntary Jurisdiction requires the approval of the FSA. Click here to see a draft of the proposed changes to the rules. The new rules and amendments are underlined. The draft shows the deletions that are necessary to the current "made" rules. The deletions relate only to guidance notes - the substance of these notes is reinstated in new guidance notes covering the proposed new rules and amendments.

DISP 2.6.9 R. Sub-paragraphs DISP 2.6.9R (1), (2), (4), (5) and (6) have been added so that the Voluntary Jurisdiction can cover general insurance, banking (deposits and lending), plastic card transactions (excluding store cards), ancillary banking activities - and any activities ancillary to each of these activities.

DISP 2.7.2 R. This new rule extends the territorial scope of the Voluntary Jurisdiction in relation to the activities specified in DISP 2.6.9 R - with the exception of those covered by a former scheme of which the participant was a member. The extension applies to participants carrying on activities from establishments elsewhere in the EEA, Channel Islands or Isle of Man.

In order to give full effect to the proposed new rules and changes, a small number of consequential amendments to rules and guidance in other chapters of the Complaints Sourcebook will be needed. However, none of these changes are substantial and do not change the effect of any rule. FSA and the Financial Ombudsman Service will make the consequential changes at the time of making and amending the rules resulting from this consultation.

We would welcome comments on these rules.

4. Consultation and timing

Any rules made by the Financial Ombudsman Service relating to the Voluntary Jurisdiction are subject to approval by the FSA. Prior to finalising our proposal, we would welcome comments from firms, customers and others with an interest in this matter.

To enable consultation to take place with interested parties, we do not believe it is practicable to make changes to the rules to reflect these issues until after "N2" (1 December 2001). However, it would be desirable to make any changes as soon as possible after this date.

As an interim arrangement, the Financial Ombudsman Service has agreed with the IOB to provide a dispute-resolution service on a service basis in relation to existing members of the IOB which are based overseas.

We welcome views on the general approach set out in this paper and on the desirability of extending the Voluntary Jurisdiction of the Financial Ombudsman Service to cover firms in the EEA - based outside the UK but trading into the UK. In particular, we would welcome views on:

  • the revised territorial limitation and the treatment of the Isle of Man and Channel Islands;
  • the need for residency restrictions, or other additional restrictions, on the jurisdiction, when dealing with non-UK firms;
  • the activities to be covered initially;
  • the proposed amendments to the rules.

Click here to see a draft of the proposed changes to the rules.

Comments in writing on these proposal are requested by 15 December 2001 and should be addressed to:

Tony Boorman
Principal Ombudsman - insurance division
Financial Ombudsman Service
South Quay Plaza
183 Marsh Wall
London E14 9SR

Unless you mark your comments as confidential, we will assume you are happy for us to make them available publicly at the end of the consultation period.

Last updated November 2001

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