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ombudsman news

issue 100

February/March 2012

claims managers aren't the only ones who need to clean up their act ...

by Paul McMillan

Branded 'claims chasers', 'claims farmers', 'claims churners' and plenty of other names unrepeatable in the 100th edition of ombudsman news, claims-management companies have long been the scourge of independent financial advisers (IFAs).

With financial businesses currently charged a £500 case fee for the fourth and every subsequent complaint referred to the ombudsman service each year - no matter if the complaint is later rejected - and with network members being charged for every complaint, there is understandable frustration over the tactics sometimes employed by claims managers to garner complaints.

Journalists often have a love-hate relationship with claims-management companies. Even though claims managers are universally loathed by readers, they can provide great examples of poor behaviour by product providers for industry trade titles to expose. For journalists working in the consumer press, claims managers can also provide sparkling case studies to liven up a spread - even though editorial policy, quite rightly, is to suggest that consumers complain direct to the ombudsman service, rather than incurring claims-management costs that can be up to 30% of the potential payouts.

In defence, claims managers say that certain people don't have the time or confidence to pursue complaints themselves. But judging by my mailbag of angry complaints over the sharp practice that continues to be deployed by some claims managers, there is still plenty to be done to clean up their sector.

However, it's interesting to note the low numbers of complaints about IFAs that reach the ombudsman service as a result of claims-management companies. With most endowment complaints now resolved or time-barred, claims managers haven't found the IFA sector to be a profitable hunting ground of late.

Of the 3,000 or so complaints referred to the ombudsman service about IFAs last year, around a quarter were brought by third parties on behalf of consumers. Of these, 30% were brought by claims managers, compared to 20% brought by other IFAs. As the complaints generated by claims-management companies were skewed during the year by a small number of companies focusing on Keydata and Arch Cru-related issues, we could soon have a situation where more complaints about IFAs are generated by other IFAs than by claims managers.

The growing number of IFAs complaining about their peers - perhaps when advisers take on new client-books - adds a new dynamic to the usual debate around claims generation. The Ministry of Justice, which regulates claims-management companies, does not provide a figure for the number of IFAs authorised to provide claim-management services - but it says that 210 claims companies are also FSA-regulated.

Money Marketing readers often argue for the introduction of a small upfront refundable fee to ward off spurious complaints - especially those triggered by claims-management companies. In an ideal world, this proposal has considerable merit. But the obvious concern is ensuring consumers with valid complaints aren't discouraged from taking cases to the ombudsman.

While the behaviour of certain claims managers in churning inappropriate complaints continues to create justifiable anger, the poor claims-handling procedures of many larger institutions must also be taken into account.

The continued unacceptably high uphold rates seen in the ombudsman's published complaints data suggests that too many bigger businesses are simply fobbing off valid complaints - and banking on the fact that a certain proportion of these consumers won't bother going to the ombudsman. Their rejection letters are often designed to dent the consumer's confidence to pursue their complaint any further.

Claims managers aren't the only ones who need to clean up their act.

A perceived lack of transparency and of consistency in the decision-making processes of the Financial Ombudsman Service are two common complaints I hear from Money Marketing readers. An adjudication process that rules on complex investment advice - based on very personal individual circumstances - will always lead to charges of inconsistency.

The proposal is that the ombudsman will begin publishing all its decisions on its website - to shine a greater light on the cases it decides. But over the years, case studies in ombudsman news have offered a useful guide both to advisers and consumers on the thinking behind the big complaints issues.

Looking back through the archive, a selection of case studies from ombudsman news in 2005 - based around what makes an investor 'experienced' - particularly caught my eye, as they clearly emphasised the individual nature of many complaints.

The case studies include upheld complaints where the financial adviser had suggested that owning 'windfall' shares, or inheriting a share portfolio, was proof of being an experienced investor. The case studies also include a rejected complaint - involving a lottery-winning couple who believed they should not have been recommended any risk-based products due to their 'inexperience'.

After reviewing the file in this case, the ombudsman decided that the couple did understand and have tolerance for the risk involved. This case study emphasises the need for advisers to keep well-documented evidence of the advice they are giving - to guard against speculative complaints triggered simply by stock market falls.

ombudsman news 48/15 (August 2005)

48/15 - when investments decline in value, investors complain that advice has been unsuitable as they were 'inexperienced' investors

Case studies relating to the fall-out of the 2008/2009 credit crisis also stood out. In particular, I noticed a selection of cases relating to commercial property funds that had introduced deferral periods or market value reductions (MVRs) to stop the rush of people wanting to exit funds that invested in illiquid investments.

These funds were heavily marketed by asset managers, even when it became apparent that the top of the market had been reached. However, just because an MVR is inconvenient to an investor does not automatically mean the investor should be compensated for actions that have been put in place to safeguard the future of the fund.

A complaint from an investor who had extensive knowledge of the commercial property market, and who was warned by his adviser against too concentrated a property portfolio, was rejected by the ombudsman - as was a complaint from a consumer who claimed he hadn't been made aware of a possible deferral period.

However, an eye-catching case was upheld by the ombudsman where someone approaching retirement was advised to borrow money against his property and invest in a property fund.

ombudsman news 84/7 (March/April 2010)

84/7 - consumer complains about advice to borrow money and invest it in a property fund

The fall-out of the 2008/2009 credit crisis prompted plenty of other complaints, as heavy stock market falls exposed poor industry behaviour, which often goes unnoticed in rising markets. One major issue we focused on in Money Marketing was the number of elderly people who were advised by their bank out of low-interest deposits into more complex investments.

With interest rates lingering at 0.5%, it was an easy sell for many bank branch staff to move people into corporate bonds promising high yields. However, the risks of such complex investments were often not explained - and many customers had no desire to put their capital at risk.

A case study from ombudsman news in 2009 paints a familiar picture of this type of behaviour.

ombudsman news 80/6 (September/October 2008)

80/6 - consumers seeking regular income are advised to re-invest proceeds of a fixed-rate savings bond in a corporate bond fund

Until the sales culture within high-street banks is dramatically restructured - so that branch staff are truly thinking of their customers' needs, rather than their own monthly targets for high-margin products - we are unlikely to see an end to the large numbers of complaints about advice given by banks.

guest editor - Diana Wright

Paul McMillan

Paul McMillan is the editor of Money Marketing, a weekly newspaper and website for independent financial advisers (IFAs). He has won a number of industry awards, including HeadlineMoney trade journalist of the year.