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ombudsman news

issue 61

April/May 2007

ombudsman focus - complaints-handling by FSA-regulated firms: a more principles-based and outcome-focused approach

The Financial Services Authority (FSA) is developing its approach to regulation, to become more principles-based and outcome-focused.

Stuart King (head of retail intelligence at the FSA) and David Thomas (corporate director at the Financial Ombudsman Service) explain what this means for FSA-regulated firms and the way they handle complaints.This follows on from their explanation of the wider-implications process in ombudsman news issue 57 (October/November 2006).

the FSA is talking about "more principles-based" regulation and being more "outcome-focused". What does this mean-

The FSA wants its regulatory work, and the senior management of firms, to focus more on the outcomes for consumers and others rather than on the particular ways in which firms do things - so a focus on substance, not process.

By reducing the number of prescriptive rules, the FSA will give firms more flexibility to treat their customers fairly. And focusing on outcomes will enable firms to move away from a literal and "box-ticking" approach. Overall, the FSA will aim to produce a more effective regulatory regime.

is this a break with the past-

It's a significant shift in emphasis but principles-based regulation is not new. The FSA's regulatory approach is founded on 11 high-level principles, which describe the outcomes firms should aim to achieve and the ways in which the FSA expects firms to behave. The FSA has been moving in the direction of a more principles-based approach to regulation for some time. This is an enhancement of the FSA's long-established risk-based approach, where FSA resources are focused on the areas of greater risk.

Having an effective ombudsman service in place to deal with the problems that individual consumers experience is essential in enabling the FSA to focus its resources in this way. This is because consumers can have confidence that each complaint will be dealt with promptly and fairly by the ombudsman.

does this mean that eventually there will not be any detailed rules-

The FSA's approach will continue to combine the existing high-level principles with some detailed rules but the balance is changing. Greater detail will always be required in certain circumstances, particularly with more complex products. But, where possible, these too will focus on outcomes.

how will firms cope with the change-

Senior management of firms will need to take greater responsibility for aligning their business objectives with the FSA's regulatory goals. This approach needs to be embedded throughout a business, so must be led from the top.

To enable firms to rise to this challenge, the FSA has developed a range of material which will supplement the principles and help senior management think for themselves how to meet the high-level requirements. Other FSA material is being added over time, including examples of good and poor practice.

The FSA is also envisaging greater use of industry codes and guidance to help firms consider how to meet its minimum standards.

how does the FSA consider this will affect consumers-

The FSA wants to have a stronger focus on the outcomes that really matter for consumers, investors and markets. The move to a more principles-based approach is not about any lowering of standards - but about delivering these outcomes more effectively. Customers should get better treatment through the management of firms taking responsibility for running their businesses in accordance with the principles, rather than through firms or, indeed regulators, mechanistically following detailed rules alone.

will the rules on how firms handle complaints be changed-

The FSA recently finished consulting on proposed changes to DISP 1 (the rules and guidance on how firms deal with complaints). The changes reflect the move to fewer, more outcome-focused rules, which remove some rigid processes while focusing more clearly on firms' central obligation to treat complainants fairly and deal with them promptly.

In particular, the FSA aims to clarify and emphasise the main goals of prompt, effective and fair complaint resolution, while reducing "box ticking" and debates about insignificant process issues. The changes should provide a regime that can be swiftly grasped by firms' senior management, so they understand their own responsibilities in this area.

what does this mean for the way firms handle complaints from their customers-

The FSA expects firms to treat their customers fairly. This is one of the FSA's principles and it requires senior management to ensure the firm both thinks and works in ways that support fair treatment of all its customers. This should improve the way businesses treat their customers and reduce causes of complaint.

But when customers do have cause for complaint, the FSA expects firms to take their complaints seriously, and deal with them fairly and promptly. It also involves firms identifying the underlying causes of complaints and learning any lessons for the future.

does this change in the FSA's approach mean that ombudsman decisions will in future 'make rules'-

No. The ombudsman service is part of the statutory mechanism for maintaining consumer confidence in financial services. The ombudsman is operationally independent of the FSA and has no power to make rules for FSA-regulated firms. Its role is to act as an informal alternative to the civil courts in resolving individual disputes.

Like the FSA, the ombudsman service is concerned with firms providing fair outcomes rather than with the processes firms use. Parliament has decided that ombudsman decisions should be based on what the ombudsman considers fair and reasonable in the specific circumstances of the individual case. When considering cases, the ombudsman takes into account the law, regulatory rules, codes and good practice at the time of the relevant events.

will it change the ombudsman's approach-

No. Ombudsman decisions generally turn on disputes of fact (where the customer and the firm cannot agree what happened) or on legal principles and contract interpretation (as elaborated by courts) - rather than on the detail of FSA rules. Firms sometimes forget that they are subject to the same laws as any other business, and that the FSA rulebook is not a complete description of their legal responsibilities.

So the criteria on which the ombudsman decides complaints will not change. But in the process of simplifying its Handbook, the FSA is taking into account lessons learned from the ombudsman's experience.

will the rules on how the ombudsman handles complaints be affected-

The FSA and the ombudsman service are currently working on simplifying DISP 2 to 4 - which set out the scope of the ombudsman service and the procedures it follows.

The aim is to explain these more clearly and succinctly. A consultation paper will follow later this year.

but what about cases with wider implications-

Very occasionally, ombudsman decisions (like court decisions) may have wider-implications for other cases - perhaps because they affect a wide range of consumers or of firms. For these, the FSA and the ombudsman service have developed the wider implications process referred to in issue 57 of ombudsman news (Oct/Nov 2006).

and the end result-

The transition to a more principles-based regulatory environment is not about reducing the standards of complaint handling by firms, or the way that unresolved complaints are viewed and determined by the ombudsman service. But as firms adopt the principles - particularly treating customer fairly - into their culture, their customers should benefit from the greater flexibility this approach offers.

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ombudsman news issue 61 [PDF format]

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.