Written evidence submitted by the Financial
Ombudsman Service
EXECUTIVE SUMMARY
1. The Treasury Committee has called for
evidence as part of its inquiry into the Government's proposals
to change the system of UK financial regulation, as set out in
a new approach to financial regulation: judgement, focus and
stability (Cm 7874). The Financial Ombudsman Service welcomes
the opportunity to contribute to the Committee's evidence.
2. The Financial Ombudsman Service welcomes
the Government's proposals to establish the CPMA with a responsibility
to promote confidence in financial markets and services and with
a clear consumer protection function. We also welcome the Government's
acknowledgement that it is critical to the credibility of the
ombudsman service that it is, and is seen to remain, impartial
and independent from both consumer and industry interests.
ABOUT THE
FINANCIAL OMBUDSMAN
SERVICE
3. The Financial Ombudsman Service is the
statutory-based scheme for the resolution of complaints that have
not been settled between financial businesses and their customers.
In addition to dealing with complaints involving banks, insurers,
advisors and other businesses that are (or used to be) regulated
by the Financial Services Authority (FSA), the ombudsman service
also resolves complaints made against consumer credit businesses
licensed by the Office of Fair Trading. The service handles complaints
made by both individual consumers and small businesses.[1]
Since it was established in 2000 from a merger of eight predecessor
ombudsman schemes, the Financial Ombudsman Service has received
over one million complaints. In consequence the ombudsman service
has a unique and impartial insight into where things go wrong
in retail financial services.
4. Further information about the Financial
Ombudsman Service and its work is contained in Annex A.
GOVERNMENT'S
PROPOSAL
5. The focus of the Government's proposals
in Cm 7874 is in maintaining financial stability and restoring
confidence in the ability of regulators to identify and avoid
macro-prudential risks to financial stability in future. Conduct
issues in the retail sector receive less attention. However, the
past 10 years have seen a mixed picture for firms, customers and
regulators. Past failings have resulted in widespread customer
detriment and have damaged customer confidence in retail financial
marketsjust two, mortgage endowments and payment protection
insurance, have resulted in over 425,000 complaints to the ombudsman
service and many more to the industry itself.
6. There is therefore a case for reform
of retail market regulation. The ombudsman service welcomes the
Government's proposals to establish the CPMA with a responsibility
to promote confidence in financial markets and services and with
a clear consumer protection function. A "single integrated
conduct regulator, taking a tougher, more proactive and more focused
approach to regulating conduct in financial services and markets"
should be capable of working constructively with industry and
consumer groups to identify and avoid significant conduct risks
(like PPI) occurring in future [4.4].
7. Within this new framework the Government
stresses that it will be important for the Financial Ombudsman
Service to remain independent of the CPMA [4.44]. We strongly
welcome this commitment. It is critical to the credibility of
the Service that it is and is seen to remain impartial and independent
from consumer and industry interests. It also must operate in
close contact with but independently of regulation. As the Government
notes, there are some risks here if the CPMA is to be a clear
consumer champion. But the arms length regime presently in place
between the FSA and the ombudsman service provides a generally
acceptable model that could be applied to the new relationship
between the CPMA and the ombudsman.
FURTHER ISSUES
8. The Government says it will take the
opportunity of the CPMA to consider further how consumer protection
is enshrined in the existing legislation "and what changes
may be needed to update or strengthen the regime". [4.50].
The Financial Ombudsman Service welcomes that commitment and looks
forward to contributing to that review.
9. The review of FSMA consumer protection
provisions and bringing into being of the CPMA should provide
an opportunity to modernise the regulatory regime. A conduct regime
will always have a balance of general principles and more specific
rules, whilst in handling individual complaints it is often normal
consumer law principles that have the greatest significance in
deciding fair outcomes. The absence of a detailed conduct of business
rules regime for consumer credit licensees has not restricted
our ability to resolve complaints fairly. In our experience, an
undue focus on what regulatory rules do and do not allow can lead
to poor outcomes for customers.
10. As the Government notes, the Financial
Ombudsman Service provides an important restorative role in the
overall regulatory framework. By looking across the law, regulatory
rules, industry good practice and taking an overall fair and reasonable
approach, the service provides the flexibility required to deal
with the individual circumstances of each case. And by giving
customers access to a free and impartial service that delivers
straightforward redress if things have gone wrong, the Ombudsman
not just protects individual customer interests but also incentivises
good behaviour by firms.
11. In developing the new framework for
conduct regulation and redress, one area that warrants further
attention is those circumstances where there has been widespread
customer detriment because of past failings. It is now widely
accepted that the initial FSMA regime did not do enough to provide
tools to tackle issues like PPI. The first objective of course
is to avoid such widespread areas of detriment occurring. The
ombudsman service is working closely with the regulators through
our joint co-ordination committee to help them identify and resolve
emerging new areas of conduct risk.
12. But it would be unrealistic to assume
that even with the improvements that are already underway there
will in future be a "zero failure" regulatory regime
for retail market conduct issues. Some systemic areas of detriment
will arise in future that will require effective tools to resolve
fairly and efficiently.
13. Another area that we believe will warrant
further attention is transparency. There are difficult judgements
here not least about the need to protect commercially sensitive
or personal information and the impact greater transparency could
have on the informality of our Service. But our approachfollowing
an independent review carried out by Lord Hunt of the Wirralis
to seek ways of further opening up the work we do on behalf of
firms and customers.
14. Our decision in 2009 to publish for
the first time firm specific data about the number and outcomes
of cases referred to us was controversial at the time. But we
believe it is having a beneficial effect in encouraging firms
to look again at how they handle customers who have a complaint
about the service they are receiving. We already publish extensive
information about our approach to casesalthough not presently
the individual decisions we make.
15. Finally we note that the Government
says it will in due course review whether or not the consumer
credit functions of the OFT should transfer to the CPMA. We can
see the logic in such a move. At present we provide a redress
service for both OFT and FSA regulated businesses as well as to
businesses that are not presently regulated by either authority.
16. But it should be noted that, more generally,
the dividing lines between traditional financial services and
other retail markets are blurring. In areas like subscription
media, communications and utilities, customers find it difficult
to know whether their problems with payments are with the service
provider or the financial business. Similarly, in significant
transactions like house purchasing a range of parties with different
redress and regulatory structures can often be involved. There
may be scope to simplify and improve access to redress in these
areas.
Annex A
BACKGROUND ON THE FINANCIAL OMBUDSMAN SERVICE
1. The Financial Ombudsman Service was established
under the Financial Services and Markets Act 2000. It is an impartial
body that provides an informal alternative to the courts, resolving
complaints by individual consumers and small businesses who remain
dissatisfied after complaining unsuccessfully to:
a retail financial services business
regulated by the Financial Services Authority;
a consumer credit business licensed by
the Office of Fair Trading; or
a range of other businesses who submit
to the service's jurisdiction voluntarily, including National
Savings & Investments.
2. We currently handle more than 160,000
new cases (and more than 900,000 consumer enquiries) per year.
Around half of all the cases we have handled related to "mass
claims" about just six topics. As shown by our published
data,[2]
around half of the new cases we receive relate to financial businesses
belonging to just four large financial groups.
FINANCIAL OMBUDSMEN
3. In the 1980s the insurance and banking
sectors set up ombudsman schemes. They recognised that access
to independent redress if things went wrong would increase consumer
confidence in financial servicesand that consumers see
the courts as costly and off-putting. The sectors volunteered
to pay the cost of the ombudsmen schemes, creating a free service
for consumers, and established independent governance to secure
the ombudsman's independence.
4. In 2000 the Financial Services and Markets
Act created a comprehensive independent Financial Ombudsman Service,
merging into it the insurance and banking ombudsmen together with
other financial ombudsman that had subsequently been established.
The financial regulator acted as an arms-length sponsor, and the
financial industry continued to meet all of the cost.
5. The ombudsman service links the regulatory
system with the justice system. It resolves individual cases about
financial services and consumer credit as an informal alternative
to the courts. It is not a regulator or policy-maker. Like the
courts, the ombudsman service is independent of the parties in
dispute, and operationally independent of government and regulators.
6. Its specialist expertise allows the ombudsman
service to resolve individual disputes at a fraction of the costs
incurred in court, and with no charge to the public purse. Decisions
made by the ombudsman service on individual casescoupled
with the service's commitment to openness and transparencyencourage
fair behaviour by financial businesses, enabling regulators to
focus on major and systemic issues.
7. The ombudsman service engages with regulators,
the financial industry and consumer bodies about the lessons learned
from its work, so all can benefit. The availability of the ombudsman
serviceand the information it makes publicly availableempowers
consumers, helps financial businesses that want to treat their
customers fairly and improves access to justice.
MASS CLAIMS
TO THE
OMBUDSMAN
8. The number of new cases referred to the
ombudsman each year has grown from around 31,000 (in 2000-01)
to more than 160,000 (in 2009-10). A key feature of this has been
the growth in "mass claims"large numbers of similar
cases about a particular financial product, often in relation
to a limited number of financial businesses.
9. From 2000-01 to date there have been
more than one million new cases in total. More than half of these
related to just six topics:
mortgage endowments
| about 301,000 cases; |
dual-variable-rate mortgages |
about 7,000 cases; |
split-capital investment trusts
| about 5,000 cases; |
unauthorised-overdraft charges |
about 46,000 cases; |
credit-card default charges |
about 39,000 cases; |
payment protection insurance |
about 124,000 cases |
Cases on payment protection insurance are still coming in
at the rate of about 1,600 per week.
10. In all of these "mass claim" cases, the
individual consumer had complained unsuccessfully to the financial
business and then referred their complaint to the ombudsman.
22 September 2010
1
Defined as "micro-enterprises" under Commission Recommendation
2003/361/EC. Back
2
www.financial-ombudsman.org.uk/publications/complaints-data.html Back
|