Financial Regulation

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 businesses1. 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 ten 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 markets – just 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 approach – following an independent review carried out by Lord Hunt of the Wirral – is 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 cases – although 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 data2, 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 services – and 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 cases – coupled with the service’s commitment to openness and transparency – encourage 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 service – and the information it makes publicly available – empowers 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 1600 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