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Treasury Committee - Financial Ombudsman Service Annual Review 2011/12 - Minutes of EvidenceHC 701

Written Evidence

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Treasury Committee

Financial Ombudsman Service

Tuesday 30 October 2012

Natalie Ceeney CBE and Tony Boorman

Evidence heard in Public Questions 1 - 111

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Oral Evidence

Taken before the Treasury Committee

on Tuesday 30 October 2012

Members present:

Mr Andrew Tyrie (Chair)

Mark Garnier

Stewart Hosie

Andrea Leadsom

Mr Andrew Love

Mr Pat McFadden

Jesse Norman

Mr David Ruffley

John Thurso

________________

Examination of Witnesses

Witnesses: Natalie Ceeney CBE, Chief Executive and Chief Ombudsman, Financial Ombudsman Service, and Tony Boorman, Deputy Chief Executive and Deputy Chief Ombudsman, Financial Ombudsman Service, gave evidence.

Q1 Chair: Good morning to you both. Thank you very much for coming in to help us look at the work you have been doing. Can I begin by quoting from your annual review, Ms Ceeney, which notes: "A shift towards more entrenched disputes with businesses increasingly taking a harder fought and legalistic approach and consumers becoming more demanding and less willing to concede". Why is that?

Natalie Ceeney: I think there are a number of reasons for that, but if we start with what is happening, the fact that just 18 months ago we were judicially reviewed by the major banks on PPI is a pretty good illustration of the climate we are in. What we are seeing is an increasing number of our cases where firms are using lawyers to argue out their case and consumers being in court. I think some of the reasons can be pinned down a bit to the economic climate. We have consumers who are increasingly finding that money is very tight and that £50 that was not paid for an insurance claim. A couple of years ago, it might have been, "Well, I will see what happens," whereas now that £50 might really matter. People are taking those disputes just that bit further. I think you can apply that same logic to financial services businesses where the consequences of a decision now feel bigger and so they are employing lawyers to fight their cases. Certainly, it is making our job more challenging as a result.

Q2 Chair: You mentioned PPI there. There have been complaints from the industry that many claims management companies submit PPI claims when a customer has not even purchased a PPI. Certainly very many of us have had experiences with marketing material suggesting that we have a PPI claim that a claims management company would like to handle on our behalf. Do you think that the firms are right? Where does the balance of the argument lie, and what needs to be done about this, if anything?

Natalie Ceeney: Inevitably, I think that the issues are more complex than how they immediately get presented.

Q3 Chair: Well, take a moment to set it out, because I think that this is very important. These are large sums of money.

Natalie Ceeney: Absolutely. There is fault on both sides here. If you look at how we got to the position we are in, the reason the claims management industry has been able to thrive is because detriment built over so many years while banks, in the case of PPI, said, "No, there is not an issue." Unfortunately, we now have an industry that is exploiting very real detriment. However, some of the actions we now see from claims management companies are pretty bad. About six months ago, Which? did a really interesting study with some cold calling where claims management companies routinely misrepresented their services: telling consumers that they needed help to complain, which they do not; and telling consumers that they had a better chance of winning if they had help, which they do not. Typically, they got a quarter of anyone’s compensation for no more than putting a postage stamp on an envelope, which is something that is not good for anybody.

If I look on the other side, though, the reason why they have been able to thrive is often because banks had not done a good enough job of investigating cases. It played into the claims management companies’ argument of saying, "You need our help," because for many years they actually did. Of the fraudulent cases issue that all the banks are talking about at the moment, typically they believe a consumer never had a PPI. In around a quarter of the cases that come to us, we see that they did-the bank just has not done a proper job of checking. Also, given that so much PPI was sold assumptively-in other words the customer got out a loan and PPI was added to it, so they were not really told about the product-I do not think it is fraudulent for a customer to say, "Did I have PPI?" I think it is a legitimate question.

We feel at the moment that the consumer is being caught in the middle. They are being told by claims management companies that they need help to complain, which they do not, and then they are getting a not particularly good answer from a firm that may not be investigating properly and may not be checking whether they actually had PPI, and then the customer ends up with us and we are trying to sort out the mess. What we would like to see is banks doing a better job of investigating cases, but on the claims management companies’ side, we have called very publicly for better regulation of this industry. We do believe cold calling should be banned and we do believe that these firms should not be allowed to make the misrepresenting statements that they are making to consumers. It is consumers who are getting caught in the middle of this.

Q4 Chair: There is so much there and many parts of it need further examination. I will hand over to a colleague in a moment to do some more of that, but let us just start at the beginning. You are saying that the companies are not doing enough to identify the cases. They are saying-certainly privately, and to some degree publicly-that they are devoting enormous resources to trying to find these cases and trying to make sure that they have all been identified. Something very odd is going on, isn’t it?

Natalie Ceeney: I think there is a past issue and there is a present issue. We have to remember PPI is a problem that happened over many decades, and in a way we are sorting the biggest clean-up in financial services history now after decades of things going wrong. It is now a matter of public record that for many years the banks said there were no problems when there were, and it took a High Court case to get that matter really sorted. In the past, it is a matter of public record that the banks said no to many people to whom they should have said, "Yes, there is a problem." It is absolutely true now that the banks have put phenomenal resources into doing this clean-up-quite rightly, because millions of people were missold.

Q5 Chair: But not enough, you are telling us, or inappropriately allocated.

Natalie Ceeney: Well, all of the banks will tell you-

Q6 Chair: You say that 25% of cases that you take a look at where they say that no policy existed turn out to have had a policy.

Natalie Ceeney: That is right the banks will all tell you-and rightly-that they have had to resource up very fast and inevitably they are all finding that a challenge. My issue is whether their standards of investigation are still good enough. Yes, of the cases we see where the bank says, "No, this customer never had a PPI case," what we do is we ask a routine set of questions. To make this real, for example, a customer might have said, "I got a loan in 2008 and you added PPI." Naturally, most of us can remember roughly when we got the loan, but it might have actually been 2007, not 2008. We ask that the firm looks a couple of years back and a couple of years forward, and looks at previous addresses and unmarried names, and we have been very open that that is the standard of checking that we would expect. Too often we see cases where the banks have not made those checks. We do feed that back to the banks. I do believe they are putting more effort into doing it, but that is why I think we hear one side from the banks saying it is fraudulent and the other side from the claims management companies saying the banks are not checking. The truth is somewhere in the middle and it is the consumer who is getting caught out.

Q7 Chair: Just to pursue a little the other side of it, with the claims management companies, are you really saying that you would rather they were not around at all?

Natalie Ceeney: No, I am not.

Q8 Chair: Do you think that they are, in effect, killing the goose that laid the golden egg?

Natalie Ceeney: I am certainly not saying claims management companies should not be around. There will always be a segment of the population who want someone by their side to fight their case. The problem at the moment is they are misrepresenting their offer in many cases. Consumers are given the impression-all the text messages we get-that they have to use these companies. What I would like is a situation where consumers know what the choice is: knowing that they can complain themselves for free and it is relatively easy, and knowing that if they want to use a claims management company, that company will take 25% of their eventual compensation, but that is what they are paying for. The problem at the moment is that most consumers are not made aware of the total cost and they are not made aware that they have a choice. We see this at the Ombudsman Service. Claims management companies typically sign up consumers before they complain to the bank. By the time they get to the Ombudsman Service, the consumers have often realised they did not need that company, but it is too late because they have signed away their legal rights.

Q9 Chair: All in all, it sounds as if claims management companies had better sort out their act, otherwise your view is that Parliament should be round to see them?

Natalie Ceeney: Yes, absolutely. Claims management companies categorically need better regulation.

Chair: Well, that message is not lost on this Committee.

Q10 Mr McFadden: I just want to go through this in a bit more detail, because it is obviously important to our constituents. Do you think that if the banks had responded sooner to concerns about PPI, there would have been less opportunity for claims management companies to step into this space? After all, this was known to be a problem five or six years ago. Do you think the banks have dragged their feet?

Natalie Ceeney: Absolutely. If you look at some of the history of what happened in PPI, it was back in 2005 that Citizens Advice raised the super-complaint. We started raising the issue back in 2000, and yet it really did take the BBA challenging us and the regulator in the courts to get this matter sorted. Over that period, millions more policies were sold. The reason the claims management companies are now doing so well is absolutely as you said. For many years, consumers would put in a complaint and get told no by the banks, which first allowed the claims management companies to get the message out, "You need our help," but, secondly, for the pile of detriment just to build and build and build. Absolutely, the consequence of such poor action from the banks has meant we now have an industry in claims management companies that are not doing consumers any good and are feeding off that problem.

Q11 Mr McFadden: So the first irony in this situation is that banks’ complaints about vexatious complaints from claims management companies should have been answered with, "If you had responded to consumer concerns earlier, this may not have happened"?

Natalie Ceeney: Absolutely.

Q12 Mr McFadden: I want to clarify something that is really important on a factual basis. I think you said this to the Chairman. We have been told by the banks that a third of the claims they get are from people who never had PPI with them or had no relationship with them in the first place. You are telling us to treat that claim with some scepticism because when you have looked at it, you have found that that is not the case. The banks’ attack on the claims management companies is not factually correct on that point.

Natalie Ceeney: Yes, that is what I am saying. I cannot comment on what the banks see themselves. What I can comment on is what comes to me. Of the cases that we get where the banks say categorically, "No, there was no PPI," we have seen about a quarter where just by asking a few more questions, we find that there was. Yes, I do have concerns that a lot of mud is being thrown around here.

Q13 Chair: Sorry, Pat, may I just interject? Clearly this is not random, is it-the cases that come to you? So you would expect a higher than average percentage to be cases that, in fact-

Tony Boorman: Yes. Obviously, we do not see a purely random selection of cases. People come to us when they feel strongly that the bank or financial business has got it wrong.

If I can just go back to one of Natalie’s earlier points-to respond to your point, Mr McFadden-there is a perfectly decent customer question: "Did you sell me this stuff that I didn’t want? I didn’t know I was being sold it." That is a perfectly decent question and all the regulatory evidence we see shows that did happen. Customers were "assumptively sold", in the ghastly jargon of this saga. It is a perfectly decent question for all of us to ask our financial institution: "Hold on a second, I had a loan with you. I have a credit card with you. Can you just check, please, that you didn’t sell me PPI during that transaction?" That is a perfectly decent question. That is not a fraudulent claim. That is a decent question from a customer to their financial institution.

We are certainly not saying that claims management companies are whiter than white. It is clear that some of them farm this problem for their own commercial gain and they do not follow some sensible steps that we have set out that we think both financial firms and claims management companies should take to make some very simple, straightforward checks about the circumstances. Does the customer have a statement to show what the position was and so on and so forth? Both sides, if they were a little bit more careful and sensible, could help each other to work their way through this problem. It is important to draw the Committee’s attention to the scale of the problem. According to the FSA, 16 million of these policies were sold since 2005 alone. Probably that number and more were sold before 2005. Some 3 million people have already raised complaints about this topic. That represents perhaps one in 10 of the policies sold, so this is by any standards a big-scale issue.

Q14 Mr McFadden: Okay. If the first irony of this situation is that the banks have created the space for this by keeping on selling them after the super-complaint was raised and not responding properly to initial complaints from consumers, is the second irony that the tactics of the claims management companies mirror very closely the selling practices of the banks in PPI by offering people a service that they do not need when they could do this free through the Which? website or by themselves, by cold calling people and by pressure selling? Doesn’t this mirror very closely-exactly-what the banks were doing with PPI?

Natalie Ceeney: Yes, absolutely, which is why we have a lot of concerns about the way the claims management companies are operating and are allowed to operate. It is often the most vulnerable consumers who were missold PPI in the first place and are now being ripped off, one might say, for the second time by claims management companies doing exactly the same thing. I think there is a gap in the regulatory structure to deal with the behaviour of claims management companies.

Q15 Mr McFadden: The consumer, having first been mis-sold by the bank, is now being mis-sold a second time-in some cases by the claims management companies.

Natalie Ceeney: Yes, absolutely, and some of the worst practice we see by claims management companies is not only all the cold calling, but potentially taking upfront fees from a consumer to "claim back" money they are owed, when the consumer was never actually owed any money back. That vulnerable consumer is left worse off after the process.

Chair: Pat, have you got more to come?

Mr McFadden: I have one more.

Chair: Go ahead.

Q16 Mr McFadden: I want to finally ask you about the policy implications for Government and regulators out of all this and to get your view on it. Sadly, this probably will not be the last mis-selling scandal or product scandal that blows up. We have the issue with small businesses and interest rate swaps, which is currently being looked at. Some people have talked about interest-only mortgages as the next time bomb within the financial system. Whatever it is, there will be something in the future where consumers seek redress. Having gone through this experience, what do you think are the key policy recommendations for Government and regulators to avoid this situation happening again in such a way?

Natalie Ceeney: What went wrong in PPI was that the detriment built for so many years when so many people knew there was a problem. The biggest thing that has to happen is really early intervention when a problem becomes known. With PPI, there was a lot of intelligence that things were going wrong, and I think the FSA is now on record as saying that it did not intervene when it should have done. The biggest thing we need is early intervention. I think positively the Financial Services Bill, which is now working its way through Parliament, does stress the importance of earlier intervention of the FCA, and that is something we really welcome. Linked with that is using intelligence from all sources to provide that early intervention and making sure super-complaints are heard. Again, positively, one aspect of the Financial Services Bill gives us the power to make super-complaints, which I think is helpful.

The other thing is that when agreement has been reached, there is a problem with how redress is awarded. The problem with a complaints-led strategy is that it allows claims management companies to jump in the middle if you essentially say, "Right, here is the problem. Anyone who has a problem, complain". The other approach, which I am pleased the regulator is starting to use more often, is a proactive compensation so that firms, with the regulator, identify problems and proactively go and compensate, which cuts claims management companies out and also does not necessarily rely on articulate consumers to complain and the less articulate not to. I think all those things would significantly help.

Q17 Chair: Given what you have said about the behaviour of claims management companies, that they are actively engaged in misselling, if that is what you said-

Natalie Ceeney: Yes.

Chair: -that must mean as a counterpart that the banks do have a case when they tell us that they are faced with a heap of misleading information, which wastes a huge amount of their time and money and may account to some degree for the fact that they have been unable to target resources as effectively as they would like to find the legitimate potential claimants. Is that a correct summary of what you have said?

Natalie Ceeney: I would say there is fault on both sides. Yes, there is-

Q18 Chair: I know. I am trying to unpick that remark to get to the heart of it.

Natalie Ceeney: There is some truth in the banks saying that claims management companies are swamping them and not all of the claims are valid.

Q19 Chair: They are easy targets, but if they are up against mis-selling themselves they are also being misled.

Natalie Ceeney: Coming back to what I said, we need the banks to clean up their acts, but we also need the claims management companies to do theirs. We do need both sides to behave properly.

Chair: Yes, okay. Well, we will not take that any further just now.

Q20 Andrea Leadsom: Good morning. I would like to ask a few questions about your operating model. The number of cases is going up exponentially and you have said that you want to move more to a case fee and away from a levy. In your own words, can you just run through the impact on businesses of the levy versus the case fee, and particularly with a view to the fairness for those companies that are paying the levy, yet never need to use your services?

Natalie Ceeney: Absolutely, as we have grown over the last 12 years, our funding structure has evolved. It is worth saying that every year we go out to consultation on it, so every year we get industry views and, in fact, most years we adjust it in response. With the way we are funded at the moment, about 20% of our costs come from a levy. That is actually raised by the FSA, and it is broadly in line with size of firm and type of activity that leads to complaints. Then 80% is raised by case fees. Over the years, we have gradually moved more and more to case fees with the idea of a "polluter pays" model, so when you get complaints, you pay. We cover in our jurisdiction more than 100,000 individual businesses, ranging from the smallest IFA, which would pay £35 a year through the levy, through to Lloyds Banking Group, which pays around a quarter of our costs-about £50 million this year. It really does cover everything. Of those 100,000 firms, 95% in one year do not have any complaints that we consider, so they simply pay the levy. That is broadly a model that most firms have felt is fair.

What we consulted on earlier this year, which has received pretty widespread industry support, was moving to a model where we take some of the smaller firms out of paying case fees altogether. At the moment, smaller firms start paying case fees when they have had three cases, and the proposal is take it up to 25 cases, which would mean that most independent financial advisers would not pay case fees at all. They really are paying £35 up to £200 and that is it for the year, whatever happens. Instead, the largest firms-four firms now account for about 55% of our work-would move to much more of a predictive group cost. We know Lloyds Banking Group accounts for about a quarter of our work. We have around 5,000 cases a month from Lloyds Banking Group. At the moment, we are sending it individual invoices for each case. Moving to much more of a group invoice model would, I think, also put that relationship on the right footing and raise the profile of complaints within the major firms.

Q21 Andrea Leadsom: Effectively you would be predicting the number of cases. It is that reliable, is it? You have that regular turnover that you can predict what they are likely to get?

Natalie Ceeney: To some extent. Our workload varies hugely by different types of product. PPI over the last 12 months has almost doubled, but if you look at things like current account complaints, they are broadly stable. They can go up by 15% or 20%, which in most worlds is high, but they do not tend to double or halve-they hover around. Just, for example, if we stick with Lloyds Banking Group, given its market share, it would be very surprising if it varied hugely from being about a quarter of our workload.

Q22 Andrea Leadsom: Is it not the case that, as Mr McFadden just said, we are staring over the abyss of another couple of potentially enormous areas of complaint that could significantly change-particularly with swaps mis-selling-the type of complaints you are getting, and also the people they are complaining about?

Natalie Ceeney: Perhaps I should say something about the scale. On PPI, with the scale of mis-selling, I think is pretty hard for any other subject to dwarf that in the near term. If we assume that somewhere around 35 million policies were sold, we have never seen anything like this in terms of volumes of complaints. We have now received half a million individual complaints. By contrast, only 40,000 individual swaps products were sold. They were of a larger value, so the total compensation sum could be significant, but in terms of our workload, we have about 200 cases with us at the moment compared with a couple of hundred thousand PPI cases. We certainly find with our work there are areas other than PPI that do rise. To give another example, we are dealing at the moment with some of the fallout of the RBS IT glitch. We have received around 200 cases so far. While there might be far more, it is still 200, not 200,000.

Q23 Andrea Leadsom: Are you saying, then, that the work involved is broadly similar regardless of the complaint? That seems intuitively wrong to me.

Natalie Ceeney: No, the work is not the same. Our work really does vary from a very, simple banking case that might be, "Someone has been rude to me at the branch and I really want an apology," through to interest rate swaps that would be at the harder end of our casework, as would most investment complaints. We do have dedicated teams with those different areas of expertise. You would expect an investment case to take considerably more work than a standard banking case. One of our challenges, though, is that the amount of work required is not always just about the nature of the product; it is also about the attitudes of the parties, to come to the Chairman’s first question around the litigious nature. Some complaints can look very simple on paper, but if you have a consumer who is adamant they are going to have their day in court or a firm that is adamant it is not going to take no for an answer, it can be more work than what might, on the face of it, look like quite a complex investment case.

Q24 Andrea Leadsom: What potential do you have to flex your charges? Is that something you are moving towards, as well for the more complex case? Is there an hourly rate that you can apply? I see that you now have a supplementary fee for PPI, but is that the only example that you intend to do that for?

Natalie Ceeney: This is one of those issues we have really grappled with over the whole of our history, because it is not as easy to say, "Well, it looks like this, so here is the fee." Often until we get the case and find out who the parties are, it is quite hard to know how much work is going to be involved. We are constantly trading off. Of course, investment cases take a lot more work than standard banking and credit cases, but as soon as we set differential case fees, we have boundary disputes. Our fear is that that will contribute to overall administration costs. At the moment, we spend a tiny, tiny portion of our budget on administration costs and we would like to keep it like that. The view we have taken-as I say, we consult the industry every year, and this is broadly where everyone comes out most years after considering this-is that a flat fee for each case, bearing in mind some cost more and some cost less, is the lowest cost to administer, and broadly it works itself out in the round. This year was the first year, as you say, we introduced a supplementary fee for PPI. It is the first year we have ever done anything different for a certain product. That was because, over the last 12 months, we had doubled the size of the Ombudsman Service, which creates training costs, recruitment costs, and new building costs. That supplementary fee really was just to cope with that PPI expansion. It was not a decision we took lightly, and we did go through quite a thoughtful process consulting on it. Our instinct is that we prefer not to do very differential fees if we can avoid it.

Q25 Andrea Leadsom: In the case of a mis-selling of a swap over many years to a business, the case fee would be the same as for a straightforward credit card issue.

Natalie Ceeney: At the moment, under our current arrangements, yes. As you will know, one of the issues on interest rate swaps is that our jurisdiction is quite limited. We can consider individual consumers and micro enterprises, so up to 10 employees and €2 million turnover, which means most interest rate swaps mis-selling cases are outside our jurisdiction. When they announced their regulatory scheme a few months ago the FSA asked us to explore with them whether we would be prepared to set up a wider jurisdiction for these cases. We have now considered it and said to the FSA that yes, we would, if it were interested in us doing so. We are discussing with the FSA what the fees would be for that scheme. The likelihood is we would have a higher fee for that scheme, if it went ahead.

Q26 Andrea Leadsom: So there is a move towards differential pricing, really.

Natalie Ceeney: In limited areas, yes.

Q27 Mr Ruffley: I am going to ask some questions that arise after a visit I had to a very reputable financial service provider in my constituency. My first point is that the legislation talks about what is, in the opinion of the ombudsman, fair and reasonable in all circumstances. That means there is a great deal of importance we should all attach to the financial qualifications of ombudsmen because they are making decisions over sometimes complex issues and sometimes giving rise to large compensation claims. What is the average minimum qualification for either an adjudicator in the first instance and, secondly, for an ombudsman? What qualification do they have to demonstrate before they can work in your organisation?

Tony Boorman: All these things are on our website-our qualification requirements are there. We require our adjudicators typically to be graduates and similarly for our ombudsmen. We do not require specific financial qualifications.

Q28 Mr Ruffley: In either case?

Tony Boorman: In either case.

Q29 Mr Ruffley: Do you have any plans to remedy that? Because in a case I saw-I will not go into it-it was quite clear from the evidence that certainly the adjudicator, and almost certainly the ombudsman, were not as financially numerate as they should have been. Could I ask the chief executive what plans you have to raise your game in recruitment?

Natalie Ceeney: I think I would challenge some of the assumptions about our business, and let me explain why. What we are is a judging service. We were set up to be an alternative to the courts. If you consider, say, a High Court judge who considers shipping cases, they would not always have a shipping qualification.

Q30 Mr Ruffley: But they are legally trained.

Natalie Ceeney: They are legally trained, and so are a lot of our staff.

Q31 Mr Ruffley: Which your adjudicators and ombudsmen by and large are not.

Natalie Ceeney: I think we were one of the UK’s biggest employers of legal graduates last year. We do have a lot of staff who are legally trained. What we recruit on are judging skills, and then we do train people in the financial areas concerned.

If I can say something about the training we give, which I hope will reassure you, every new adjudicator or case handler who joins goes through a very intensive induction process that lasts between one and three months before they are allowed to handle cases. They are then supervised and mentored on every individual case for around six months before they are allowed to handle cases on their own. We also have a professional structure where, like most professional institutions, we rely on our senior experts to provide mentoring and professional development. Our senior ombudsmen, many of whom are lawyers, provide an oversight and a professional leadership role.

Q32 Mr Ruffley: I get the drift and I am sure this is all very worthy, but are there any minimum financial qualifications or exams they have to pass?

Natalie Ceeney: No.

Q33 Mr Ruffley: No, there are not. Don’t you think it would be a good idea?

Natalie Ceeney: No.

Q34 Mr Ruffley: You do not think it is a good idea. Fine, I want to move on.

Because a lot of these are very subjective judgments by ombudsmen, it can be quite difficult for providers to work out in any given case which way the ombudsman is going to go in terms of a decision. What plans do you have to be more transparent? As you are aware, in court cases judgments are published in the All England Law Reports and elsewhere. How are you going to be more transparent in showing, particularly to providers, the logic of your decision making in certain types of case?

Natalie Ceeney: To guide our staff, we do already publish internally virtually everything that we have. On any topic you care to mention, there will be something on our website explaining past decisions and what our approach is. I absolutely understand industry concerns of needing to have some certainty about what we do. I believe they can get very, very high degrees of certainty about what we do. You will be aware that in the Financial Services Bill that is going through Parliament at the moment, there is a proposal to require us to publish every ombudsman decision. That is a provision we want. We would absolutely support that. What we do at the moment is publish lead decisions-decisions that illustrate key topics.

Q35 Mr Ruffley: That would be without redactions in every case, presumably.

Natalie Ceeney: The only things we would redact are the consumer names.

Q36 Mr Ruffley: Fine. My next question is about oral hearings: why don’t you do more of them when there is a dispute of fact? That is absolutely standard procedure in any other forum that demonstrates natural justice. Why don’t you do it more often in your cases?

Natalie Ceeney: Well, the Ombudsman Service was set up to be an alternative to the courts, not to be the courts. The model that Parliament set up was for us to be mostly evidence-based in terms of people’s submissions. We do not believe that hearings are often the best way to resolve cases because the process relies on who is the most articulate. We want to go on the evidence before us. We do have hearings, but we decide in each individual case whether it is appropriate to have hearings. There are some cases where both parties want hearings, in which case our advice is those are the sort of cases that are better handled by the courts, because that is the courts’ model, not our model.

Q37 Mr Ruffley: What proportion of complaints is attended by an oral hearing?

Natalie Ceeney: A very small proportion. We have typically under 20 oral hearings in a year.

Q38 Mr Ruffley: Twenty per cent.

Natalie Ceeney: Under 20 oral hearings in a year, so a very, very small proportion.

Q39 Mr Ruffley: Oh, really? What percentage is that approximately?

Natalie Ceeney: Well, out of 200,000 cases, it is tiny.

Chair: You are a Cambridge mathematician.

Natalie Ceeney: I am.

Q40 Mr Ruffley: My final question, Chair. I understand that you did not propose early-settlement discounts for firms that settle quickly. Why was that?

Natalie Ceeney: I am not sure that I understand what you mean by early-settlement discounts; apologies.

Q41 Mr Ruffley: Isn’t it the case that firms that decide to settle a case might get some discount in fees or any rebate?

Tony Boorman: I wonder whether you may be discussing our colleagues in the compensation scheme and one of their arrangements in relation to a particular set of cases. When cases come to us, firms have the opportunity of eight weeks to resolve their case with their customer to their satisfaction, and that is the important stage. Once the case comes to us, then it is a matter for us to resolve in accordance with the general approach that we take. This is not a deal-making environment; it is a deciding environment. I think the reference you were making, Mr Ruffley, is to one of our colleagues in the compensation scheme, not to us.

Natalie Ceeney: It is not an issue that has ever been raised with me.

Q42 Mark Garnier: Can I just start by picking up your response to Mr Ruffley’s question about the financial literacy of your staff? While I completely accept your point that a judge hearing a shipping case may not necessarily be an expert on shipping, all the barristers will be. Of course, you are the Financial Ombudsman Service. You would have thought it perfectly reasonable to expect that your staff are not only good adjudicators, but also good at financial services.

Natalie Ceeney: You are absolutely right, and I do expect that. I expect our insurance adjudicators to know a lot about insurance and I expect our banking adjudicators to know a lot about banking. That is quite different from having a qualification in how to sell a product, which is what most financial qualifications are.

Q43 Mark Garnier: Yes, but I do not think Mr Ruffley was talking about that.

Natalie Ceeney: No, but when an independent financial adviser or a firm says "financial qualifications", most qualifications are qualifications you get in order to be able to sell the product. What we require are good judging skills plus a strong knowledge of those products. If I may illustrate, we divide our organisation into divisions that specialise in different areas. Within the areas, there will be staff who have worked in the industry. There will be ombudsmen who have worked in that area for many, many years. We will have written a lot of case law, essentially, of what happens. We will run constant briefings for our staff about the latest topic. I absolutely expect our staff to be highly knowledgeable about the area they are working in, and we invest a lot in their development to do that. That is quite different from having a qualification to sell the product, which is what most financial qualifications are.

Q44 Mark Garnier: Well, possibly. I would not necessarily agree entirely with that because, of course, you could be members of things like the Chartered Institute for Securities and Investment. None of your staff have that type of qualification?

Natalie Ceeney: We do have many staff who have exactly those qualifications. A lot of our staff have worked in financial services. We do have investment staff who have worked in investment houses for many years. A lot of our senior ombudsmen in banking have worked in banks.

Q45 Mark Garnier: So you do have a significant body of knowledge and expertise in your organisation?

Natalie Ceeney: Absolutely.

Q46 Mark Garnier: Can I turn to interest-rate swaps? You said that there have been 40,000 sold and you have just seen 200 cases come before you. I think you also talked about the fact that there is a limit as to the number of cases that you can look at, in that you can only look at micro-enterprises under the new definition, which certainly means a firm with fewer than 10 members of staff and turnover of less than €2 million a year. Of those 40,000 interest rate swaps sold, how many do you think fall within your remit?

Natalie Ceeney: At the moment it is very hard to tell. The fact that, on FSA estimates, the number sold has gone over the last six months from 25,000 to 40,000 shows, I think, that people are still trying to work out the scale of this issue. In a way, we can go on what we know so far. From what we have heard, though, a lot of the firms we are talking about would be outside our limit, which is one of the reasons why we have been exploring with the FSA whether we extend our jurisdiction specifically for a swap scheme. As I mentioned, we have said to the FSA that if they want us to do that, we are up for consulting on doing so.

Q47 Mark Garnier: Do you think they are likely to do that?

Natalie Ceeney: I don’t know.

Q48 Mark Garnier: Do you have any clue?

Natalie Ceeney: Well, they have asked us to explore it, so I think they are keen to look at how there is an appeal mechanism to their own scheme. My understanding is that the FSA will make a decision in the next couple of weeks as to whether they want to progress that. If they do, they will go out to consultation with consumer groups-so the small business groups and the banks concerned-to get some feedback on that proposal.

Q49 Mark Garnier: Could I be clear about the financial redress that these people have? Your award is £150,000. I want to be clear whether that is compensation for inconvenience, or repayment of the capital that is lost. How does that work?

Tony Boorman: To go specifically to your question, in the provisional decisions that I made that we put on our website recently, the £150,000 limit is any financial award that we make. In so far as one might say, for example, that the customer should have been left with a floating interest rate, the net impact of that back to the point when the sale was made-the financial cost of that to the customer-is all calculated within the £150,000 limit. With the two cases I dealt with, one of them was in respect of a loan where the sum covered by the swap was around £2 million. I do not need a Cambridge mathematician to tell me that over the four years that the swap was in existence, that adds up to more than £150,000 worth of interest that the customer paid that they felt that they should not have paid if they had not been sold that product. The award that I provisionally made was at the limit of my powers to make an award with a recommendation that the bank thought seriously about the remaining sum.

Q50 Mark Garnier: Sorry, say that again. The bank was going to compensate the difference between what your award was and-

Tony Boorman: If we are faced with a situation where the ombudsman believes that the amount of compensation should be more than the limit of our award-£150,000 now-we may make a recommendation, but it is simply a recommendation, to the financial institution concerned, which they can accept or reject.

Q51 Mark Garnier: The reality of it is that you have a lot of businesses that have had to buy out the outstanding balance of these things, whatever the net present value of that product, which could in many cases be £250,000, £300,000 or £400,000. Presumably, you can also get what amounts to a micro-business-a small developer-that in one year could have a turnover of more than €2 million because that was the one year they were doing their property development, so these rules are absurd.

Tony Boorman: They certainly cut across the sales environment of this product in a way that makes it difficult for customers and difficult for us-and, to be fair, probably for the businesses concerned-to understand exactly how the boundaries of our jurisdiction work. Because of the limits on our awards, I think it is difficult for the customers to make a judgment about whether they are better pursuing their cases through the courts or through the Ombudsman Service. Without wishing to do the FSA’s job for it, I assume that that is why the FSA has thought about extending our jurisdiction very specifically in the context of this area of our activity to cover exactly these sorts of problems. But we are not free to make decisions about our jurisdiction; those decisions are made for us by the FSA.

Q52 Mark Garnier: One last question: as you know, there are a great many businesses that are suffering quite badly as a result of this, and obviously the longer this goes on, the more difficult it is and the more of an impact it has on their business. First, how long has it taken you to process these to outcome? Secondly, when you are processing them, are you taking into account the imperative that there is with these businesses to stay in business?

Tony Boorman: Yes, I am very conscious that there is an urgency in many of the financial situations that these businesses are in. That is a point that certainly they make and, indeed, the banks themselves make. We are keen to progress as fast as we can. Clearly, because of the sums involved and because of the potential wider significance of the cases, we are perhaps, going back to the Chairman’s first question, seeing an environment where both sides are-

Q53 Chair: Tooling up?

Natalie Ceeney: Yes.

Tony Boorman: I thank the Chairman for his assistance. We do not have powers of absolute direction to force people through a time-driven process, but we are doing everything we can to speed these things up. In relation to the individual cases, we are also keen to ensure that this is not simply a legal process that leaves the parties damaged and wounded at the end, but a process that hopefully brings people together again at the end of this process so that there can, if at all possible, be a relationship between that small business and that bank going forward that works for both of them, once this issue of the interest-rate swap has been resolved.

Q54 John Thurso: Can I ask you about your corporate governance, your board and so forth? To confirm some facts, it is correct that you have nine board members?

Natalie Ceeney: That’s right.

Q55 John Thurso: They are all effectively non-executive.

Natalie Ceeney: Yes. The way we were set up was that all our board should be non-executive. That is around my role versus the board.

Q56 John Thurso: Are you on the board?

Natalie Ceeney: No. Myself and Tony attend board meetings but we are not on the board.

Q57 John Thurso: You have an executive team of seven.

Natalie Ceeney: I do.

Q58 John Thurso: How does that work, given that you have effectively an executive board of seven and a non-executive board of nine, which are either operating against each other or, if you put the two together, creates something of a pretty unworkable size?

Natalie Ceeney: It works pretty well. Since we were created, the non-executive board has always asked the Chief Ombudsman, Deputy Chief Ombudsman and one or two other key members of staff, particularly our finance director and company secretary, to attend board meetings. In practice, those board meetings involve us in all key discussions. Obviously, it is the non-executive board that finally makes the decisions. There is a separation of powers, however. The board essentially has the responsibility for governance of the stewardship of the scheme. The powers to make individual decisions are delegated to Chief Ombudsman and my team.

Q59 John Thurso: Well, let me ask you this, then. If you take most organisations-whether they are a plc, a charity or whatever-you would normally have a mix of executive and non-executive, and there are some specific roles of governance-audit committee, nomination committee and all these sorts of things-which would fall to the non-execs, but within the board.

Natalie Ceeney: Absolutely.

Q60 John Thurso: Clearly, you cannot do that, so how do you effect the basics of good corporate governance in your structure?

Natalie Ceeney: We do actually do all of that. Our Chairman has recently announced that he is slimming down the size of the non-executive board to himself plus five over the next 12 months.

Q61 John Thurso: Right, down to six?

Natalie Ceeney: Yes. We have a senior independent director, an audit committee and a remuneration committee that function in very much the way you would see on any corporate governance board. Three members of the executive team routinely attend board meetings. In practice, we look much more like a classic corporate governance model in the way we behave.

Q62 John Thurso: The audit committee, for example, would be made up of the non-exec board members who would then behave like a classic audit committee and delve into how you operate?

Natalie Ceeney: I have worked in a number of organisations. This works as for any classic governance model. We have an audit committee chaired, obviously, by one of our non-executives. Formally, it is non-executive. Myself and the finance director attend every audit committee. We have our audit partners-external and internal. It behaves like a well-functioning audit committee.

Q63 John Thurso: Does something like the board effectiveness review and these sorts of things take place?

Natalie Ceeney: We do a board effectiveness review every year, and every third year we ask someone independent to come in and do that review for us. Last year we used an independent party-I will have to write to you and tell you exactly who we used-to do that review. This year our company secretary ran that review asking people anonymously each to give feedback on how the various committees work against classic corporate governance standards, and then we have an away day to discuss it.

Q64 John Thurso: Forgive me, but it begs the question that if you behave entirely like a classic organisation and attempt to model yourself on that-if you attempt to do all the corporate governance of that-why don’t you just do it and become one, rather than this curious animal that is not there?

Natalie Ceeney: The roots in the current arrangements are the decision-making powers of the ombudsman as opposed to the governance. The key concern when the organisation was set up was that the Chief Ombudsman and all of the ombudsmen should not be in any way allowed to become political appointees. The FSA appoints our board. The board appoints me and I appoint the ombudsmen, with board approval. If I was formally on the board, the FSA would have a veto or a say over who the Chief Ombudsman was. When we were set up, Parliament decided it was important to preserve the independence of the Chief Ombudsman. In practice, as I said, we function very much like a classic organisation with corporate governance.

Q65 John Thurso: Can you give me an example of a challenge that comes to you from the board and how you deal with it, because I am sure that you do not all love each other every day, as it were.

Natalie Ceeney: If I perhaps think back to the last board meeting we had-by the way, we do publish all our board minutes, so we try to be very open about our debates.

Q66 John Thurso: Lots of people publish board minutes, but they are usually sanitized before they get to see the light of day.

Natalie Ceeney: Thinking back to the last couple of board meetings, one of the big debates we are having in the organisation at the moment is how we respond to the scale of the PPI challenge. We have doubled the size of the organisation in the past 12 months. The last board meeting we had was to decide that we now need to start talking with people again about whether we expand again and to what scale. Over the last 12 months, the board has been extremely challenging in making sure our plans for expansion were robust, that our costings were robust and that we had effectively talked with all of our key stakeholders about their concerns. The sort of debates we are now having with the board, for example, are around preparing for the public consultation we do in January around our fee structure. At our last board meeting, which was last week, as you can imagine I had a lot of challenge around how ruthlessly were we being value-for-money and efficiency-focused in our cost structure, how were we making sure we have the right cost balance between who bore the cost of any expansion and how robust our plans were for making sure we could anticipate and manage the workload coming. It is pretty robust challenge.

Q67 John Thurso: Turning to another point, during the Joint Committee on the Draft Financial Services Bill, you mentioned that the regulator was slow to take action on systemic issues. Can you tell us just a little bit more of what exactly you meant by that?

Natalie Ceeney: This is probably an issue that PPI illustrates extremely well. If I can do a brief potted history of what happened there: in 2005, as we have mentioned, there was a super-complaint from Citizens Advice. Throughout the following five years, the regulator did a lot of investigations but, in the meantime, PPI continued to be sold and the number of complaints grew. In the recent document published by the shadow FCA, there was a recognition that they should have intervened closer to 2005 and 2006, and not when they finally did in 2010. We started going on record very publicly after 2005 to say that this was a systemic issue that needed regulatory action-in fact it was put formally in writing when our Chairman wrote to their Chairman in 2008-and yet nothing really happened until 2010.

Q68 John Thurso: Is there a power that you need that is not the super-complaint power? Do you need some powers that are missing from your armoury at the moment?

Natalie Ceeney: I do not think that the ombudsman has been the problem. I do not think it is about the powers we have-

Q69 John Thurso: No, but if you are the solution rather than the problem, that is my point. You might be the solution, but if you do not have the wherewithal to do anything about it-do you see what I mean?

Natalie Ceeney: I think the solution is a regulator that takes earlier action, to be honest. Positively, I am seeing the rhetoric coming out of the FCA in line with what I would look for. The Financial Services Bill is saying all the right things about early intervention from the regulator. The speeches of Martin Wheatley, the new shadow chief exec, say absolutely what I would want the regulator to say, so I think it is less about our powers, and more about the culture of the regulator.

Q70 John Thurso: Clearly you are saying that this is a problem for the regulator rather than you needing the ability to trigger something other than by the super-complaint?

Natalie Ceeney: Yes.

Q71 Chair: If PPI has doubled the size of the Ombudsman Service, presumably when it is over, if you do not have another mega case, you can halve the size of the Ombudsman Service?

Natalie Ceeney: Yes. I am probably the only chief exec you are ever going to meet who would say that it would be really nice if my organisation was smaller. Certainly, the sort of scale of expansion we have gone through is not something we wished for. It is not something-

Q72 Chair: Do you have plans in place to try to prevent a ratchet effect?

Natalie Ceeney: We employ a number of our staff on fixed-term contracts. We use a mixed contractor and permanent staff model precisely so that we can cope with volatility down as well as volatility up. In fact, if you look back at our history, we had something similar with mortgage endowments when we grew and then mortgage endowments went away and we did downsize. Unfortunately, PPI came soon afterwards. We are making sure, for example, that our property leases are fixed term so that we can exit. As we look at whether we need to expand further, we are going to look very carefully at our employment model to make sure that we can reduce as well as grow.

Q73 Chair: Consistent with your long-term objectives and the need to maintain value for money, it might be helpful if we have a note setting out how you intend to go about that much more awkward role, as with any organisation, of downsizing than upsizing.

Natalie Ceeney: Yes.

Q74 Chair: You have in place already a system, which many would argue is fair, although some not, that even when the Financial Ombudsman Service concludes that the initial decision was the correct one and they have communicated clearly with the consumer at all points prior to involvement of the Ombudsman Service, there is a case fee. Do you think that there is an argument for introducing a consumer fee as a counterpart?

Natalie Ceeney: My answer is no and I will say why. One of the reasons the Ombudsman Service was set up-initially in voluntary form and then in the form that we were-was to help to give confidence in financial services to consumers. It is quite powerful for industry to be able to say to their customers, "If we do not get it right, there is a free place you can go to get it put right." That was how we were set up on a voluntary basis. The industry representatives I talk to would, in the vast majority, say that that philosophy is still right. Our view is if you did introduce even a very small fee, the people it would deter are the last people you want to deter from using our service. Something I am quite proud of is that 66% of people who used us last year came from the C, D, E socio-economic demographics. They are the sort of people who would find even a very small fee deterring. It is the frivolous and vexatious complaints that everyone gets upset about, but frankly they will be fought, either with us, in court or in the High Court, regardless of a fee. It would deter the wrong people.

Q75 Chair: You are making a number of persuasive points, but what about cases that any reasonable person would judge had been vexatious or fraudulent.

Natalie Ceeney: Positively, we do not see very many. If I take PPI to one side, typically in our workload we-

Q76 Chair: Whatever number you may have.

Natalie Ceeney: I will come back to PPI. We have the powers to dismiss the frivolous and vexatious case-and we do. As you would imagine, the sort of customers who are frivolous and vexatious often end up in my office-I end up knowing them quite well-and we do routinely refuse to deal with people who are frivolous and vexatious. It is typically less than 2% of the work we do. Even for those customers, the firms are able to say, "You know what, it is the end of the road here. You can go to the ombudsman," and they have the power to stop dealing with them. If those sort of customers could not come to us, they would go to court, and that would cost firms more.

Chair: I have to participate in a Banking Commission meeting in a moment. I shall call Stewart Hosie and then hand over the Chair to David Ruffley for the remainder of the meeting.

In the absence of the Chair, Mr Ruffley was called to the Chair.

Q77 Stewart Hosie: I want to ask some more questions about the regulator, but just to go back a second, you said that you were able to scale up staff and potentially scale down a mixed workforce. With temporary staff, how do you manage to do the intensive induction you described earlier and the six months’ mentoring? How do you ensure the quality of staff who are perhaps not there for a permanent period?

Natalie Ceeney: Our model is to use our ombudsmen essentially as a quality control, and our ombudsmen work for us. We do routinely use contractors to deal with particular peaks and troughs of work. To give an example, our mortgage case volume is up a third from this time last year, we think predominantly because of financial hardship issues. Rather than staff up permanently, we staffed up using temporary staff. Our mortgage ombudsmen are our staff. They provide the quality control. They do the checking. The managers of those contractors are our staff, and they still provide a role doing a lot of supervision. When we take contractors, we do take people who already have expertise in the subject. They are more expensive, but we can recruit and lose them quickly and they come with more expertise than if we took lower paid graduates, for example.

Q78 Stewart Hosie: On the Joint Committee of the Draft Financial Services Bill, you appeared to say that sales practices were more important than product design, but the FCA certainly appeared to be more focused on the latter. Do you think the FCA are wrong about that?

Natalie Ceeney: I think you will find we entirely agree with the FCA on this. I have been on the same speaker platforms as Martin Wheatley and we end up agreeing with each other. The point we both keep making is that, of course, the product matters, but signing off a product and saying, "Therefore, nothing can go wrong," is naïve, because even the best product can be badly sold. In fact, PPI is a really good example of that. The concept of PPI is not inherently wrong. It was sold to people who did not need it and did not want it, but the concept is not inherently wrong. I think you will find Martin Wheatley and I are completely at one on this.

Q79 Stewart Hosie: I am delighted to hear that because you did say that tackling the sales end and the sales culture is in many cases more appropriate than necessarily looking at products, because, as you have just said, well-designed products can be sold to the wrong people. But the FCA were very clear when they said the new style of supervision will mean they will intervene early in a product’s lifespan and seek to address root causes of the problems for consumers. They will do it by scrutinising product governance, and how firms design, operate and sell the products. They did seem to be quite focused on the product and it is not exactly the same.

Natalie Ceeney: I think it is "and". I do not disagree with what they have just said. I think you would also find Martin would not disagree with what I have said. Recently, for example, I know that the FCA have taken action against certain products such as sale of wine and land sales, which were being sold to too many unsophisticated investors. That seems to us to be eminently sensible.

Q80 Stewart Hosie: How would you describe, then, what your organisation thinks is the right balance between offering simplified products and improving the sales process?

Natalie Ceeney: Both matter. Something we say routinely throughout all our casework that the simpler we can make the product offer to customers, the better. There is huge information asymmetry in financial services. Key material terms are often buried on page 48 in six-point font, so it is no wonder that consumers do not understand them. It is not like Sainsbury’s where a consumer can go in and feel the mangos and understand the product. We need to keep this simple. The concept behind simplified products where material terms are spelt out clearly is something we absolutely welcome. I think it is a really good step forward. The point in a way is that even the best products can be still sold badly if the sales process is not designed well. It cannot be, "Don’t worry, we have a lovely product"-stop. The sales process also needs to be good, but having a clearly defined product is a great step forward.

Q81 Stewart Hosie: Would you like to be consulted by the FCA on things like product design or sales technique, given your experience of consumers?

Natalie Ceeney: I think we are cautious to make sure that we can stay independent in resolving disputes. What we want to be is an insight function. We see a lot of what goes wrong. We want to be used for our insight. The FCA is increasingly using us, but that is not about consulting us; that is about using our insight.

Q82 Stewart Hosie: Of course, I understand the need to keep distance and be separate, and I understand what you are saying about insight. If you have this insight, surely you would like to be consulted so that insight could be brought to the fore on product design or sales process development.

Natalie Ceeney: We might be dancing on the head of a pin about words.

Stewart Hosie: I am trying not to.

Natalie Ceeney: I know. In practice, do we share what we see to help the FCA make better decisions? Increasingly, yes, and that is good.

Q83 Stewart Hosie: Okay. Just to move very quickly on to a couple of final questions about the FCA, how do you see your regulatory relationship changing with the transition to the FCA?

Natalie Ceeney: I think the answer to that hinges on some of the answers I have given earlier, in that what I am hoping is that some of the things that have gone wrong in the past will not arise. The biggest issue we have seen in the past is that when we see something go wrong, it is not used as insight to nip things in the bud. If there is one thing I am looking for from the new regime, it is that. As I said, positively, I am seeing the right language and the right behaviour. That is the biggest thing I think that will change our relationship, and it could be quite fundamental in terms of the way the Ombudsman Service works. Over our 12-year history, more than half our work has come from three big mis-selling scandals. All of them, if they had been nipped in the bud earlier, would have dramatically changed the sort of work we did and consumers’ experiences. If we can stop those big detriment issues from building through earlier intervention, it will have quite a profound impact on the Ombudsman Service and one that we would really welcome.

Q84 Stewart Hosie: That is very helpful. Just one final question: in response to John Thurso’s last question-and you have just said it there in terms of the language and behaviour from the FCA, which you seem to like-you also spoke about the rhetoric from the FCA being appropriate. Irrespective of what they are doing, how they behave and the relationship with you, is there anything that you would like to see in the Financial Services Bill that is not there that would make your job and their job easier, and consumers safer? Please be honest. If there is something you think ought to be there, tell us what it is.

Natalie Ceeney: To be honest, from how the Ombudsman Service operates, I feel quite comfortable with the Financial Services Bill. I think the things that directly relate to us-about publishing ombudsmen decisions and the service provision-I would really welcome. In terms of what I had been hoping for from a regulatory function, I think it is all in there. To be honest, I do not have anything I would add to the wish list.

Q85 Jesse Norman: Ms Ceeney, I see in your letter to the Committee that you say that around 1% of complaints related to independent financial advisers. Is that disproportionate to the number there are? Should one expect that number to be higher or lower?

Natalie Ceeney: I am quite pleased that it is that low. It has been declining in real terms over a number of years, but I do not think it is just a volume issue. In a way, to give you an indication of what we see, we really judge financial services firms in two ways: one is sheer volume, which is often correlated with market size; but the other is uphold rate, or how many complaints they win or lose. Independent financial advisers win more complaints than they lose. In contrast, last year, firms lost more complaints overall than they won. I think that is quite a good measure of some of the investigative work that independent financial advisers do on the complaints they receive. By and large, we find they do a pretty good job on complaint handling.

Q86 Jesse Norman: That is interesting. To summarise what you are saying, there is a smaller than pro rata number of cases and, on the cases that there are, they do better than the large financial organisations?

Natalie Ceeney: Yes.

Q87 Jesse Norman: Are they doing a better job?

Natalie Ceeney: On average, yes.

Q88 Jesse Norman: On average of representing their customers?

Natalie Ceeney: Like everything, there is good and bad, but on average, yes.

Q89 Jesse Norman: No, I understand. It is interesting. Okay, thank you for that. Why do you think that IFAs are doing a better job?

Natalie Ceeney: If I can give a big picture, and then I will answer. The uphold rate issue-the win/lose rate-varies so significantly by different types of firms. If I give some other examples, the mutual sector win 80% of what comes to us. They top the league. Independent financial advisers win more than they lose. Equally, some of the big banks lose far more than they win. It really does vary by institution.

Q90 Jesse Norman: Do you make those numbers public?

Natalie Ceeney: They are public. Every six months we publish the overall win/lose rates by individual financial institution.

Q91 Jesse Norman: That is interesting, thank you. Yes, keep going, sorry.

Natalie Ceeney: What we tend to find that influences our uphold rate are two things. Firstly, obviously, it is the underlying product sale or underlying issue but, secondly, how well they have investigated the complaint. By and large, for smaller firms-and I would include independent financial advisers and also small mutuals-because it is a very personal business and a personal customer, they really want to do a thorough job. It is unusual for a smaller business that we do not get a complaint where it has really been taken personally-that investigation has been done quite thoroughly. If I contrast that with some of the larger businesses, we do too often get a very standard letter that might have been issued to many customers that could have just come out of a machine that looks like "press a button and out comes a letter". The contrast I would give, which is really back to the Chairman’s first question, and this is because it is so personal, is that those smaller firms will often take it so seriously that they will have lawyers to the ready and, to quote the Chairman’s language, they will have tooled up, which we do try to encourage them not to do, because genuinely they do not need it when they work with us.

Q92 Jesse Norman: That is very interesting. So they know their customers better, they do a more thorough job, and they do not use what you might call standard forms or standard methods of response?

Natalie Ceeney: By and large, yes.

Q93 Jesse Norman: Thank you. Could you just remind the Committee, looking at the bottom end of the scale, who your worst offenders are among the big banks?

Natalie Ceeney: Some of the worst offenders, if I really go to the worst offenders, are not banks. We have one payday lender, for example, which we found against 98% of the time. This is all public data so I can tell you names. That is Micro Credit Ltd. If I look at some of the banks, and I will give you some contrasts, Lloyds TSB-

Q94 Jesse Norman: Stop for a second. On that payday lender, you found against it 98% of the time?

Natalie Ceeney: Yes.

Q95 Jesse Norman: One in 50 people with whom that payday lender deals has been properly dealt with according to the cases that have been brought to you, on average.

Natalie Ceeney: All the data show is the cases that come to us, but yes. If I give some other end of the scale-

Q96 Jesse Norman: What about the bigger payday lenders? Where would a Wonga come, for example?

Natalie Ceeney: We actually do not get a large number of complaints about Wonga and their uphold rate is not as extreme as that.

Q97 Jesse Norman: Okay, so let us go back to the banks.

Natalie Ceeney: If I give some examples, with Lloyds TSB, we found against it 75% of the time last year. Let me contrast that with Skipton Building Society: we only found against that 7% of the time.

Q98 Jesse Norman: Seven per cent. So Skipton 7%; Lloyds TSB 75%?

Natalie Ceeney: Yes.

Q99 Jesse Norman: In three quarters of the cases that get referred to you from Lloyds TSB, the bank has done wrong. Where do the other big banks come?

Natalie Ceeney: If I give some of the uphold rates of the other big banks: Barclays we found against 52% of the time last year; HSBC was 53% of the time; MBNA was 83% of the time; and RBS was 54% of the time.

Q100 Jesse Norman: Lloyds TSB is a real outlier at 75%-something like 25% worse.

Natalie Ceeney: Some of this depends on the product mix.

Q101 Jesse Norman: Is it heavy PPI?

Natalie Ceeney: Yes. On PPI, in general, most banks have been losing a high proportion of cases. It does vary by product area. I could give some contrast by just looking at standard banking: Lloyds Banking Group only lost a quarter of such cases, compared with Barclays, which lost 41%.

Jesse Norman: That is interesting.

Natalie Ceeney: It does vary by product area.

Q102 Jesse Norman: If I may, I just want to continue this line for a second longer and then wind up. With the banks, what view are you are forming of the way in which they are responding over time? Are they getting better at dealing with complaints? You might have to put brackets around PPI. Are they becoming more formula driven? Do they know their customers as well now as they perhaps used to five or 10 years ago?

Natalie Ceeney: Tony has actually been in the organisation longer than me, so I do not know if you want to give a longer perspective.

Tony Boorman: That is a really difficult question in many ways. Slightly surprisingly, given the data that Natalie has just quoted, I would actually say that probably the banks have been getting better recently. Certainly, many of them put a lot of effort into dealing with complaints slightly more thoughtfully, after they were widely criticised by the FSA for their complaint-handling standards. As the data suggest and our judgment is, they are still not good enough. This is certainly not "Captain Mainwaring" banking going on here.

Q103 Jesse Norman: Sorry, do you mean it is not incompetent, or it is not close to the customer?

Tony Boorman: It is certainly not close to the customer. A lot of the customer issues that we see are simply driven by that fact. This is not banking close to the customer. Virtually half the letters we see in our banking caseload will inevitably say, "I have been a customer of X bank for"-like most of us-"30 years and I thought I could rely on them, but this has happened." That very strong sense from many customers of that longstanding relationship that they thought was built on trust is simply not something that they see, in the cases that we deal with.

Q104 Jesse Norman: The banks are not reciprocating their customers’ feelings of trust?

Tony Boorman: That is certainly the evidence of many of the cases that we see, yes.

Q105 Jesse Norman: Okay, that is interesting. Thank you for that. Given the contrast that you have drawn, why do you think the previous Government and now the FSA-soon to be the FCA-have been so insistent on the retail distribution review? After all, IFAs do much better than banks, and the effect of the RDR will be to enfranchise and privilege the banks over many of the IFAs.

Natalie Ceeney: One of the dilemmas of being Chief Ombudsman is I often get accused by industry of trying to be a regulator, so I am very cautious of ever wanting to speak on a regulatory issue because I am adamant I do not want to be a regulator. I think that really has to be a matter for the FSA rather than us.

Q106 Jesse Norman: Let me put the question a different way. Do you regard it as surprising that there should be a piece of legislation whose effect is to undermine a segment that is doing very well from your point of view versus a segment that is still in recovery?

Tony Boorman: Let me answer it from a different way and see whether this helps. I think commission bias is something that we see right the way across the financial services sector. I think it is quite right to look again at the rules of this marketplace to try to eliminate commission bias in whatever part of the world it arises. We see that as part of the large background to PPI, and we see that often in complaints around financial advisers and others. Tackling commission bias is, I think, a sensible regulatory step, to take that nervous step that Natalie warns me against of stepping into the regulatory arena.

Q107 Jesse Norman: No, you have taken the nervous step of endorsing Government policy. What I wanted to focus on is that it does seem very curious, because you acknowledge that commission bias exists across all these segments, yet IFAs are, by your own testimony, performing unusually well on volume of complaints, quality of upholds, the level of knowledge they have of their customer, and the thoroughness of the job they do. We know that the RDR is going to hurt the commission-only business, which is a small proportion of your complaints. It will drive it out of business.

Natalie Ceeney: I think that has to be a matter for the FSA, rather than us.

Q108 Mr Love: Can I first of all apologise to you for arriving late for some of your evidence? I wanted to come back to the issue of payday lenders and, in particular, this issue that has been flagged up about multiple loans. Have you noticed in your case load an increase in this particular form of activity?

Natalie Ceeney: We have seen quite a significant increase in complaints about payday lending, admittedly from a very small base, and I think one of the challenges is often that the sort of consumer base who have payday loans are often not those who find it easiest to complain or use formal channels. To give you some data, we have seen in the first half of this year an 80% rise in the number of complaints about payday lending.

Q109 Mr Love: The OFT is carrying out a study-I will come on to your interaction with that-but there is a lot of concern that many of these people who do not come through normal channels are in some desperation over gaming loans. There are some concerns that payday lenders are not responsible lenders. They do not investigate whether the person can actually afford to repay these loans. Is that coming through in some of your cases?

Tony Boorman: Yes. I think the whole question of loan affordability is a point well understood. Obviously, it is a very large part of the workload of our colleagues in the advice agencies sector. I think in many cases it is true to say that the customers who get into difficulties of the sort that you are describing, Mr Love, are customers who end up with multiple debt issues, and it is often through working with advice sector colleagues that we can provide most assistance. That is what we have put a lot of effort recently into doing, working with Citizens Advice and other agencies to support their work on customers with multiple debt. Certainly, we see those cases ourselves. That is something that we tackle within the limits of our role, dealing with the bilateral relationship between the lender and the customer. We ask lenders to consider the customers’ financial circumstances and to treat them sympathetically and constructively. Obviously, there is a responsibility on customers to think about the lending that they are involved in as well, but there are, as your question suggests, some responsibilities for responsible lending by these firms. It is a difficult area-quite a small area. I suspect it will be a growing area of our caseload over the coming year.

Q110 Mr Love: Let me refer you back to what you said in relation to PPI emerging in 2005, with little being done and it growing into a major problem. In relation to multiple loans from payday lenders, is the OFT taking too long to carry out their study? What influence on and interaction with the OFT do you have to try to highlight some of the problems that are emerging?

Tony Boorman: In the context of consumer credit generally and particularly the issues that you are raising, we have a very active dialogue with the OFT as the sectoral regulator. That mimics in many ways exactly the same points that we would make about our relationship with the FSA. It is a full and open one. We feed back what we see. Obviously, the powers of the OFT have been slightly different from those of the FSA. To some degree, I have to say historically that it has been a more active and speedy regulator in the past than perhaps the FSA has been on some of these issues. It has certainly tackled very successfully individual company problems. I think its powers to deal with more systemic issues, given that most of the regulatory regime is set out in statute, are inherently more testing in the case of the OFT, but I know that it is certainly looking at all these issues very seriously and relying in part at least on the evidence that we provide.

Q111 Mr Love: One final question: you mentioned Micro Credit and the figure of 98%. Do you refer any of the experience that you have to the OFT with a reference to look at whether their consumer credit licence should be withdrawn?

Tony Boorman: Yes.

Chair: Ms Ceeney, Mr Boorman, thank you for your evidence today and some frank and direct answers. That concludes today’s session.

Prepared 21st December 2012