Joint Committee on Financial Services and Markets First Report


282. Protection of consumers of financial services is one of the statutory objectives set for the FSA in the Bill. No regulatory scheme can guarantee that regulated firms will always comply with the rules or generally accepted standards of conduct. The Government therefore intends to rationalise the existing arrangements through the creation of a single Financial Services Ombudsman Scheme, membership of which will be compulsory for firms which are authorised by the FSA. The Government believes it will "reduce the scope for confusion about the roles and responsibilities of different schemes..[and] also ensure improved access for consumers by providing single points of entry."[373] Earlier this year Mr Andreas Whittam Smith was appointed Chairman of the Panel which will decide on the detail of the Ombudsman Scheme.

283. The single Financial Services Ombudsman Scheme provided for in the Bill will replace eight existing dispute resolution schemes:

Banking Ombudsman

Building Societies Ombudsman

FSA complaints service

Insurance Ombudsman

Investment Ombudsman

Personal Investment Arbitration Service

PIA Ombudsman

SFA Complaints and Arbitration Service

284. "These schemes are different in a number of material ways. Some are compulsory, others voluntary. Some are set up under statute, others are based in contract. Some have been set up by the industry, others by regulators. And some use ombudsmen and others arbitrators."[374] However, although membership of some of the existing schemes is voluntary, the Government considers that regulated firms should not be able to opt out of joining a dispute resolution scheme. It intends therefore that the new scheme should be compulsory for regulated firms. If consumers fail to obtain satisfaction from a firm's internal complaints handling arrangements they will be able to refer the case to the Ombudsman Scheme. Firms authorised by the FSA will be required to cooperate with the Scheme's investigation of a case. If the Scheme makes a decision in favour of the consumer the firm will be bound by the terms of the decision. Consumers, however, will not have to accept the verdict of the Ombudsman.

285. The Government has also proposed that the FSA should be able to extend the compulsory coverage of the scheme to financial services business of regulated firms which is not itself a regulated activity.

286. Mr Whittam Smith paid tribute to the success of the schemes which would be merged in the single Financial Services Ombudsman Scheme: the Scheme's task would be to build on that success. In what ways could it be better? In his view the Scheme had several advantages. First, it could provide a single point of entry. Second, "We will be a single scheme, we will have the ability to make ourselves better known, we will have a single address, a single telephone number...Thirdly, as a single scheme, we can remove any gaps and overlaps which exist if you look at the eight schemes as they are. We can make a more coherent pattern.... Fourthly there will be some economies of scale.....Finally, although the existing schemes certainly are independent and have run independently...nonetheless the consumer may believe they are not...I think that charge will be less capable of being levelled against us."[375]

287. We received written and oral evidence from five of the current Ombudsmen. Although they were pleased that the Progress Report had dealt with some of their concerns they remained concerned about gaps in coverage, particularly in relation to unauthorised mortgage lending firms and consumer credit. They were also uneasy about the dependence on a cost benefit analysis being a prerequisite for the FSA to exercise its discretion in deciding the scope of the compulsory jurisdiction.[376]


288. Mr David Thomas, the Banking Ombudsman, emphasised the Ombudsmen's concern that any gaps should be identified and the opportunity taken to plug them or at least provide the legislative framework by which they might be plugged in the future. He referred to two particular areas of concern. The first was lending money which is "something which is often done by organisations which hold a deposit-taking licence, typically banks or building societies, but it is often done by other organisations...It is probably difficult to find circumstances where parties are more unequal than where one is talking about the relationship between a lender and a borrower and therefore, if there is an area that cries out for comprehensive coverage, it is where money is being lent."[377] The other area is credit cards and personal loans. Many organisations providing such loans will not require authorisation by the FSA and will therefore fall outside the Ombudsman Scheme for compulsory jurisdiction as proposed.[378]

Cost benefit analysis

289. The new approach to the scope of the scheme will leave the FSA a wide discretion to decide what, within the spectrum of regulated business, is to fall within a compulsory jurisdiction or indeed whether to make such a direction at all. The discretion is to be exercised after carrying out a cost benefit analysis. The Ombudsmen in their written evidence argued that "While cost benefit analysis may be an appropriate test to apply to the extent of regulation, the value of a complaint handling and dispute resolution scheme cannot be measured by a crude comparison of costs and savings. A case where a small amount is at stake may involve an important point of principle." They questioned whether the establishment of the scheme should be dependent on an assessment by the FSA of its costs and benefits and argued that there are public policy judgements to be made which should more appropriately be made by Ministers or Parliament.[379] The FSA said that it did not take a narrow view on the application of the cost benefit test. "We think that is possible not to look at each transaction but to look at the overall benefits of bringing a particular sector of business within the scheme as against the overall costs of doing so."[380] We welcome the assurance that the FSA does not intend to apply cost benefit analysis in a narrow (purely accounting) way but, as with cost benefit analysis elsewhere, will take account of the objectives of the Ombudsman Scheme.


290. Mr Whittam Smith emphasised the importance of accountability. "It is important, first of all, because of course we have a lot of power and there have to be checks and balances. Secondly, because in forming the ethos of this new organisation, it is very important that everyone should understand where accountability lies." He saw four elements to accountability: "we are first of all accountable to consumers, we are secondly accountable through Ministers to Parliament, but thirdly we are accountable to the industry....Fourthly, of course, we are accountable to the FSA. We are very accountable to the FSA because they both have to approve our budget and make every appointment to the board."[381] As a means of helping to provide accountability, Mr Whittam Smith argued that it would be important for the FSA to compel providers of financial services to make the existence of the Ombudsman Scheme plain at the point of the transaction. In addition, the Scheme must publish an annual report and a series of bulletins designed not only to inform the public but also help the industry improve its procedures.[382]

291. No work has been done yet on the budget of the Ombudsman Scheme though Mr Whittam Smith noted that the combined spending of the current schemes is about £15 million.[383] We believe that like the Consumer and Practitioner Panels it is essential that the Ombudsman Scheme should have sufficient funds to allow it properly to carry out its functions. We recommend that the Ombudsman Scheme should be required to report annually to Parliament on the adequacy of its budget. We hope that the Parliamentary Committee which takes evidence on the FSA's report will, as part of its examination, consider whether the Financial Services Ombudsman Scheme is adequately funded.

Article 6 of the European Convention on Human Rights

292. The Ombudsmen were concerned that the Scheme, given the due process requirements of ECHR, might resemble a court or Tribunal rather than an Ombudsman scheme. They have attempted to consider and plan how reformed procedures might comply with these requirements while retaining the informality and flexibility that are the hallmarks of an Ombudsman approach.[384]

293. The Ombudsmen's perception was that Article 6 will apply to the new scheme as it is currently envisaged because it is conceived as a compulsory scheme that will bind.[385] Mr Tony Holland, the PIA Ombudsman, felt that "it is going to be very difficult to prevent what is up to now an informal and flexible operation becoming legalistic and effectively becoming a financial services court."[386] Mr Holland went on to describe some of the ways in which the Ombudsmen felt this problem could be dealt with. First, they suggested that it would be better to introduce a hearing as far as possible down the process in order to avoid hearings being used in as many cases as the complainants, or indeed the insurers of IFAs, might wish. Second, after the Ombudsman makes his decision, if somebody still wants a hearing "you have some kind of review operation at the end, ring-fenced, which is done by a different Ombudsman, which would mean that any concerns the courts may have would be directed towards the review section rather than the process as a whole."[387] He emphasised the importance of "proportionality"— having regard to what is at stake and the effort involved in having the hearing—and the "margin of appreciation"—the question of the State saying "we actually favour this kind of dispute resolution."[388]

294. The Council on Tribunals considered whether it might have a role in relation to the procedures under the Ombudsman Scheme. It suggested that it was possible that Article 6 would require oral hearings to take place in some circumstances and that there might be a role for the Council at least in connection with consultation on the procedural rules.[389]

295. We agree that the present Ombudsmen schemes bring a welcome degree of flexibility and informality to what may be a relatively daunting process. It is important that the procedures should be fair and transparent but within those parameters we hope it will prove possible to ensure that the Financial Ombudsman Scheme does not become over-legalistic. We have not received sufficient evidence to enable us to reach a judgement on this point. We look to the Government to resolve these issues before the Bill is introduced.

The Ombudsman's decisions

296. The Progress Report states that the Ombudsman's decision will be binding on the respondent but not the complainant. APCIMS argued that "while this process is possibly acceptable when the claimant is a private individual, it is unacceptable if the claimant is an authorised firm." It suggested that either the Scheme should not be used by authorised persons or the Bill should be amended to accommodate the possible use of the scheme by firms.[390] We believe that the Scheme is for individuals, not firms. We therefore recommend that the Bill should be amended to preclude authorised persons from using the Scheme.

373  Consultation Document, Part One, para 10.1 Back

374  FSA consultation document 4: Consumer complaints, December 1997. See also Appendix 34 Back

375  Q 465 Back

376  Q 465 Back

377  Q 471 Back

378  Q 471 Back

379  Appendix 34 Back

380  Q 492 Back

381  Q 480 Back

382  Q 472 Back

383  Q 473 Back

384  Appendix 34 Back

385  Q 47 Back

386  Q 474 Back

387  Q 475 Back

388  Q 475 Back

389  Response to the July Consultation Document Back

390  Appendix 14 Back

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Prepared 29 April 1999