VIII. THE OMBUDSMAN SCHEME
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."
Earlier this year Mr Andreas Whittam Smith was appointed Chairman
of the Panel which will decide on the detail of the Ombudsman
283. The single Financial Services Ombudsman Scheme
provided for in the Bill will replace eight existing dispute resolution
Building Societies Ombudsman
FSA complaints service
Personal Investment Arbitration Service
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."
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 try...to 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
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.
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
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.
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.
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."
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."
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
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.
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
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.
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.
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."
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
He emphasised the importance of "proportionality"
having regard to what is at stake and the effort involved in having
the hearingand the "margin of appreciation"the
question of the State saying "we actually favour this kind
of dispute resolution."
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.
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.
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
consultation document 4: Consumer complaints,
December 1997. See also Appendix 34 Back
to the July Consultation Document Back