Joint Committee on Financial Services and Markets Minutes of Evidence

Examination of witnesses (Questions 465 - 479)




  465.  Good afternoon. It is very nice to see you all. I am sorry we are over-running a little but, as you heard, we were dealing with some quite difficult matters. For those of us who are not lawyers it has taken us a little while to get our minds round them. This session is an opportunity to talk about the Ombudsman scheme and we are very pleased to see you all here. I have said to other witnesses that if there is anything else outside the scope of the particular subject we have defined for the session which you wish to offer comments about, we are very happy to have them but our main purpose is to concentrate on the Ombudsman scheme. I suggest the way forward might be to ask you each to introduce yourselves and to give us any introductory remarks you might like to make.
  (Mr Whittam Smith)  Thank you very much, Chairman. Like everybody who has appeared in front of you, I am extremely glad as an interested party to have a chance to comment on the Bill. I think we have been asked by way of introduction to speak for three or four minutes. I am the Chairman of the Financial Services Ombudsman scheme and therefore not an ombudsman, and not likely to be so either. I thought it might be useful if I just said a little as to how I see the scheme developing. The first point I would like to make is that normally if you are engaged in a merger of some kind or reconstruction it is because what has gone before has not been done very well, but this is not that case at all. What has gone before has been done very well. In the seven weeks in which I have been Chairman I have got to know the schemes as well as one can in that period and they are extremely effective and two of them are voluntary and that is an admirable thing. So the Financial Services Ombudsman Scheme Limited's task is to build on the success of the existing schemes and the question is, in what way can we be better. I think there are a number of points I would like to make here before I hand over to one of my colleagues. What are the advantages to be seized? First of all, of course, that we can provide a single point of entry for complainants. That is extremely important. However, I would not like you to think that it has been a grossly confusing situation up to now, the schemes individually are very used to receiving enquiries and complaints from people who should have turned to another scheme and they are very good at directing people, so there is already a work around if you like, but we shall be able to dispense with the work around and provide a very clear single point of entry. Partly as a consequence of that and partly because of our size, we should be able to make ourselves much better known, that is extremely important. 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, and I shall want us to log and examine how well we are known as we go along, and I hope to find that is a rising curve. Thirdly, as a single scheme we can try—and this is going to be a complicated business—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. That, however, is going to depend upon the whole notion of the compulsory jurisdiction and the voluntary jurisdiction, and as we shall probably come to later on that is not the easiest system in the world to work. Fourthly, there will be some economies of scale. I do not think the economies of scale are going to be huge, they certainly will exist, but the primary job is to be a case worker and there are no economies of scale to be gained from putting case workers together, but in all the support services there clearly are. So there are some gains of efficiency to be sought. I think that putting the schemes together will yield something which I always pay great attention to and find well worth working for, which is there should be a fruitful chemistry when you put together eight schemes which have been independent and know each other rather well at the level of the ombudsman but do not know each other very well below that level, and I think they will learn from each other and will develop the creativity which was not possible before and will result in a better service to the consumers. Finally, although the existing schemes certainly are independent and have run independently, and nobody I think has ever impugned their independence, nonetheless the consumer may believe they are not, that the industry somehow must control them when all is said and done. I think that charge will be less capable of being levied against us because of our arrangements. I think our arrangements are clearly and signally independent and that itself is a virtue. That is as far as I would like to go now and I may have exhausted my four minutes.
  (Mr Dean)  Chairman, I have been deputed to act as a quasi-spokesman for the Ombudsmen, although others will speak from time to time and answer individual questions. Can I start with some introductions? On my right is Mr Walter Merricks, who is the Insurance Ombudsman. I am the Investment Ombudsman. To my immediate left is Mr Brian Murphy, who is the Building Societies Ombudsman, on his left Mr Tony Holland, the Personal Investment Authority Ombudsman, and on his left Mr David Thomas, the Banking Ombudsman. We are a diverse bunch. Two of us run voluntary schemes, that is to say the Banking Ombudsman and the Insurance Ombudsman. One of us is a statutory scheme, that is Mr Brian Murphy's Building Societies Ombudsman scheme. The other two, Tony Holland's and mine, are hybrid schemes, we exist by virtue of two of the SROs, the PIA and in my case, IMRO. Despite this diversity and we have come into being at different times over the last 20 years—the Insurance Ombudsman scheme is the oldest, about 18 years old, others more recent—there are more similarities between what we do than there are differences. We are all in the business of resolving complaints and we all seek to do so promptly and fairly and informally. The Ombudsman story is a story of success. It is gratifying that Mr Whittam Smith should say that rather than you simply hear it from our mouths. It is a system which is favoured by consumers and consumer bodies and also by the industries. Against that background of success we are obviously pleased as Ombudsmen that it is an Ombudsman scheme that has been chosen as the method of dispute resolution as part of the new regime, albeit it will imply the extinction of our individual offices. Over the last 12-18 months we have collaborated as far as we can in anticipation of the legislation by making recommendations to the FSA, comments to the Treasury and latterly, of course, a submission to yourselves. In our memorandum to you we have highlighted three points. First, the paramount importance, as we see it, of minimising formality. It is an extremely important feature of the Ombudsman schemes that they do operate very informally and flexibly. We are delighted, therefore, that some of the provisions in the draft Bill relating to appeals on points of law and cost orders and so forth are no longer going to be pursued, but we are left with residual concerns about Article 6 and I am sure you will wish to come on to that later on. The second matter concerns scheme coverage, the coverage of the new scheme, and we remain concerned about gaps, particularly in relation to unauthorised mortgage lending firms and consumer credit firms. Thirdly, we are uneasy about the dependence on a cost benefit analysis as being a prerequisite for the FSA to exercise its discretion in deciding the scope of the compulsory jurisdiction. We are not opposed to cost benefit analyses as a matter of principle, we just question whether they are an adequate means of measuring the value of an Ombudsman system. Simple comparison of cost and benefit does not seem to do that. Lord Chairman, that was all I wanted to say by way of introduction and we will be happy to take any questions which you put to us.

Chairman:  Thank you very much.

Mr Loughton

  466.  Some of us, myself not included, were able to speak to the Chairman the other day. In general terms could you perhaps tell us why the Ombudsman scheme is such a success and what advantages it has over a tribunal system or other systems for example?
  (Mr Dean)  One of the things that we can do is investigate. We take an active role in investigating, getting at the facts which tribunals typically find it hard to do. We operate an inquisitorial process as opposed to an accusatorial one or adversarial one. Secondly, we are able to conciliate, we are able to take measures during the course of an investigation which mean that a complaint can be resolved sometimes very quickly and amicably without a great deal of fuss and without the need for a formal determination by the Ombudsman. There are advantages of informality. I think that it is a more user friendly process than many tribunals, it is flexible, there are cost advantages, and I have to say that the Ombudsman schemes are a proven success, they have shown that they work.

  467.  Could you contrast it with, say, the Parliamentary Ombudsman, of which many Members here will have a greater experience, in terms of it is more formal from what you say, the timescale is rather more drawn out, although that has been improved a little one hopes. What can the Parliamentary Ombudsman learn from yourselves? That is one point. Secondly, stemming from that, perhaps you could comment on your different experiences in different roles as statutory bodies or as voluntary bodies as you have been but all coming from slightly different angles.
  (Mr Dean)  I think we must resist the temptation posed by your first question to tell the Parliamentary Ombudsman how to do his job.

Lord Fraser of Carmyllie

  468.  Go on.
  (Mr Dean)  He is actually doing a very different job from us. What we are doing is looking at complaints by customers of firms and arriving at a view typically as to what is fair and reasonable in the circumstances and saying what that is and the firm pays up or does not pay up if it is not fair to do so. The Parliamentary Ombudsman has no power, as I understand it, to fine or indeed to do much except express opinion.

Mr Loughton

  469.  He can institute penalties.
  (Mr Dean)  In that case I am wrong about that. As regards timescales I really would not like to comment on that. We have rather different timescales among ourselves as to how quickly we resolve complaints. All I can say is that we do our best to resolve them very quickly.

  470.  And your different approaches?
  (Mr Dean)  Others might wish to chip in here. I would say that the different approaches are not so significant as you might think. We do find ourselves all doing substantially the same job irrespective of whether we have voluntary origins or statutory origins, we are all resolving disputes as rapidly as we can. There are some differences in so far as the voluntary schemes may not have within their jurisdiction everybody they might wish whereas the statutory schemes may do so, or in Tony Holland's scheme and mine we do have within our jurisdiction the firms subject to the Personal Investment Authority jurisdiction and IMRO jurisdiction. The similarities are greater than the differences I would say.

  471.  Finally, you mentioned gaps. Could you perhaps comment on some of the complaints that fall outside your remit at the moment and how you think that may now be plugged? Can you give us some examples perhaps of things that you have not been able to tackle.
  (Mr Dean)  I mentioned two in my opening comments and I will ask one of my colleagues to deal with those. So far as gaps, we do, as Mr Whittam Smith said at the outset, have a pretty crisp system of passing on complaints from one of us that should go to one other and that is really not too much of a serious problem. I think we probably would not be able to give an answer as to how many complaints come to us that actually fall outside the remit, we have not added those figures up. On the two particular matters, consumer credit and mortgage, which are matters of concern perhaps I could ask David Thomas to talk about those.
  (Mr Thomas)  If I can just pick up one earlier comment. Brian Murphy runs the Building Societies Ombudsman Scheme which is statutory, I run a scheme which is voluntary, but in the nature of the complaints that we deal with they are very much the same. It is the nature of the complaint which typifies the differences, in so far as they exist, between the different schemes. What Brian Murphy and I do is very similar and in so far as it is different from what Peter Dean does or what Tony Holland does it is because of the different nature of the product with which we are dealing. Leading on to the jurisdiction point, we are concerned about three inter-related issues. We are concerned first that the new Ombudsman scheme should have a jurisdiction which is at least as wide as the aggregate of the existing Ombudsman schemes so that nothing which is covered now ought to be left out. Secondly, we are anxious to identify any gaps and to take this opportunity of plugging them or at least providing the legislative framework by which they may be plugged at an appropriate stage in the future. Thirdly, to ensure that the subsequent framework is one which consumers can actually understand, that they will be able to tell without a lot of complicated explanation from us as to whether we will be able to help them or not. There are two areas of particular difficulty which concern us. The first area is the area of lending money. Lending money 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. Ombudsmen schemes exist to redress the uneven balance between the small consumer and the large institution with whom they are dealing and indeed to replace the feeling that all was not equal between those parties in the courts. It is probably difficult to find a 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 any area which cries out for comprehensive coverage, it is where money is being lent. We have a situation at the moment where the majority of mortgage lenders are banks or building societies but there are a small number of mortgage lenders, some of them with practices which have been criticised very severely by for example the Office of Fair Trading, who do not fall within our existing jurisdictions and it would appear are likely to fall outside the jurisdiction of the new Ombudsman scheme. Secondly, there are mortgage brokers who introduce business to various lenders. Insofar as they are also authorised for investment business, presently under the Financial Services Act, they will need to be authorised by the Financial Services Authority and the Financial Services Authority will be able to bring them within the scope of the new Ombudsman scheme. But insofar as they do not do other financial services business, the FSA will not be able to bring them into the scope of the compulsory scheme according to the system as it is currently proposed. So if you envisage a typical high street with three mortgage brokers, Mortgage Broker A also sells endowment policies and is forced by the FSA to be in the Ombudsman scheme, Mortgage Broker B does not sell endowment policies but voluntarily decides to join the Ombudsman scheme and come under its jurisdiction, and Mortgage Broker C, who is probably the one who most needs it, decides not to join the Ombudsman scheme at all. Where we are trying to create a scheme that is simpler for consumers to understand, it seems to me that is a situation which is not particularly easy for them to understand. The final area is the area of credit cards and personal loans where at the moment there are some organisations which are providing credit cards which are neither banks or building societies and which are not covered, and there are many organisations out there which are providing personal loans which have licences from the Office of Fair Trading authorising them to provide loans but they will not require that authorisation by the FSA and therefore will fall outside the Ombudsman scheme for compulsory jurisdiction as proposed.

Lord Montague of Oxford

  472.  I would like to develop what you have been saying a little and slightly change the terminology because it is being summarised now as a one stop shop, and that is certainly the impression the consumer will get and is increasingly getting. You have explained what you want to bring into, as it were, the one stop shop and I am concerned about how all this will be made known. I do not know whether it is the intention of the Ombudsman to produce an annual report, annual guidance, I do not know about your budget and whether you will have sufficient funds to make things clear. I think the combined expenditure of all of you is about £15 million, is that right? Clearly you will need to supplement that. I am also a bit concerned about the impression that the public will get about where it will get help, which is not quite the same as someone resolving a particular dispute. Help it can of course get from the FSA, it is only when there is a dispute they will turn to the Ombudsman, so I would like to hear about how this is likely to be clarified.
  (Mr Whittam Smith)  Starting with your last point, I think it will be very important for the FSA, which will have the power I think, to compel providers of financial services to make it plain at the point of the transaction that there is an Ombudsman scheme so as part of the basic literature, the basic deal, if you like, you are put on notice there is an Ombudsman scheme. Clearly you should first complain to the provider but you should always know the Ombudsman scheme is there as a back up. If that is done, I think it would already be a great improvement. Secondly, we will, indeed must, publish an annual report but I think there must be much more than that and I think it would be very important for us to publish a series of bulletins and perhaps special papers designed not only to inform the public quite often by a secondary route, which is through the financial press, but also we do have a role I think to play in helping the industry to improve its own procedures. I think it would be very important for us to try and do that. But I am absolutely committed to broadcasting the scheme as widely as possible and I think it is very much the responsibility of the board to know that it has to adopt a sort of evangelical, missionary approach to this. Everybody must know about it.

  473.  The budget?
  (Mr Whittam Smith)  No work has been done on the budget yet. From my point of view, I have observed, as you have, that the combined spending is about £15 million, but that is a figure which, if it were the available revenue for a commercial enterprise, would yield on normal considerations enough money to put in hand a reasonable promotional and marketing campaign.

Mr Sheerman

  474.  Our role as a pre-legislative inquiry is to tease out whether there is at this stage any improvements you would like to see in the Bill as drafted. The big question is, are there? Is the Bill giving you sufficient powers? Are you happy with them? Can you see modifications which could take place at any stage which could make it more effective? I am one of these sceptics who start off thinking almost that this is an alien concept drafted in Scandinavia—and Andrew and I had this conversation the other morning. You do say you are very successful but, representing a constituency which is a fairly average constituency, I do know that the most financially deprived people in my constituency probably have the most trouble getting access to you or knowing about you because you are quite a complex set of people with quite complex rules. I think you still appeal very much to the Moneybox type of listener, the professional middle classes, and you have actually failed to get down to the people who pay mostly on credit and get into the most financial trouble because they pay high interest rates and all the rest. You are talking to a sceptic, so can you on the one hand tell me that this new improved Ombudsman is going to get to the parts which have not been reached before, and on the other hand are you content with the Bill as framed?
  (Mr Dean)  So far as getting to the parts which have not been reached before is concerned, there is nothing we would wish to add to what Mr Whittam Smith has already said. So far as improvements in the Bill are concerned, I think I said at the outset what our main concerns were. I think that the issue of gaps is one which possibly is capable of being dealt with. We do not have drafts here to put on the table but I think that possibly is. So far as minimising formality is concerned, that is a more complicated question. The issue revolves largely around, so far as our current concerns go, the effect on Article 6 of the European Convention on Human Rights, about which you have heard a great deal earlier this afternoon. Our perception of the matter is that there is no doubt at all, as we understand it, that Article 6 will apply to the new scheme as it is currently envisaged because it is conceived as a compulsory scheme which will bind and no amount of tinkering with the wording here or there will alter that situation. If that remains the Government's intention then a consequence is going to be that it will be subject to Article 6. Our discussions have proceeded on that footing. The issue therefore is, how does one minimise the effects of Article 6 and that is something upon which we have more work to do. I think so far as this Committee is concerned it would be very helpful if, to the extent you agree with us, you would bear in mind the virtue of and need for informality as the Bill wends its way through Parliament and keep an eye on it. I do not know whether Mr Holland wants to add to that?
  (Mr Holland)  Yes, I would. The Article 6 point is the crux, as far as my colleagues and I are concerned, of whatever success we may have had—I appreciate that may be a contentious view—and certainly the success of the new scheme. Just to give you a flavour of what happens at the moment, I can only speak as to my own operation but it is quite a large one, I have 130 staff and of those 70 are case officers and they made over 9,000 decisions last year. The normal process is not that different from that of my colleague's. When a complaint or a dispute comes in—it is quite a cross-section of people who send in complaints ranging from the less well off to the quite well off—the case officer initially tries to mediate between the two parties. That process does not last very long and he then moves to a provisional assessment. In 80 per cent of the cases, 80 per cent of the 9,000 cases I am talking about, that provisional assessment will be accepted by both parties. The remaining 20 per cent go to myself and my colleagues who are the Ombudsmen at my bureau and we then come either to a preliminary conclusion or give room for further argument and then arrive at a decision. We will occasionally have hearings, sometimes that go on for a day or two, but that is the rarity rather than the norm. The benefits of what we do now is first of all what Lord Lester referred to as equality of arms in the sense that whereas before he was concerned about the equality of arms between the regulator and the provider, we are concerned with an equality of arms between the complainant and the provider who may be a big company or may be quite a small independent financial adviser but who has behind him, of course, very often an insurer who is represented by lawyers. We try to avoid any kind of adversarial hearing, and we do not have adversarial hearings. If we do have a hearing it is on the basis that it is an investigative, inquisitorial type hearing and an agenda is set by the Ombudsman. That will be very difficult to sustain in that mode in the future. If I can put this in as polite a way as possible for myself and my colleagues who are lawyers, 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. That is why we need, and indeed I am praying for, the help of this Committee because it is in this area that we are most exposed to changing what people expect to see at the end of the Bill and what actually will arrive. There are ways around the issue which I will not go into great detail about if you do not wish me to because of the time but certainly it would help us to know that this Committee is alive to these dangers and could explore ways around them.


  475.  Could you give us the headlines of what they would be?
  (Mr Holland)  Yes. The first issue is when you actually introduce the obligation to have a fair and public hearing, does that mean during the entirety of the process or do you take it as far down the process as possible when you have reduced the original 100 per cent of complaints down to the last 20 per cent that are actually going to an Ombudsman? That is the first point. One has to assume that it is better to introduce the hearing as far down the process as possible to avoid hearings being used in as many cases as the complainants may wish, or indeed the insurers of the IFAs might wish. The second thing is assuming you take it a long way down the process I think one can justifiably do it by saying that everything remains as before, the Ombudsman makes his decision, and then 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 that review section rather than the process as a whole. At the end of the process it is possible, of course, that there are other issues under the Convention that one can use to minimise even further the necessity to have a hearing. The Convention and the courts in Strasbourg have very clearly said on a number of occasions that it is not always necessary to have a fair and public hearing in the context of how we understand that word to actually comply with Article 6. If, for example, there is no dispute about facts it is unlikely that a hearing would help and it may not be necessary. There are two words I would just like to headline and those two words are "proportionality" and "margin of appreciation". Proportionality means, of course, having regard to what is at stake and the effort involved in having the hearing. The margin of appreciation is the question of the state saying "we actually favour this kind of dispute resolution", so the means of it being done this way are attractive even though it may well be that Article 6 may say otherwise.

Lord Taverne

  476.  I am very worried about the application of Article 6 in the light of what we heard earlier and the fact that there appear to be some legal opinions which suggest that there may be conflict between the section dealing with the Ombudsman and Article 6. I am worried about it because, like you, I very much hope that it will be possible to retain the informal approach and keep the law out of it as far as possible. I have got certain questions. First, have you had a legal Opinion?
  (Mr Dean)  We have seen a legal Opinion. I would be amazed if we could not find a way of getting it to you.
  (Mr Holland)  I think I have got six Opinions which, not surprisingly, do not exactly agree. I can certainly let you have the opinion that my own bureau obtained because that is our property.

  477.  I think it would be very useful for us if we could have one. The second question is have you had any difficulties with the Convention in the past because this problem is not going to be new unless there are special provisions in this Act which did not exist in the past which raise the question?
  (Mr Dean)  No. I think with one exception we have not in the past. The reason is that our schemes have not had the characteristic of being binding and compulsory, it is that feature. I think that the PIA Ombudsman is different in that respect.
  (Mr Holland)  I have always been exposed technically to the risk of someone eventually going to Strasbourg and enforcing their Article 6 rights by that route because I am both binding and compulsory. It is those two features that bring Article 6 into play.

  478.  Then I have got some particular worries about these provisions. First, I think you have already mentioned the question of equality of treatment or equality of arms between the investor and the practitioner but there are also provisions here—I do not know whether they are normal—at 155(2) saying: "The complaint is to be determined in favour of the complainant if the Ombudsman considers that the matter complained of (a) is contrary to law, or (b) is not fair and reasonable in the circumstances", which suggests that you have carte blanche for arbitrary decisions which have nothing to do with the law. It seems to me very sensible but is that not something which may get you into trouble with something or other in the Convention?
  (Mr Dean)  It is not in itself. On the fair and reasonable provision I do not think so. We have not received any advice that the fair and reasonable criterion would lead to problems with the Convention. It is one, by the way, which exists in four out of five of our schemes already.

  479.  The fact that you can appeal on a point of law means that you can still appeal on this although it is not subject to the law?
  (Mr Dean)  One of the comforts which we have drawn from the Progress Report has been that the Treasury is minded to drop the notion of an appeal on a point of law which we were very strongly opposed to and we are glad to see the back of.

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