Banking StandardsLetter from Natalie Ceeney CBE, Chief Executive and Chief Ombudsman, Financial Ombudsman Service


In your letter of 23 January, you requested evidence from the ombudsman service about the effectiveness of the current enforcement regime—with some specific questions about our role, and around some specific powers. I hope my response below is helpful.

The Enforcement and Redress Regime

As you suggest in your letter, the enforcement regime and redress regimes under FSMA need to be considered together when thinking about addressing poor conduct in retail markets. The ombudsman and the FSA/FCA each play a crucial—but different—role. The ombudsman’s role is to resolve individual disputes, and put right things which have gone wrong on a case-by-case basis. The FSA/FCA’s powers include the creation of mass redress schemes (where whole groups of consumers receive compensation for something which has gone wrong), fines, and enforcement of proper conduct.

The FCA and the ombudsman can, and should, also work together to use our respective insight from what has gone wrong to prevent future issues occurring. Inevitably, as the ombudsman sees complaints from individual consumers, we are likely to see many of the same issues that will concern the FSA/FCA.

Where things have gone wrong, typically three things need to be considered. Firstly, correcting poor conduct so that consumers do not suffer detriment in future. Secondly, providing redress to those consumers who have suffered as a result of past poor conduct (either collectively or individually). And thirdly, providing a visible deterrent to other businesses from carrying out the same poor conduct (and/or whether individuals need to be criticised and their practice curtailed)—for example through fines, public censure or criminal prosecution. All three of these approaches are valid responses to poor conduct. Historically, regulation in financial services has primarily focused more on the first and third of these—with limited powers for delivering proactive collective redress. But more recently and particularly since the revision of s404 of FSMA, regulatory action in financial services has placed increasing weight on collective consumer redress.

In practice, consumer redress costs to businesses can be far more material than regulatory fines. PPI provides an extreme illustration of the point. But other regulatory action shows the significance of redress to consumers and businesses.

In the particular context of financial services, providing redress only on the basis of relying on proactive action by the consumer has a number of policy disadvantages. Consumers may not be aware that they have a problem, or of its cause in terms of poor conduct by the financial business. They may also lack the confidence or ability to complain. And as we have seen in areas like PPI and mortgage endowments, claims managers may “intermediate” complaints for their own commercial advantage.

In contrast, proactive action by the financial business is—if conducted fairly—likely to increase the proportion of consumers compensated and minimise the administrative overheads associated with large-scale complaint environments. It can accordingly provide a powerful incentive for businesses to ensure fair conduct. Our view, therefore, is that any effective enforcement regime needs to consider redress as a powerful tool in its armoury, with the ombudsman and regulator able and ready to play key, different but complementary, roles.

Section 404

You asked specifically for our comments on the section 404 provisions within FSMA. The current FSMA section 404 power was brought into force around two years ago and gives the FSA powers to make a widespread redress scheme, covering groups of consumers. Section 404 also, for the first time, provides that the ombudsman will decide relevant cases according to the redress scheme.

We welcomed the strengthening of this power. The ombudsman is set up to consider the individual circumstances of each case, and sometimes—for the reasons expressed above—it is more appropriate and effective to have a more proactive and wide-reaching approach than relying on consumers complaining individually if they believe that there has been detriment. The regulator is inevitably best placed to judge whether there has been widespread and regular failures and, where there has, can intervene decisively to correct the problem.

Experience with the use of new s404 powers is still limited. So, it is early days to identify how this will work out in practice. But one of the early challenges for s404’s use is around the transparency of the processes, and, given the scale of its impact, what evidence is taken into account in determining the redress solution.

For an industry-wide redress scheme under s404, the legislation requires the FSA to consult publicly on its approach. In contrast, some actions under s404 do not carry an obligation to consult—particularly where a scheme only covers one individual financial services business. The FSA (and new FCA) has said that it wants to ensure that it is not only the perspective of the financial services business (that is considered to have acted unfairly) that is brought to bear on the regulatory decision about the approach to redress, but that consumers’ voices are also heard and understood. This is particularly important given that s404 schemes act to limit the ability of the ombudsman to consider cases under its “fair and reasonable” jurisdiction (where both parties’ evidence is considered in reaching a judgement) instead being tied to the scheme determined under the s404 power. At the same time, public consultation is complex, time-consuming (in that it delays redress), and exposes financial services businesses to external scrutiny before a decision to take enforcement action has necessarily been agreed. The FSA is currently considering its approach to transparency for enforcement action, and has also committed to consulting publicly at a future date on how they will operate the business-specific s404 action going forward.


As you say in your letter, one new power being introduced into FSMA under the new regulatory structure is the power for named consumer-groups, financial services businesses (in respect of their own failings), and the ombudsman service to raise super-complaints.

Again, we believe that the power for consumer groups to raise super-complaints is a helpful one. It’s a power which has existed in relation to general market issues and the OFT for some time, and which has been actively used in the past. Extending this regime across all of financial services seems to us to be sensible.

As far as the ombudsman is concerned, we have always maintained that this is a power we hope we will never have to use. The regime envisages a transparent ombudsman service which will be publishing our final decisions—and a regulator which acts early on issues of mass detriment. There should, therefore, be no need for us to ever use a power where we need to flag an issue formally because we believe that the regulator hasn’t taken account of what we are seeing.

1 February 2013

Prepared 19th June 2013