The Financial Ombudsman Service should provide a fair and consistent service, but Andrew Davis says the the scales are tipped in favour of the consumer, and questions what can be done to resolve this
The Financial Ombudsman Service's role is to resolve individual disputes between consumers and financial services firms quickly, informally, fairly and reasonably. However, independent financial advisers' professional indemnity insurers increasingly find themselves at the mercy of decisions that would not normally be made by the courts but are possible because of the FOS's 'fair and reasonable' jurisdiction.
The FOS was formed by the Financial Services and Markets Act 2000 and its constitution says it must be run by a chairman, together with a board.
A panel of people with appropriate qualifications and experience act as ombudsmen.
The ombudsmen's responsibilities extend to making rules of procedure for investigating, considering and determining complaints from members of the public. They specify matters that are to be taken into account in deciding whether an act or omission by a firm of financial advisers is fair and reasonable. They make provision as to the evidence that may be required or admitted, and impose fixed time limits for completion of tasks.
The FOS is growing in popularity with the public, primarily because the service it offers to consumers is free of charge. Last year, it received more than 328 999 phone enquiries, 285 141 written enquiries, and handled 110 963 cases, with the number said to be growing.
While consumers find the process quick and easy to use, with most disputes resolved fairly quickly and economically, professional indemnity insurers' requirements can differ. Insurers are finding that the infrastructure is inadequate to provide a consistent and reliable network. The problem is exacerbated by the fact this free service positively encourages complainants who, under other circumstances, would be reluctant to bring a claim due to the costs of doing so.
The ombudsmen's interpretation of what is fair and reasonable, its criteria for deciding cases, and its inconsistency in decision-making are particular areas of grievance. If a case is determined based on what is fair and reasonable, problems will invariably ensue - one case handler's view will almost certainly be different from the next.
Past decisions are published, but are not always closely followed. The overriding principle is that each case should be judged on an individual basis, which often leads to irreconcilable decisions.
The FOS has a tendency to blame IFAs for a bad product and does not take into account the IFA's warnings to clients when the initial advice was given about the product.
There is no third-party system available. The IFA is not able to implicate another party that may have been negligent or responsible for any alleged loss.
The concept of claimants mitigating their losses is not encouraged in FOS awards and it has even applied the generous commercial interest rate of 8% to awards. With such a penal rate of interest, there is little incentive for claimants to settle at an early stage and they may prefer to wait for an award that will be significantly increased by the favourable interest rate. However, it is understood that the FOS is set to adopt a less penal rate.
Recently, there has been a whole raft of re-evaluation and re-assessment cases, where old decisions are reviewed and often changed, somewhat indiscriminately.
Consistency and predictability is of paramount importance to insurers and lawyers. Consistency requires that similar cases lead to similar results and predictability requires a process by which the outcome is, and is clearly seen to be, related to the original rights and duties - it is not acceptable to simply open old cases.
The FOS is too often liberal with the rules on jurisdiction and time limits. Generally, the ombudsmen cannot consider a complaint if it is: made less than eight weeks after the receipt of such a complaint by the firm; more than six months after the date on which the respondent sends its final response; more than six years after the event complained about; or more than three years from the date the complainant became aware that they had cause to complain.
More frequently, ombudsmen have been applying their 'exceptional circumstances' argument, whereby they justify their intervention when and if, in their view, failure to comply with time limits was a result of exceptional circumstances.
Such inconsistency is inevitable when each case is dealt with on an individual basis with reference to what is fair and reasonable.
While the 'fair and reasonable' test is ingrained in the legislation, more attention should be given to previous decisions and precedents that would allow a more objective evaluation of the subjectivity of an ombudsman's decision.
An appeals procedure after a final decision would also be beneficial.
This does not exist apart from a limited judicial review. A penalty imposed on vexatious claimants, and a blueprint of the complaints procedure issued by the Financial Services Authority, could also go some way to easing insurers' concerns. A system for bringing in a third party would also be helpful.
Insurers further require a better understanding of what amounts to fair and reasonable and a procedure whereby a third party - which could be in some way responsible for the loss - is held to account. The FOS seems to have concentrated on formulating a strategy suitable for consumers, while neglecting the concerns of IFAs and their insurers.
It is advisers, after all, who are charged a levy of between £100 and £300,000 per year, while consumers pay nothing. A small fee per case might discourage vexatious complaints and, given 100,000 complaints per year, ease the burden on the financial services community.
- Andrew Davis is a partner at Fishburns Solicitors.
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