Alternative dispute resolution of financial complaints in the UK Walter Merricks chief ombudsman David Thomas corporate director and principal ombudsman Financial Ombudsman Service

UK = United Kingdom of Great Britain and Northern Ireland England, Wales, Scotland and Northern Ireland

60 million people 60 million people £1 = ¥200 £1 = ¥200 Firm = financial business Firm = financial business

Financial Services Authority (the regulator) Financial Ombudsman Service (adjudicates on unresolved disputes) Financial Services Compensation Scheme where we fit in …

Financial Services Authority (FSA) makes and polices the rules makes and polices the rules supervises financial firms supervises financial firms prudential regulation prudential regulation conduct-of-business conduct-of-business some self-regulation through codes some self-regulation through codes

Financial Ombudsman Service (FOS) resolves individual disputes resolves individual disputes an alternative to the civil courts an alternative to the civil courts informal / quicker / cheaper informal / quicker / cheaper not a regulator not a regulator some decisions can have big effect some decisions can have big effect

Financial Services Compensation Scheme (FSCS) safety net safety net claims against ‘dead’ firms claims against ‘dead’ firms contributions from ‘live’ firms contributions from ‘live’ firms

Ombudsmen …

Characteristics … citizen/consumer v state/institution citizen/consumer v state/institution deal with unresolved disputes deal with unresolved disputes free to citizen/consumer free to citizen/consumer flexible and informal processes flexible and informal processes investigative procedure investigative procedure

… characteristics wider dialogue wider dialogue encouraging complaint resolution encouraging complaint resolution encouraging complaint prevention encouraging complaint prevention

Public sector ombudsmen 1967: Parliamentary ombudsman 1973: Health service ombudsman 1975: Local government ombudsman

1981: Insurance Ombudsman established by industry voluntarily established by industry voluntarily in partnership with consumer bodies in partnership with consumer bodies independent council independent council alternative to civil courts alternative to civil courts but redress beyond the law but redress beyond the law binding on firm, but not consumer binding on firm, but not consumer

Other financial ombudsmen Banking Ombudsman Banking Ombudsman Building Societies Ombudsman Building Societies Ombudsman Investment [Management] Ombudsman Investment [Management] Ombudsman Personal Investment Ombudsman Personal Investment Ombudsman

FOS established by law … ‘a scheme under which certain disputes may be resolved quickly and with minimum formality’

Disadvantages compared with courts centralised centralised cannot cover third parties cannot cover third parties

Advantages over courts free to customer free to customer draw line for firm draw line for firm specialist knowledge specialist knowledge informal informal we mediate we mediate we investigate we investigate fair in the circumstances fair in the circumstances

Who we cover …

26,000 financial firms … banks banks building societies (mortgage banks) building societies (mortgage banks) other mortgage lenders other mortgage lenders mortgage intermediaries mortgage intermediaries credit unions credit unions electronic money institutions electronic money institutions

… 26,000 financial firms … insurance companies insurance companies insurance intermediaries insurance intermediaries investment/pension companies investment/pension companies investment/pension advisers investment/pension advisers stockbrokers stockbrokers

… for these activities … taking deposits, lending money and providing credit/debit/cash cards taking deposits, lending money and providing credit/debit/cash cards providing, arranging or advising on mortgages providing, arranging or advising on mortgages providing, arranging or advising on investments/pensions providing, arranging or advising on investments/pensions providing, arranging or advising on insurance providing, arranging or advising on insurance

… if they are provided in the UK in the UK from the UK from the UK

We cover business done from all UK branches of: UK firms UK firms Foreign firms Foreign firms We do not cover business done from non-UK branches: even of UK firms even of UK firms

Complainants covered Customers, potential customers and some others individual individual business (< ¥200 million turnover) business (< ¥200 million turnover) charity (< ¥200 million income) charity (< ¥200 million income) trust (< ¥200 million assets) trust (< ¥200 million assets) from UK and world-wide from UK and world-wide

Complaint process …

Complainants heard about us from: the firm 29% the firm 29% the press 28% the press 28% our literature 13% our literature 13% friend/relative 10% friend/relative 10% advice centre 7% advice centre 7%

If complainant comes to FOS and has not complained to firm FOS refers complaint to firm refers complaint to firm issues complaint form issues complaint form awaits complainant contact awaits complainant contact

What requires firms to do about complaints 8 weeks written response – final ombudsman referral rights 4 weeks written response – final or holding 5 business days written acknowledge- ment and recorded as complaint complaint unless resolved by close of next business day

Time limits after final response letter or 8 weeks (if sooner) after final response letter or 8 weeks (if sooner) 6 months from final response letter 6 months from final response letter 6 years from event or 3 years from knowledge (if later) 6 years from event or 3 years from knowledge (if later) we can waive time limits in exceptional circumstances we can waive time limits in exceptional circumstances

sift and respond cases written enquiries to casework phone enquiries

final decision by ombudsman 8% termination/mediation by adjudicator 42% initial decision by adjudicator 50% case

Termination by adjudicator no reasonable prospect of success no reasonable prospect of success no loss/material inconvenience no loss/material inconvenience fair settlement on offer fair settlement on offer court has dealt with merits court has dealt with merits more suitable for court more suitable for court legitimate commercial judgment legitimate commercial judgment [can ask for review by ombudsman]

Mediation by adjudicator evaluative mediation evaluative mediation by agreement by agreement

Initial decision by adjudicator initial view initial view (paper) investigation (paper) investigation power to compel evidence power to compel evidence adjudication adjudication [can ask for review by ombudsman]

Review by ombudsman (‘appeal’) request by either side request by either side additional evidence/arguments additional evidence/arguments possible hearing (rare) possible hearing (rare) ombudsman’s final decision ombudsman’s final decision if customer accepts, both bound if customer accepts, both bound otherwise, neither is bound otherwise, neither is bound [possibility of judicial review] [possibility of judicial review]

We decide what is fair in the circumstances of that case taking into account law law regulations regulations regulator’s rules regulator’s rules relevant codes relevant codes good industry practice good industry practice

Outcome of cases In about 35% of cases on average we agree with the complainant In about 35% of cases on average we agree with the complainant But that reflects rates of 15% to 80% depending on firm and product But that reflects rates of 15% to 80% depending on firm and product In about half the cases where we agree with the firm, it had not explained properly to the complainant In about half the cases where we agree with the firm, it had not explained properly to the complainant

Redress …

Remedy Generally, our aim is to put the complainant in the position they would have been in if the firm had not done something wrong

We can make the firm pay compensation up to ¥20 million pay compensation up to ¥20 million pay interest pay interest pay costs (rare) pay costs (rare) We can recommend more than ¥20 million, but the excess is not binding

Additionally, or alternatively, we can make the firm take ‘appropriate’ action This might be to put something right, reconsider an application or simply to apologise

We cannot make the firm compensate other customers in similar circumstances compensate other customers in similar circumstances change its products, procedures or staff change its products, procedures or staff

Complying with awards a firm must comply promptly with any award made by the ombudsman a firm must comply promptly with any award made by the ombudsman a complainant may enforce a money award or direction in the law courts a complainant may enforce a money award or direction in the law courts

Workload …

total enquiries (615,000) Enquiries to cases (111, 000) written enquiries (285, 000) phone enquiries (330, 000) to casework year ended 31 March 2005 …

banking and mortgages general insurance other investments mortgage endowments pensions securities current inflow …

number of new cases

>50% of complaints are about the 11 largest groups >50% of complaints are about the 11 largest groups >15% of complaints are about the 20 next largest groups >15% of complaints are about the 20 next largest groups <35% of complaints are about the other 22,000 firms <35% of complaints are about the other 22,000 firms

Resources …

Staffing 1 chief ombudsman 1 chief ombudsman 2 principal ombudsmen 2 principal ombudsmen 27 ombudsmen 27 ombudsmen 1,000 other staff 1,000 other staff

¥ Cost per case

Cost free to consumer free to consumer average cost of case = < ¥100,000 average cost of case = < ¥100,000 firms pay yearly levy (25% of cost) firms pay yearly levy (25% of cost) firms pay case fee (75% of cost) firms pay case fee (75% of cost)

Yearly levy based on market share bank pays ¥1 for every 2 bank accounts bank pays ¥1 for every 2 bank accounts insurance company pays ¥1 for every ¥100 of premiums insurance company pays ¥1 for every ¥100 of premiums small intermediary pays ¥10,000 small intermediary pays ¥10,000

Case fee ¥72,000 fee per case but first two cases per year are free ¥72,000 fee per case but first two cases per year are free only 7% of 26,000 firms covered pay case fees only 7% of 26,000 firms covered pay case fees 11 largest groups pay >50% of case fees 11 largest groups pay >50% of case fees

Information … consumer enquiries technical advice publications public website

Europe …

EUROPEAN UNION (EU) Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and United Kingdom

EUROPEAN UNION (EU) Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, United Kingdom EUROPEAN ECONOMIC AREA (EEA) European Union plus Iceland, Liechtenstein and Norway

EEA ‘passport’ rights Financial firms authorised in one EEA member state can provide services in or into any other EEA member state For example – UK-based internet bank directed at Spain and working in Spanish

FIN-NET  financial redress body network  refer cross-border complaints  advise on local law  meet six-monthly retail/finnet/index_en.htm

1998 European recommendation on principles for redress bodies  transparency  due process  independence  legality  effectiveness

Alternative dispute resolution of financial complaints in the UK Walter Merricks chief ombudsman David Thomas corporate director and principal ombudsman Financial Ombudsman Service