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APCIMS annual conference

speech by Walter Merricks, Chief Ombudsman

London, 5 November 2003

Yesterday the Financial Secretary to the Treasury, Ruth Kelly, announced that, as part of the review of the workings of the Financial Services and Markets Act, some aspects of our service should be examined. We and the FSA have been asked to undertake this work. One question we have been asked to review is whether firms should have some right to appeal against ombudsman decisions. I know that APCIMS has suggested that this question should be looked at. As Ruth Kelly said, there are a number of disadvantages to appeal mechanisms. So it is important that all our stakeholders put their minds to the question of how any such appeal could be structured, if it is to avoid adding undue delay, formality and cost to the process, while maintaining the independence on which our credibility as an alternative to the courts depends. The Financial Services and Markets Act gives us the objective of resolving complaints speedily and with minimum formality - and I am sure that you would not want our scheme to cost more than it need.

At the same time, the review will look at how the ombudsman is able to refer issues to the FSA that might more appropriately be dealt with by regulatory action. Over the past couple of years, we and the FSA have accumulated considerable experience - through having examined a variety of circumstances where we have had to consider such issues. But it is right that our stakeholders should have the opportunity to comment in detail on how they would like to see this working, the extent to which it could be made more transparent, and where they believe there could be any structural changes.

We and the FSA will be announcing shortly how we will be taking forward this review. We will want all our stakeholders to have a chance to participate in the process. The model for an ombudsman in the private sector was developed 23 years ago as a voluntary initiative - originally by the insurance industry, with joint participation and support from consumer bodies, before it was more widely adopted by banks, building societies and the investment sector, and then finally blessed by Parliament. So it is important that, as far as possible, any changes should have similar widespread support. Those who want change may be wise to seek a consensus for the reforms they see as needed.

urban myths

I want to take the opportunity to put paid to a few urban myths about the ombudsman. We are not a consumer champion, out to pin financial professionals to the wall, and ready to fall for the first sob story. We are impartial dispute resolvers. We never intervene until the firm has had a chance to investigate a complaint itself. We never uphold a complaint without giving the firm at least one, and in practice usually two or three, chances to make representations and argue its case with us.

Unlike the courts, we operate by conducting a pro-active enquiry, rather than by listening to adversarial argument. We operate confidentially, naming no names. Most of my staff have a background in the financial industry, we can use our experience and expertise to get to the real issues. We can spot where something is likely to have serious implications for the market as a whole.

Although, of course, many complaints about advice are triggered by falls in investment performance, we are at pains to ensure we distinguish complaints that, in essence, are simply about such market falls, from complaints that centre on the proper duties of a financial manager or broker. Of the portfolio management complaints we've looked at so far, we have upheld the firm's handling of the complaint in 85% of cases. Even in those rare cases where we uphold a complaint, we are careful to ensure that an investor is not over-compensated. We don't automatically think investors are entitled to all their money back, even if the advice they received was unsuitable. It may be clear that they would otherwise have put their money into another area of the market where it would have also fallen in value.

evidence

We have undertaken some research on what firms think of the service we provide. This is in addition to the regular customer surveys we carry out. Over 70% of firms surveyed think that the decisions we make are "generally fair". And 75% said that the ombudsman service has upheld a reasonable proportion of the complaints made against their firm. In addition:

  • 80% thought our letters were clear and concise.
  • 85% felt able to challenge the views expressed by our adjudicators but only 14% did so regularly (ie people understand how to go about appealing to an ombudsman but generally they don't).
  • Only 11% of firms disagree with the statement that our decisions are "generally fair".
  • 90% of firms agree that the ombudsman is a better alternative to the courts.
  • 90% understand how we deal with complaints (ie we are not a mystery!).
  • 89% say our adjudicators are polite.
  • 90% of firms felt up-to-date with what we are doing and 85% read our monthly publication ombudsman news.
  • 63% of firms said that in the last six months they had received increasing numbers of complaints - but only 42% had increased their staff to cope with this.

case fees

Another gripe I often hear: the ombudsman charges the firm a non-refundable case fee - payable even if the complaint is rejected - while the complainant pays nothing. As far as the last point is concerned, it is true that consumers don't pay fees to us - and the Financial Secretary to the Treasury made it clear in her statement yesterday that she would not support any change to that. So the ombudsman service has to be funded by firms - and there is a strong view that those who produce more work for us should pay more.

We have been considering how the case fee system can be softened, so that it bites less hard on those who only infrequently cause work for us. Last year, for example, the vast majority of firms within our remit didn't cause us any work at all - and an even smaller number were the subject of only one or two complaints. So we propose that next year (from April 2004) only the third and subsequent complaints in the year should attract a case fee. This means that if a firm has only two complaints (or fewer) referred to us in the year, it will pay us only the basic annual levy. This proposal has already received strong support, and I hope it will go some way to alleviating concerns about case fees.

split capital investment trust complaints

One area in which the roles of the Financial Ombudsman Service and the FSA do overlap - and where the FSA does want us to press ahead - is the investigation of 'splits' complaints. We have received around 4,200 of these, of which just under half are against 'splits' sponsors and just over half are against intermediaries - including IFAs, private client brokers and portfolio managers.

These cases throw up complexities for the ombudsman service beyond those raised by the complicated nature of 'splits' themselves. This is because many cases involve not only issues that are specific to the individual case but also issues that are specific to the individual 'split' involved.

Case-specific issues are ones that can only be investigated and assessed in the circumstances of each individual case. They include the risk profile of the complainant and, in portfolio management cases, the agreed profile for the managed portfolio.

'Splits'-specific issues are ones that can only be investigated and assessed collectively, to ensure a consistent outcome between separate cases that both involve the same 'split' at the same period. The issues include the actual risk profile of the different types of shares in each of the 'splits', and the extent to which information about this was available to financial firms.

The conclusions on 'splits'-specific issues can vary over time, for a combination of reasons. First - the actual risk profile of the different types of shares in each 'split' varied over time. Second - the extent of the information available to financial firms also varied over time. Third - the extent of the information available at a particular date can also differ depending on the role fulfilled by the financial firm. So that, for example, information may have been available at a particular date to a firm that acted as a 'splits' investment manager when it was not available to a firm that acted as an intermediary.

Any 'splits'-specific information that we identify when considering individual cases has to be fed into the collective investigation and assessment. And the 'splits'-specific conclusions that we reach must be fed back to inform the outcomes of the individual cases.

This would all be complicated enough, even if each individual case involved only a service provided on a single date for a single type of share in one 'split'. But, for example, portfolio management is a continuing service provided over a period of time. And each portfolio may contain a number of 'splits' shares of different types or in different 'splits' companies - or both of these.

So managing the two-way flow of information between the case-specific issues and the 'splits'-specific issues is an extremely complex task - which is over and above the complex issues raised by the investigation and assessment of the case-specific issues and the 'splits'-specific issues themselves.

And, of course, the way in which some of the 'splits'-specific issues impact on the financial firms that sponsored and promoted 'splits' means we can be deluged with information and arguments - and even our most tentative conclusions can be subjected to minute scrutiny and dispute by teams of hot-shot City lawyers.

All of this helps to explain why, so far, we have resolved only about 850 'splits' cases - mainly those at the least complex end. We are pressing on with our work as fast as we can, consistent with due process and a realistic use of resources. And of course, the time all this is taking is unwelcome to the complainants.

On the other hand, I suspect the delay may well be welcome to some APCIMS members. I have heard exaggerated fears expressed that we will make findings against intermediary firms for the alleged sins of some 'splits' sponsors - leaving the intermediary firms to pursue the 'splits' sponsors.

I accept that these fears exist, but they are misconceived. When dealing with cases involving intermediary firms, our decisions are based on what the firm should have done in the light of the information available to it at the time it provided the service to its customer. They are not judged as if the firm should have had the benefit of hindsight, or of X-ray vision. We do not and should not hold intermediary firms liable for things they did not know, and that they could not have been expected to have known, at the time.

and finally...

The complaints we receive from APCIMS members are a tiny proportion of the total we have to handle. This year we expect to receive 100,000 complaints, of which half will be about mortgage endowments. We have increased our staff numbers to respond to the extra demand, and the extra recruitment has enabled us to take on more adjudicators with a background in stockbroking and portfolio management to serve your sector better.

No one likes being on the receiving end of a complaint, especially if it points a finger - apparently without justification - at their professional judgement. We try to remember the hurt this causes, and we try to tread carefully with our own brand of professional dispute handling. Our objective (something of an ideal, I know) is that, at the end of the case, both parties will have a sense of having been heard and having been treated fairly - whatever the final outcome. To help us achieve this, we are conducting regular satisfaction surveys among both customers and firms. Another aim - although I must be careful how I express this - would be to find that we were receiving fewer complaints and were having to uphold fewer of those complaints that we did receive. This would mean not only that you were causing fewer complaints but also that you were handling well those that will inevitably emerge.

I end by saying how important trade associations are to us - in warning us of upcoming issues and market trends that might affect us, and in voicing any concerns - generally and specifically - about our work. We maintain excellent relations with your senior executive staff in Middlesex Street, who are not slow to contact us on your behalf if need be. We look forward to continuing the good relations we have with you.

But if I were to say that we would be delighted to have less to do with you, I imagine you would reciprocate the sentiment - and this without either of us being thought in the least discourteous!

Thank you for listening.

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