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annual review 2008/09

1 April 2008 to 31 March 2009

chief ombudsman's report

Back in January 2008, when we were consulting on our corporate plan and budget for the 2008/09 financial year, the widespread assumption was that we could expect a fall in the number of new complaints reaching us. In fact, the total number we received during 2008/09 exceeded even the record level we saw in 2007/08.

Given the recent turmoil in financial markets, this increase is perhaps no great surprise. But what is new and very disappointing is that, of the complaints we have handled, we have found a record proportion - almost six out of ten - to be justified.

Before consumers bring a complaint to us they are required to complain first to the financial business they are unhappy with. This gives the business the chance to resolve the complaint before it ever reaches us. Businesses should usually be able to settle justified complaints early on. So we would normally expect only a minority of the complaints referred to us to turn out to have been justified. This has not been the case during the year under review.

For most of the eight years we have been in existence, the rate at which we have upheld complaints in the consumer's favour has usually been within the 30% to 40% range. So the increase we are now seeing in the proportion of cases we uphold has caused us to reflect more deeply on what has been happening - not only to those consumers who do reach our service, but also to those who may have complained to the business concerned but who have not then come to us. We have also reflected on the situation of those consumers who might have lost out, but who have never pursued a complaint.

Technically, of course, our direct concern is to ensure we deliver a fair resolution for those who enter our system - in each individual dispute between a financial business and its customer. But it is difficult to ignore the wider context - and its implications for the accessibility of our service.

When the ombudsman service began, complaints-handling and dispute-resolution operations were generally regarded as relevant only in isolated instances of misunderstanding or maladministration. At this level, the complaints procedure - in which the individual consumer identifies the problem, communicates it to the business, and comes to the ombudsman if still dissatisfied - remains an entirely appropriate model.

The complaints-handling rules set the framework for this procedure - specifically requiring businesses to examine expressions of dissatisfaction from individual consumers and to deal with these complaints within a prescribed timescale. Where businesses find that similar types of complaint are occurring, they should identify root causes and, where appropriate, pro-actively address the situation of customers who have not complained - but who may have been disadvantaged by that same root cause.

In addition, the regulators - the Financial Services Authority (FSA) and the Office of Fair Trading (OFT) - have powers to identify systemic issues that have resulted in detriment to consumers. Where a business has broken FSA rules, the FSA can require that business to pay redress to all its customers who have been disadvantaged by that breach of rules, not just to those individuals who have actually made a complaint.

If this complaints-handling framework - involving financial businesses following the rules and the regulators using their powers - was working well, then the number of complaints reaching us and the proportion we upheld would both be modest.

There are no published figures for the total number of consumer complaints made to financial businesses. FSA-regulated firms are required to report these numbers - and the FSA has expressed the view that publishing this data would be an effective regulatory tool. However, the FSA has not yet been able to go ahead with this. We understand that it will be issuing revised proposals for consultation shortly.

And while there is nothing to prevent businesses publishing their own complaints experience, few seem interested in doing so. This means it is likely to be some time before a full picture emerges of the complaints-activity of consumers in the financial sector - let alone of the extent to which consumers who make justified complaints are able to obtain redress from particular financial businesses.

One of the significant drivers of consumer complaints is the now substantially-increased number and activity of claims-management companies, encouraging disadvantaged consumers to complain. The Ministry of Justice reports that it has authorised over 900 of these companies to trade in the areas of financial products and services. And apparently the number of companies applying for authorisation has been growing rapidly during the past year. No figures are available for the number of complaints these companies have made on behalf of their clients - or the extent to which the companies have given their clients appropriate advice.

The vast majority of claims-management companies operate in well-trodden territory where consumer detriment has been already identified. So they are a symptom of the problem and not its cause.

Consumers can make a complaint direct to a business - or to the ombudsman service - free of charge. If they make their complaint through a claims-management company, on the other hand, that company will charge a fee - usually a percentage of any compensation awarded. These fees have been criticised as being disproportionate - especially in relation to the effort or expertise that some claims-management companies actually deploy. So it is questionable what advantage consumers gain by using such companies.

But it is also undeniable that the marketing activities of claims-management companies have succeeded in identifying a very large number of consumers who have suffered loss. And this has resulted in many people being paid redress when they would otherwise have received nothing. Indeed, over half of the complaints we received during the year about payment-protection insurance (PPI) were brought to us on behalf of consumers by claims-management companies. And, as we report in this annual review, we upheld a very high proportion of these cases. So it is clear that the wider system is not working as it should.

Large areas of un-remedied consumer detriment represent risks and opportunities for different parties. For businesses, the risk of having to remedy legacy-issues at substantial cost, for which no provision has been made, is a threat to profitability. For claims-management companies, this would be a tempting business opportunity. For regulators, there is the embarrassment of not having prevented the malpractice in the first place, and the challenge of arriving at a proportionate regulatory solution.

These issues have led commentators to take a particular interest in proposals that would harness the collective interest of consumers who have suffered loss - and allow them to be pursued in a legal remedy. These proposals are under consideration in government in the UK (both north and south of the border) and in Europe.

The idea would be to allow a collective claim to be made on behalf of all those people who are adversely affected - without the need for them to register individually. This is seen as a more effective method of determining collective issues - and of generating redress, where appropriate. While this may not be a universal - or even an appropriate - remedy for all instances of widespread detriment, it does focus on the core of the bigger problem, rather than on the detail of individual cases.

There are other possible redress mechanisms that could be considered. But what is clear is that the present system for dealing with large areas of un-remedied consumer detriment is in need of reform.

I would sum up the objectives of any reform in the following way. It should:

  • Lead to the fair and timely resolution of a widespread issue.
  • Resolve the issue generically for all affected consumers - not just for those who have the initiative to make a complaint to a business (and the persistence to then take their dispute all the way to the ombudsman, if necessary).
  • Draw a line under the liability of financial businesses, so they know once and for all what amount (if any) they need to budget for.
  • Avoid offering easy opportunities to claims-management companies to take disproportionately large slices of redress belonging to consumers.
  • Involve a process which is transparent and open to reasoned input - from both the financial services industry and consumers.
  • Provide incentives for consumers to accept fair redress, rather than pursuing individual claims in court.
  • Lead to solutions that provide sufficient economic drivers to deter future behaviour that could be detrimental to consumers.

To meet these objectives, policy-makers will need to be imaginative. They will need help from consumer organisations, and positive and fair-minded input from the financial services industry. There are signs that the coming year may see energies focused on the issue.

A solution to the problem would reduce the volatility of the ombudsman service's workload, adjust unrealistic expectations of what we can be expected to deliver, and ease tensions between the financial services industry, its regulator and its ombudsman. Above all, it would be a real step towards re-establishing the confidence of consumers in financial services.

Walter Merricks CBE
May 2009