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annual review 2000/2001

resolving banking-related disputes

The banking and loans division of the Financial Ombudsman Service resolves cases between an individual (or a small business) and a bank or building society. A "case" is a complaint that the bank or building society has not resolved and which has passed initial screening by our customer contact division.

In the year ended 31 March 2001, the banking and loans division handled 6,153 new banking-related cases. This is an increase of about 15% on the number of new cases handled last year involving banks and building societies.

Until the Financial Services and Markets Act 2000 comes into force (expected to happen later this year), these cases are resolved under the separate rules of the Banking Ombudsman Scheme and the Building Societies Ombudsman Scheme.

The banking and loans division has 60 staff - including a principal ombudsman (David Thomas) and four other ombudsmen (Jane Hingston, David Millington, Sue Wrigley and Roger Yeomans). Currently, David Thomas is also the Banking Ombudsman under the rules of the Banking Ombudsman Scheme and Roger Yeomans is the Building Societies Ombudsman under the Building Societies Ombudsman Scheme rules. This chapter comprises a report on behalf of both those schemes.

regulatory background

Even after the Financial Services and Markets Act 2000 comes into force, the regulatory background for banks and building societies will be complex:

  • Deposit taking (which includes current accounts when they are in credit) will be regulated by the Financial Services Authority (FSA). But this will be limited to "prudential regulation" - ensuring the deposit-taker is financially sound and has fit and proper management.
  • At around nine months after "N2" (the date the Financial Services and Markets Act 2000 comes into force), some mortgage lending will become regulated by the FSA. Regulation will be restricted to new first mortgages on properties lived in by the borrower or a family member. Mortgage regulation will not extend to second mortgages, mortgages on non-residential properties and "buy to let" mortgages.
  • Other lending will not become regulated by the FSA. Some lending will be covered by the Consumer Credit Act 1974, which requires the lender to have a licence from the Office of Fair Trading and to follow detailed procedural rules. Some lending will not be regulated at all.
  • Day-to-day conduct of banking is not subject to detailed regulation. But there are a number of voluntary codes, such as the Banking Code and the Mortgage Code. And the banks and building societies have announced their intention to introduce a Small Business Banking Code.

our approach

Accordingly, in considering good banking practice, the banking and loans division of the Financial Ombudsman Service needs to keep in regular contact with the Banking Code Standards Board, the Mortgage Code Compliance Board and the Office of Fair Trading, as well as the FSA.

This means that, when a new type of banking complaint starts coming through to the division in significant numbers, we believe it is helpful for us to publish a briefing on the approach we are likely to take. It is an approach, not a policy, because individual cases are still decided in the light of their particular circumstances.

If banks and building societies (and their customers) know in advance the approach we are likely to take to a particular type of case, there is more chance that they will be able to resolve their differences without recourse to the ombudsman. Both sides save delay, and the bank or building society saves case fees.

We recognise that our briefing notes could lead to industry fears that the ombudsman is becoming a quasi-regulator. However, we have no power to issue regulatory guidance telling banks and building societies what they must do. We cannot monitor or discipline them. All we do is say how we will approach those cases which are not resolved by the bank or building society and which come to us for resolution. Many banks and building societies find this helpful in resolving complaints directly with their customers. And some have asked us for more briefings.

As part of this process, the work of the banking and loans division is featured in the quarterly banking and loans editions of ombudsman news - the first of which appeared in March 2001. These publications provide regular reviews of our work resolving banking complaints, and comment on themes and types of complaint.

We hope that ombudsman news will provide a prompt and helpful source of reference - and that firms will take its contents into account when considering how to handle complaints. Please contact our communications team (phone 020 7964 0092) to join our mailing list for future copies.

feedback on banking-related complaints

The first banking and loans edition of ombudsman news focused on the following areas, which were key sources of cases in relation both to banks and building societies during the year:

  • mortgage underfunding
    This is where the lender calculated the amount of the repayment incorrectly. The borrowers paid that amount in good faith, only to discover much later that they now owed much more on their mortgage than they should have done. We consulted on a harmonised approach to compensation.
  • pre-1988 mortgage endowment policies
    Mortgage endowment policies became legally defined as "investments" on 29 April 1988, when the Financial Services Act 1986 introduced record-keeping, "know your customer" and "suitability" requirements. Cases involving mortgage endowments sold by banks and building societies before this date are dealt with by the banking and loans division, using the rules of the Banking Ombudsman Scheme and the Building Societies Ombudsman Scheme. (Mortgage endowment complaints involving insurance companies and independent financial advisers (IFAs) are dealt with by the investment division of the Financial Ombudsman Service under the rules of the PIA Ombudsman Bureau.)
  • TESSAs
    From August 2000 our customer contact division started to receive thousands of enquiries from customers dissatisfied with the interest rate paid on their Tax-Exempt Special Savings Accounts (TESSAs) - often comparing the rates paid on their TESSAs with the interest paid on Individual Savings Accounts (ISAs). Many complaints were settled in the light of the briefing note which we published subsequently. But test cases were required to resolve the many hundreds that remained.
  • downgraded deposit accounts
    The Banking Code has been changed several times in an attempt to stamp out the practice of some deposit-takers slashing interest rates on obsolete deposit accounts and profiting from those savers who do not keep a check on the interest rate they are receiving. But we continue to receive a regular supply of such cases.
FROM
the chairman
..........................

Council of the Banking Ombudsman Scheme
Sir David Calcutt QC

June 2001

The Council of the Banking Ombudsman Scheme was established to protect the independence of the ombudsman and to oversee the efficient operation of the scheme. The scheme started operations on 1 January 1986. On 1 April 2000 the staff transferred to the Financial Ombudsman Service, which contracted to continue to resolve banking cases under Banking Ombudsman Scheme rules until the Financial Services and Markets Act 2000 comes into force.

Until then, the Council continues to fulfil its responsibilities under the Banking Ombudsman Scheme, and it seeks to assist in easing the transition from the old scheme to the new. The Council receives regular reports from David Thomas, who is both the Banking Ombudsman and principal ombudsman of the Financial Ombudsman Service's banking and loans division.

In these circumstances, it makes sense that the Financial Ombudsman Service should also publish information and statistics that would otherwise need to be published separately by the Banking Ombudsman Scheme. The last annual report published by the Banking Ombudsman Scheme covered the year ending 30 September 2000. This report covers the period to 31 March 2001 - bringing the scheme's reporting year into line with the Financial Ombudsman Service's reporting year.

The government's decision to establish an ombudsman for the financial services on a statutory basis was a recognition of the valuable work that has hitherto been undertaken by the separate financial-sector ombudsman schemes. So I pay tribute to the foresight of those who established the voluntary Banking Ombudsman Scheme almost 16 years ago.

David Calcutt
Chairman
Council of the Banking Ombudsman Scheme

Membership of the Banking Ombudsman Scheme is voluntary. At 31 March 2001, 139 banks and bank subsidiaries - understood to cover more than 99% of UK banking customers - were members. A full list of members is available from our communications team (phone 020 7964 1400).

Once the Financial Services and Markets Act comes into force, membership of the Financial Ombudsman Service will become compulsory for all banks authorised to take deposits in the UK.

The preponderance of cases about mortgages reflects mortgage underfunding complaints and mortgage endowment complaints, both issues covered recently in ombudsman news. But it also reflects complaints about early repayment charges, commented on in previous Banking Ombudsman Scheme reports, which continue to be a fertile source of cases.

new cases about banks by subject matter
year ended 31
March 2001*
year ended
31 March 2000**
percentage
change
mortgages
1,906
1,764
+ 8%
other lending
442
421
+ 5%
savings accounts
947
518
+ 83%
current accounts
416
371
+ 12%
other accounts
54
51
+ 6%
payment systems
377
375
-
card services
222
305
- 27%
other services
344
440
- 22%
non-customers/third parties
45
130
- 65%
total
4,753
4,375
+ 9%
* The Banking Ombudsman Scheme has always used a 30 September year-end. To harmonise with the different year-end of the Financial Ombudsman Service (and the majority of the other financial sector complaints-handling schemes), these annual figures are now based on a 31 March year-end. This means that the figures include six months of statistics which were covered in the Banking Ombudsman Scheme's 1999- 2000 annual report (1 October 1999 to 30 September 2000) plus six months of "new" figures (1 October 2000 to 31 March 2001).

** The Banking Ombudsman Scheme recorded statistics on a different basis from that now used by the Financial Ombudsman Service, so these figures are necessarily estimated.

The substantial increase in cases about savings accounts reflects an influx of complaints about TESSAs. Fewer enquiries turned into cases than might otherwise have been expected, because a significant number of banks resolved cases themselves in the light of our briefing note. Many of the cases we actually received were ones where, on the basis of the briefing, the bank thought we would not uphold the complaint but the customer remained to be convinced.

The sharp percentage drop in cases brought by third parties reflects an apparent fall in the use of cheque guarantee cards, producing fewer complaints from traders about cheques which banks refused to pay.

A number of cases we received turned out to be outside the jurisdiction of the Banking Ombudsman Scheme. But a significant degree of assessment - and consideration of evidence - is often necessary before we can be sure this is so. Typical reasons for a case falling outside the jurisdiction of the Banking Ombudsman Scheme include the following:

  • The complaint is about the legitimate exercise of a bank's commercial judgement and there is no maladministration. So, for example, we cannot second-guess a bank's refusal to give someone an overdraft where the bank has gone through the proper processes fairly.
  • Even if it were established that the bank had made a mistake, the person complaining has not actually lost any money or incurred any material inconvenience for which we could award them compensation. We are not regulators and we have no power to fine a bank for getting something wrong.

Where a case comes within the jurisdiction of the Banking Ombudsman Scheme, it is often possible to mediate an agreed and fair settlement between the person complaining and the bank, early on in the process. This has long been a specific stage in the Banking Ombudsman Scheme's process and is reflected in the proportion of cases resolved by mediation. This practice is to be adopted more widely by the Financial Ombudsman Service.

outcome of cases about banks*
year ended
31 March 2001**
year ended
31 March 2000**
resolved by conciliation or mediation
(agreed voluntarily by both sides)
70%
66%
resolved after investigation by an adjudicator
17%
20%
in favour (in whole or part) of the customer
8%
10%
in favour of the bank
9%
10%
resolved by the final decision of an ombudsman
13%
14%
in favour (in whole or part) of the customer
6.5%
7%
in favour of the bank
6.5%
7%
 
100%
100%
 
* In order to present statistics as consistently as possible, in a format which allows comparison with similar figures from the other complaints-handling schemes, some information which was included in past annual reports of the Banking Ombudsman Scheme is not covered in this consolidated report. However, this data can be made available on request for research purposes.

** The Banking Ombudsman Scheme recorded statistics on a different basis from that now used by the Financial Ombudsman Service, so these figures are necessarily estimated.

As at 31 March 2001, 74% of the Banking Ombudsman Scheme's caseload was less than six months old; 21% was between six and twelve months old; and 5% was more than twelve months old.

In cases resolved after investigation by an adjudicator, or by the final decision of an ombudsman, the average compensation awarded in the year ended 31 March 2001 was £2,634. The highest amount was £64,000 and the lowest was £25.

complaints about building societies

FROM
the chairman
..................

Council of the
Building Societies
Ombudsman Scheme
The Rt Hon Peter Brooke CH FSA

June 2001

In last year's annual report of the Building Societies Ombudsman I suggested that it would be our definitively last appearance, though I protected us against the alternative contingency. Another year on, and the Building Societies Ombudsman Scheme is still with us, legally at least - bringing the requirement once again to produce positively our last ever report. So this constitutes the report for the year ended 31 March 2001.

Last year I was able to report on the practical arrangements that had then recently taken place to ensure the smooth transition of the work and staff of the Building Society Ombudsman to the new Financial Ombudsman Service. Since then, Josephine Thompson has retired as an ombudsman. We are indebted to her for her efficient stewardship in a challenging period of transition.

This transition is now almost complete, with the integration of the various dispute-resolution schemes into the single ombudsman service carried out, for all practical purposes, ahead of the long awaited "N2" (the date on which the Financial Service and Markets Act comes into force and the Financial Ombudsman Service is able to handle complaints in its own right).

Therefore, while the Building Societies Ombudsman Scheme has continued, against expectation, to exist for a further year, its existence is now essentially only a technicality - to provide the rules under which the new Financial Ombudsman Service resolves disputes between building societies and their customers (until the Financial Ombudsman Service's own new rules come into force at "N2").

The work involved in resolving building society related disputes, as reported in this section of the combined annual review, indicates, however, that the spirit of the Building Societies Ombudsman Scheme lives on, though the mantle has now been passed to the Financial Ombudsman Service

Peter Brooke
Chairman
Council of the Building Societies Ombudsman Scheme

Membership of the Building Societies Ombudsman Scheme is compulsory. At 31 March 2001, all 67 building societies were members. Once the Financial Services and Markets Act 2000 comes into force, all building societies authorised to take deposits in the UK will come under the jurisdiction of the Financial Ombudsman Service.

new cases about building societies by subject matter
year ended 31 March 2001
year ended 31 March 2000*
percentage change
mortgages
593
611
- 3%
savings accounts and banking
732
245
+ 199%
conversion benefits**
46
87
- 47%
other cases***
29
28
+ 4%
total
1,400
971
+ 44%
* The Building Societies Ombudsman Scheme recorded statistics on a different basis from that now used by the Financial Ombudsman Service, so these figures are necessarily estimated.
** "Conversion benefits" refers to cases involving account maladministration that caused loss of benefits (such as free shares) when a building society became a bank.
*** Other cases include cases relating to unsecured loans, confidentiality and references.

The building society sector contracted again when Bradford & Bingley became a bank in December 2000. Had it not been for the influx of TESSA cases (which represented 76% of the new cases in the savings account and banking category), the number of cases would have continued to decline.

Most of the TESSA cases arose because the society members who complained were unhappy that the TESSA interest rate was lower than the rate on one or other of the same society's Individual Savings Accounts (ISAs). Most of the 558 cases involved five building societies.

Despite the guidance note issued jointly with the Banking Ombudsman Scheme, most building societies have chosen not to settle TESSA cases, preferring to await the outcome of "test cases". These are currently at various stages in the investigation and adjudication process. One society has said it may wish to challenge the ombudsman in court, if the final decision is unfavourable to it.

The number of mortgage cases would have shown a more marked decline, had it not been for cases involving mortgage endowments. All these mortgage endowment cases related to policies sold before endowments became legally defined as "investments" and the requirements of the Financial Services Act 1986 came into force.

Few of the mortgage endowment complaints against building societies, decided so far, have resulted in the complaint being upheld. In nearly all the cases, the ombudsman was satisfied either that the society had no duty to give advice in the terms claimed by the consumer or that the information given by the society about the endowment mortgage was adequate by the standards which prevailed when the sale took place. In a number of other cases, the consumers involved were no worse off than if they had opted for a capital repayment mortgage.

The majority of the other mortgage cases comprise complaints about early repayment charges (sometimes called "redemption penalties") and mortgage underfunding.

As at 31 March 2001, 88% of the Building Societies Ombudsman Scheme's caseload was less than six months old; 9% was between six and twelve months old; and 3% was more than twelve months old.

The case summaries published by the Building Societies Ombudsman Scheme in earlier annual reports, which many building societies found useful as a guide to the approach the ombudsman was likely to take in particular cases, will now appear in the quarterly banking and loans editions of ombudsman news.

outcome of cases about building societies*
year ended 31 March 2001
year ended 31 March 2000**
resolved by conciliation or mediation (agreed voluntarily by both sides)
17%
21%
resolved after investigation by an adjudicator
44%
27%
in favour (in whole or part) of the customer
8%
8%
in favour of the building society
36%
19%
resolved by the final decision of an ombudsman
39%
52%
in favour (in whole or part) of the customer
9%
16%
in favour of the building society
30%
36%
100%
100%
* In order to present statistics as consistently as possible, in a format which allows comparison with similar figures from the other complaints-handling schemes, some information which was included in past annual reports of the Building Societies Ombudsman Scheme is not covered in this consolidated report. However, this data can be made available on request for research purposes.
** The Building Societies Ombudsman Scheme recorded statistics on a different basis from that now used by the Financial Ombudsman Service, so these figures are necessarily estimated.
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