Treasury Consultation
"A new approach to financial regulation: judgement, focus and stability"

Response from Mr Paul Grenet

I wish to respond to the above document, with regard to proposed regulatory changes and the Financial Ombudsman Service (FOS). This response is primarily to questions 10 to 14.
The FOS has been little mentioned in the consultation document, but it is an area of financial regulation where members of the public are deeply involved. There are areas where I believe it does not meets today’s standards of best practice, openness and transparency. For instance, FOS provided 166,000 decisions last year, with no appeals procedure and its Ombudsmen routinely recommend redress awards as “fair and reasonable” without actually checking the calculations.

Appeals against FOS decisions
There is no independent appeal against an FOS decision. FOS say that when a case is reviewed by an Ombudsman, this is regarded as an appeal, but this is much too cosy an arrangement. In instances where a case is passed to an Ombudsman because the Adjudicator cannot properly grasp the issues, then this cannot possibly be regarded as an appeal since only one competent person (the Ombudsman) has assessed the case and no second review has taken place of his decision.

Furthermore the quality of Ombudsmen’s reviews is questionable. In her 2004 review of the FOS Professor Elaine Kempson stated:

This suggests to me that Ombudsmen expect and get guidance from Adjudicators about what they regard as most important. No appeal can be run on such a basis.

Contrarily, if a complaint is made about FOS “service standards”, the complainant can appeal to a Casework Manager and even further, to the Independent Assessor. Last year 166,000 cases were decided by FOS. There must have been some mistakes and I can think of no other area in public affairs where decisions involving up to £100,000 (soon to be £150,000) can be taken by a single individual without the right of appeal.

The lack of appeal affects both consumers and firms, especially small firms and IFAs. An ill considered decision made by an Ombudsman without IFA qualifications, can be accepted by the claimant and be binding on the firm. With no right of appeal, an IFA can have his business, career (and life) ruined at a stroke by a decision made by a single individual..

CPMA should reconsider this situation. The lack of an appeals system requires guaranteed infallibility on the part of the Ombudsmen which is neither realistic or possible. Para 4.40 suggests that CPMA decisions will be subject to appeal, it would be strange is FOS decisions exempt from appeals.

Calculating redress
The current FOS does not generally calculate redress payment or check the calculations to establish whether a firm’s offer is reasonable, so a prime reason for approaching the FOS (for an ordinary person to get the firm’s calculation checked) is misplaced.
The FOS generally does not check a firm’s calculations where they make an offer to pay redress. I cannot see any basis for this. Putting the consumer back where they would have been if the firm had not made the mistake requires a particular figure which depends on the facts of the case, not on the firm’s willingness to offer redress or not. There must be a possibility that some firms may make a low offer in the knowledge that it will be waved through, indeed the whole question of how an Ombudsman can assess a firm’s offer as “fair and reasonable” when he has not actually checked the figures threatens the credibility of the whole FOS process.

CPMA should address the question of how redress is checked, perhaps by making FOS set up an actuarial department to do this.

Guidelines and principles
FOS Adjudicators and Ombudsmen are not constrained by a legal framework and can make decisions taking into account pretty well anything they choose as long as they can say the result is “fair and reasonable”. There is no easy way for a consumer to know the rules and guidance on which the Adjudicator and Ombudsmen are working. In his review of the FOS, Lord Hunt recognised this and suggested a solution, the FOSBOOK, which would act as the main means of recording and promulgating details of developing practice and decisions for the benefit of both consumers and FOS staff. There is no sign of the FOSBOOK, as far as I know.

The last Chief Ombudsman, Mr Merricks, says guidelines are available to “help consumers and firms settle between themselves without needing to come to the ombudsman service”. It follows from this that the guidelines must espouse best practice and produce a fair settlement. However it seems that FOS Ombudsmen are not required to follow them.

The FSMA . (DISP 3.8.1) states

This seems clear enough, but Mr Merricks says the guidance referred to is

It is ludicrous that Adjudicators and Ombudsmen are not required to follow FOS guidelines. FOS is, after all, the principal body setting best practice in this arena. CPMA should review this policy, promote openness and transparency by publishing the guidelines in the FOSBOOK and making sure FOS staff follow its policies.

The role of Independent Assessor
At £48,000 for two days a week, this is clearly a very important position. However the authority and duties of the post are minimal. The IA is not permitted to consider the merits of the actual decision, merely FOS service standards. Last year the IA, Mr Barnes, only reviewed 165 cases (1 in 1000) and made awards (usually £50-£1000) in only 60 of these. The IA can make recommendations, but the FOS can ignore them and indeed the FOS do not have to comply with the IA’s requests or recommendations at all.

The independence of the IA has also been questioned. The last IA was an ex-board member and the new IA was appointed by the FOS board assisted only by a ‘public interest observer’ who as an observer presumably took no part in selection. I doubt if the man in the street sees this as independent especially as the IA is also paid by the FOS.

The IA also makes reports to the Board, but I question the usefulness of these. Mr Barnes looked at such a small number of cases that his report can have little relevance to overall service standards, and no relevance at all to the FOS main business since he is not permitted to consider this. Mr Barnes was aware of this and frequently said as much in his annual reviews.

There is evidence that the FOS does not properly respect the IA’s independence or authority. In one case, the Principal Ombudsman told the IA he would not accept any recommendation that he might make. What is the point of the Independent Assessor if he can be brushed aside like this ?

In her current role the Independent Assessor is underused and her qualities and experience are wasted. CPMA should review the role of the Independent Assessor and confirm her responsibilities and authority. She should be given the authority to issue instructions which FOS must follow, not recommendations which FOS and the Board can ignore.

Staff and qualifications
In Summer 2010 FOS staff levels have reached about 1600 with around 600 new staff joining in a single year recently and further recruitment taking place. 25% are outsourced contractors. This means a huge rate of expansion, or a huge staff turnover but whatever the reason, in 2010 there were hundreds of new staff with low experience levels and this, combined with the practice of paying Adjudicators extra to achieve workload targets must sometimes impact on quality. The Chief Ombudsman has confirmed that more cases are being passed to Ombudsmen, so it seems consumers have less confidence in the Adjudicators. I am concerned that Ombudsmen and Adjudicators may not have appropriate qualifications for the work they are doing. A recent advertisement for Ombudsmen did not require any minimum financial qualifications and the salary level offered to Adjudicators recently for a nine month fixed term is unlikely to attract the best candidates away from the attractions, salary and long term career structure of London’s city and financial world.

Customer Service staff advised 760,000 FOS enquirers that their concerns did not need a formal investigation. I do not know what qualifications are required for these workers, but they appear to be offering advice to many people. Do they have appropriate qualifications to do this ?

CPMA should insist that FOS publishes minimum standards for staff qualifications at all levels and should make every effort to attract the best candidates as Adjudicators, perhaps with higher basic pay and no incentive payments.

FOS should be allowed to penalise firms for serious mistakes
The current system where a firm is required only to put a consumer back where he would have been if the mistake had not been made, is no longer acceptable. It is equivalent to telling a serial shop-lifter that as long as he puts the stolen goods back on the shelf, then no action will be taken and its OK to carry on shop-lifting. Next year FOS could be awarding some consumers £150,000 in redress but the firms will receive no criticism or penalty regardless of the seriousness of the issues.

FOS should be allowed to penalise firms if necessary, and perhaps consumers who make frivolous complaints.

Summary
I hope the Government will review the way FOS works. Just saying “the award is fair and reasonable” and “the Ombudsman’s decision is final” is no longer good enough. The public need explanations, openness and transparency from staff with qualifications and experience to match the quality of the professional staff employed by the financial firms. The Independent Assessor’s role needs a complete review. Firms’ calculations should be checked properly before approving them as reasonable, and FOS must accept that 166,000 decisions a year made by 1000 staff must include some mistakes, and introduce some form of appeals system.