It’s been plagued by accusations of bias and poor service – and now the head of the Financial Ombudsman Service, Caroline Wayman, has resigned amid a growing backlog of cases, with some consumers waiting years for a decision on their complaints about banks and financial service providers. But while it is easy to criticise the slowness and backlogs that built up, especially on payment protection insurance claims, new research in my latest Who Regulates the Regulators report indicates that there are more serious structural issues with how the FOS operates.
The FOS was established under the Financial Services and Markets Act 2000 [FSMA] so that disputes relating to financial services could be resolved quickly and with minimum formality by an independent person. Individuals and small businesses can refer a complaint to the FOS free of charge if they are not satisfied with their service from a provider of a regulated financial service. The FOS case worker determines the complaint by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case. While the FOS has improved its transparency over the years and now published anonymised reports of all of its decisions, its rules and criteria for making determinations are not published, and can be unpredictable.
In a typical case study published by the FOS, a consumer complained that they were charged £2,000 for exceeding the maximum mileage under a car finance agreement. Even though the mileage limit was clearly stated in the contract, and there was no suggestion that the contract was obscurely worded or misleading, the complaint was upheld on the grounds that the credit broker had not actively brought it to the consumer’s attention and her prior credit agreements had not included such a term.
This seems likely to undermine the ability of a business to rely on its binding terms of business in matters where the FOS has jurisdiction. It also risks disincentivising consumers from reading and considering the terms they are entering into, when it is known that any undesirable terms that are subsequently discovered will be overturned. This is ultimately, contrary to the aims of the FOS, disempowering to consumers, who are not expected to take responsibility for their decisions, and come to rely on firms and regulators to make decisions for them. (It is also contrary to the principles of good regulation under FSMA).
In the high cost, short term lending market, an unpublicised change in the FOS criteria for determining when a loan was affordable to the borrower, and therefore made fairly, caused the uphold rate in complaints against lenders in home credit to rocket from 39% in 2018/19 to 84% in 2019/20. In guarantor lending it went from 32% to 89% over the same period. The effect on the availability of these products was marked. Data from the FCA shows a 40% decline in loans made between Q4 2018 and Q4 2019. The review into the unsecured credit market by former interim executive chairman of the FCA Christopher Woolard, published earlier this year, acknowledged the ‘potential cooling effect on investment and growth’ from ‘perceptions of regulatory uncertainty in the credit market’ (though without acknowledging that the perceptions are based on reasonable foundations).
You may think pay day lending is ethically questionable and should be more tightly regulated, but surely this should be done transparently by lawmakers, not as a consequence (intended or not) of an unaccountable dispute resolution body’s internal procedures.
Not only is this damaging to the firms concerned, but it could have a detrimental impact on consumers who need access to short term credit and, in the absence of regulated providers (in what was already a concentrated market), turn to unregulated and informal lending, as highlighted by the APPG on Alternative Lending last year.
Another sector that has been affected by the operation of the FOS is financial advice. The FCA and HM Treasury found in their 2016 Financial Advice Market Review (FAMR) that there is an ‘advice gap’, with less affluent consumers being excluded from the provision of personal financial advice as it is not cost effective for advisers to provide it. The Review said “advice is expensive and is not always cost-effective for consumers, particularly those seeking help in relation to smaller amounts of money or with simpler needs”.
Regulatory costs, including the costs of redress schemes such as the FOS and the Financial Services Compensation Scheme (FSCS) were cited as contributory factors causing a reduction in the number of advisers and an increase in fees. The FAMR downplayed this structural issue of regulation, and seemed to accept the submission of consumer organisations that such regulatory costs are a necessary part of doing business well. It recommended better use of technology to serve less well-off consumers more efficiently and greater outreach and transparency by the FOS to assist independent financial advisers. It proposed exploring further regulation of professional indemnity insurance [PII] provision to address the difficulty that many IFAs have in finding commercially viable PII in light of the unpredictable and non-time limited exposure to customer claims that they face, rather than questioning whether the underlying risks posed by this system are justified.
It is notable that the FAMR, like the many other reports that have been carried out into the functioning of the FOS, did not consider whether the operation of the FOS is conducive to the FCA’s competition objective or is beneficial to consumers at large, as opposed to individual consumers who have their complaint dealt with. It has been suggested that the uncertainty and cost now built in to the FOS system is favoured by large firms who can afford it where mid-market operators cannot, a profoundly anti-competitive outcome.
The incoming chief ombudsman will no doubt be expected to address the service issues, but the FCA and Treasury ministers should be equally concerned with the effects that the FOS is having on competition and innovation, especially in services to less affluent consumers. Specialist lawyers in the industry have long been concerned with the dis-application of the rule of law that is intrinsic to the way the FOS works. Solutions have been suggested that strengthen the legal safeguards, by allowing appeals from the ombudsman decision, or by establishing a tribunal system, similar to tribunals that hear employment claims. As the complexity of cases coming to the FOS increases it is clear that the current service, underpinned by subjective ideas of fairness and the avoidance of detriment is struggling to cope.
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