It is 30 years since regulation of financial services acquired a statutory framework as a result of the Financial Services Act 1986 coming into force.
The Act set up a number of so-called self-regulating organisations, each of which took on the job of regulating a specific sector of the industry. Thus, Lautro regulated the life assurance and unit trust sectors, Fimbra regulated IFAs and so on.
Each SRO had its own dispute resolution scheme under which its ombudsmen decided disputes between firms and their clients.
Originally, each ombudsman was required to apply the ordinary law of the land. However, when the Financial Ombudsman Service was introduced in 2000, it was no longer required to. In the course of reaching a decision, which appears to it to be “fair and reasonable”, it must do no more than take the law into account. That was a serious retrograde step.
Other unacceptable aspects of the FOS scheme are that it is unbalanced. A firm is bound by a decision without any appeal on the merits but the complainant can re-run the same case again in court. Complainants pay no fee, while firms have to, even when a complaint is dismissed.
Then there is the fact the FOS hardly ever holds oral hearings. Indeed, its own senior staff have suggested it does so in one out of 10,000 cases. It defies belief that there can only be a factual dispute for which the live examination and cross-examination of witnesses is necessary or appropriate in so tiny a proportion of cases.
There is also so close a structural connection between the FOS and the FCA as to cast doubt on whether the ombudsman can be regarded as independent of the regulator.
These features make the FOS system incompatible with the rule of law and unacceptable for a body with jurisdiction currently of £150,000. The rule of law is a fundamental principle of the British constitutional arrangement.
It is not surprising consumers resort to the FOS if they cannot settle their dispute with a firm, because it costs them nothing and most (although by no means all) cases are decided in their favour. If they do not like the decision, they can reject it and sue in court.
But the firms about whom the complaint is made also accept the FOS. That is evidenced by the fact that, according to the 2016-2017 FOS annual review, only about 11 per cent of adjudications are challenged and go on to be decided by an ombudsman. That is a remarkable statistic. Just under 39,000 cases were decided by ombudsmen out of a total of just over 336,000 cases.
It suggests a way in which to take what is obviously working in the FOS and improve it so that it is no longer open to the above serious criticisms.
Anthony Speaight QC and I wrote a paper on this topic about five years ago. It is time to re-examine those ideas.
In essence, we proposed the FOS scheme should continue up to the point at which one party rejects the adjudicator’s views and wants to take the case further. That would ensure almost 90 per cent of all cases would be resolved at that early stage by adjudicators. But even at that preliminary stage, adjudicators should apply the ordinary law – as the ombudsman schemes which operated under the auspices of the SROs did.
Once a party has rejected the adjudicator’s views, the case should be transferred to a tribunal presided over by a judge sitting with two non-lawyers. The tribunal would be part of the ordinary administration of justice. There are many similar tribunals, each of which develop considerable expertise in relation to the matters coming before them.
The case would then be dealt with by way of a full re-hearing. Both parties would be able to call witnesses to be examined and cross-examined, and would be able to address the court. Judgment would bind both parties but either would have the right to appeal further on points of law.
Such a reform would deal with the unacceptable aspects of the current FOS while retaining its good aspects. Space does not permit me to expand on the details and, of course, the devil is often in the detail. The issues of fees and costs would be contentious but it ought to be possible to work out a system regarded as broadly fair to all.
We should examine the merits of what is set out above and not forget the current FOS scheme is an affront to the rule of law.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk