As readers of Money Marketing know, I have written before about the defects in the FOS system and have made suggestions for reform. The Government’s legislative plans for its new approach to financial regulation present an ideal opportunity to reform the FOS.
In response to the Government’s second round of consultation, Anthony Speaight, QC, and I have submitted a paper to the Treasury in which we have set out our constructive proposals for the reform of the FOS. We have had a meeting with the Treasury to discuss our ideas.
Anthony and I bring many years of experience to the issues. Anthony’s practice includes financial services law and he has had particular involvement in cases in which the impact of the Human Rights Act and the European Convention on Human Rights has been considered. Earlier this year, he was app-ointed a member of the Com-mission on a Bill of Rights.
I have been involved in the regulation of the retail end of the financial services market since Professor Gower published his review of investor protection in January 1984.
The essential point of our paper is to restore the rule of law to financial services compensation. Our prop-osals would benefit consu-mers and be fair to firms.
The defects in the FOS scheme are well known.
First, it is unbalanced. The firm is bound by a decision without any appeal on the merits. The complainant is not bound and can re-run the same case again in court. Complainants pay no fee but firms have to pay, even when a complaint is dismissed.
The FSA, which has the duty of making some of the rules which apply to FOS cases, has among its statutory regulatory objectives, the protection of consumers. This is not balanced by any objective to be fair to firms.
Second, the FOS does not have to make decisions in accordance with the law of England (or of Scotland in Scotland) and does not do so. Instead, it proudly proclaims that it makes its “own law”. The FSMA provides that a “complaint is to be determined by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case”.
The Court of Appeal has held that provided a determ-ination by the FOS is “fair and reasonable in all the circumstances,” it does not have to be in accordance with the law of England. This means that the FOS has the power to make a binding award against a firm for payment of up to £100,000 although the firm has committed no wrong under the law and although the law would impose no liability upon the firm.
Third, the FOS does not publish any of its decisions, even in anonymised form, despite the recommendation by Lord Hunt of the Wirral that it should do so. The FOS does not even keep a register of decisions although the FSMA envisages that it should do so. It is therefore difficult to discover in advance how the FOS might deal with a particular case.
Fourth, the FOS hardly ever holds oral hearings. Its own senior staff have suggested that it does so in one out of 10,000 cases. It defies belief that there can be a factual dispute which would benefit from the examination and cross-examination of witnesses in only so tiny a proportion of disputes. This is also at variance with the assurance given to the House of Commons when the Financial Services and Markets Bill was in comm-ittee by the then Treasury economic secretary, who said there would be a hearing whenever either party requested one.
English law requires a professional regulator to order an oral hearing where there is a dispute of fact which is central to an adjudicator’s assessment and which cannot fairly be resolved without an oral hearing.
Finally, there is so close a structural connection between the FOS and the FSA as to cast doubt on whether the FOS can be regarded as independent of the regulator. Thus, for example, the FSA appoints and may dismiss the chairman and directors of the FOS. The chief ombudsman and the FOS must report to the FSA on the discharge of their functions and the FSA must approve the budget of the FOS.
Such concerns are exacer-bated by the conduct of both organisations. For example, the FSA has asked the FOS to solicit complaints from investors and the FOS has done so – contrary to its own rules.
These features make the FOS system incompatible with the rule of law. The FOS is an affront to the rule of law. It is wholly unacceptable for a body with jurisdiction to order firms to pay compensation of (currently) up to £100,000, and a proposed new limit of £150,000.
The rule of law is not just an academic legal principle, it is a central pillar of the British constitution. Prof-essor Sir Neil MacCormick has written: “Where the rule of law obtains, the government of a state … is carried on within a framework laid down by law. … Where the law prevails, you know where you are and what you are able to do without getting yourself embroiled in civil litigation or in the criminal justice system… There cannot be a rule of law without rules of law…. Values like legal certainty and legal security can be realised only to the extent that a state is governed according to pre-announced rules that are clear and intelligible in themselves.”
Thus, under the law, I know in advance where I can and cannot park my car. But if I could park only where some official specified after the event, I would have no right to park at all. Similarly, if my right to my possessions is watered down to mean only a right to hold them until the FOS decides it is fair and reasonable for me to pay them to somebody else, then I have no “right” in a true sense to my possessions at all.
This conclusion is reinf-orced by the fact that there is no appeal and the fact that any judicial review of a FOS decision on the merits of a case is, for all practical purposes, impossible because of the vagueness of the subjective (“in the opinion of the ombudsman”) fair and reasonable criterion.
In my next article, I will go into the detail of our reform proposals. Briefly, these are that cases at the FOS would be decided by the adjudicators. Already they decide at least 93 per cent of cases.
The position of ombuds-man would be abolished. Instead, both the customer and the firm would be able to refer the adjudicator’s decision to a new first-tier tribunal. If the firm wished to refer the case, it would have to pay the amount awarded to the customer or into the tribunal, where it would be held pending the tribunal’s decision. The case would be completely reheard orally, with the examination and cross-examination of witnesses. English law would apply. Customers would not be exposed to a costs order against them.
If a firm initiated a refer-ence and lost, it would have to pay the customer’s costs. The money saved by the abol-ition of the position of omb-udsman would be used to create a legal aid fund to help customers present their cases to the tribunal.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court