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How to improve the FOS

In my last article on May 19, I said that Anthony Speaight, QC, and myself have developed some constructive proposals for the reform of the FOS and we have submitted a paper which sets out our proposals to the Treasury.

I summarised the well known defects in the FOS system which have had the effect of making the FOS, and the way it works, an affront to the rule of law. I said it is wholly unacceptable for a body with the power to order compensation of up to £100,000, and a proposed new limit soon of £150,000, not to comply with the rule of law.

One answer to these criticisms could be that a binding award of financial compensation against a financial professional should be made only by a court. But there would be disadvantages. Most complaints to the FOS are made by individuals against big financial corporations so the imbalance of resources is great.

Court proceedings either place consumers at a disadvantage because they are unrepresented or impose on them an undue financial cost in engaging legal representation. So there seems to be a conundrum – an existing arrangement which denies the rule of law, or an alternative which unfairly handicaps consumers.

We believe there is a solution. But before explaining what it is, it is necessary to look at one of the features of the FOS and to explain an existing, successful dispute resolution process in another industry.

The FOS decision-making staff are on two levels – ombudsmen and adjudicators. There are now about 71 ombudsmen, and they have a higher status than the adjudicators.

Every complaint to the FOS is considered by an adjudicator, who summarises the issues and sets out a proposed decision. This is sent to both parties. The vast majority of all complaints go no further – the adjudicator’s assessment is accepted by the parties.

It is only if that assessment is not accepted by a party that a case proceeds to an ombudsman. Its last annual report shows the FOS then dealt with 166,321 complaints, of which 10,730, only 6.5 per cent, got to an ombudsman.

If a case does go to an ombudsman, he first writes a provisional decision. This is sent to the parties for comment. After considering their comments, he writes a final decision.

So, in that small minority of cases there are no fewer than three decision letters written, some up to a dozen pages in length. This drawn-out procedure means that the FOS can take a long time to reach its decisions. Three years is not uncommon. This is hardly satisfactory, given that the FOS was established as “…a scheme under which certain disputes may be resolved quickly…”

Is there a way of improving matters?

In 1996, Parliament introduced a radical reform in the construction industry and required, with limited exceptions, every construction contract to provide the right for either party to refer a dispute to a procedure called adjudication. Adjudication means a decision by an independent person within 28 days.

The dominating characteristic of adjudication is speed. One consequence of the speed is that the justice is rough and ready but it is also popular because of the availability of litigation or arbitration to rectify a decision if either side believes it to be wrong. That fallback makes its rough and ready nature acceptable.

The last decade’s practical experience has been that over 99 per cent of adjudication decisions are accepted by the parties without further challenge.

The essence of our proposal is that the FOS’s decisions should have a standing similar to that of construction adjudications. In other words, FOS decisions should have to be complied with as soon as they are made but both parties, and not just the customer, should have the right to have the case reheard and to get a binding decision by a tribunal operating consistently with the rule of law.

This would immediately allow the FOS to simplify and speed up its own procedure. There would be no need for the FOS to have more than a single tier and a single decision letter. This would allow considerable staff reductions and cost savings.

We propose that there should be a new specialist tribunal as part of the tribunal system administered by the Ministry of Justice. It could be called the Financial Services Complaints Chamber.

The system would operate in a slightly different way, depending on whether a review of the FOS decision was being sought by the firm or the customer. In the case of a request by a firm, it would have to comply with the FOS decision within 28 days. That would be a precondition for the firm to take the case to the FSCC.

If there was a significant and reasonable worry as to whether the complainant could repay the award if he or she lost before the FSCC, the firm could be allowed to pay the money element of the award into the tribunal to be held by it.

Experience of specialist courts shows that they can handle complex cases surprisingly quickly and without detriment to the quality of justice

The FSCC could have an unlimited jurisdiction. Thus, supposing a firm lost a pension transfer case at the FOS and faced a maximum FOS award of £100,000 but the actual loss to the customer was £250,000, the FSCC, if it held in favour of the customer, could award the full £250,000.

On such reviews, the customer would be entitled to an order for costs against the firm if the FOS award were upheld but the firm would not be entitled to a costs order against the customer, irrespective of outcome, unless the customer’s conduct was vexatious, frivolous or unreasonable.

The FSCC would have jurisdiction to handle two kinds of applications for review by customers. One would be where the FOS had dismissed the complaint altogether. The other would be where FOS had upheld the complaint, but full compensation would be in a sum in excess of the FOS’s jurisdiction limit, currently £100,000.

In the case of a request for a review by the customer, there would normally be no orders for costs other than recovery of the tribunal filing fee from the firm if the customer was successful. This would be in line with general practice in most tribunals.

The FSCC would be a specialist tribunal with a chairman who would be a lawyer and up to two other members – a financial services industry expert, and a lay person representing consumer interest. Members would, through training and experience, be able to deal with technical cases far more quickly than, say, a county court district judge. Experience of specialist courts shows that they can handle complex cases surprisingly quickly and without detriment to the quality of justice.

The FSCC would always hold a hearing unless both parties asked for a case to be dealt with by written submissions alone. There would be a full rehearing, as if it had never been heard before. Where matters of fact were in dispute, witnesses would give evidence and be tested by normal cross-examination. The FSCC would apply the law of England. It is likely, therefore, that the FOS adjudicators would cease to make awards contrary to English law.

Entitlement to the rule of law is absolute and unqualified. But how many cases would the FSCC have to cater for?

Taking into account the current experience of the FOS and the construction industry, it seems likely numbers would be modest, maybe 750 to 1,000 cases a year – sufficient to keep the tribunal occupied but not so many as to dent the overall picture of speedy and simple redress and certainly not so many as to overwhelm any system.

Customers seeking to uphold a FOS decision would face no risk of an adverse costs order but in order to persuade the FSCC in their favour, consumers would naturally want to match legal representation employed by a firm.

It is unlikely that legal aid would be available. Accordingly, we propose the establishment of a legal aid scheme for consumers, to be wholly funded by the financial services industry, and largely out of the savings made by the dismantling of the FOS’s second tier of decision-making.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court


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There are 12 comments at the moment, we would love to hear your opinion too.

  1. I really hope that we do not see an adjudication and tribunal service for finance. An effective Ombudsman scheme is much more than adjudication of complaints and allows for a more customer service orientated approach to resolution (a positive difference from judicial and quasi-judicial approaches).

    Ombudsmen also have the further advantage in that they can and do often advise on systemic change – something you don’t see from the adjudications schemes for telecoms complaints and postal complaints (and who has heard of those schemes….?). An Ombudsman can consider all the circumstances which gave rise to the complaint and make recommendations for a change of practice or procedure in a particular firm or across the whole sector – for the benefit of all future customers. Adjudication focuses on the merits of the individual complaint and is far more limited in effecting change. Ombudsmen acquire knowledge and experience of good practice and this further informs their recommendations.

    Maybe FOS should re-title adjudicators to investigators or case handlers (in line with most other UK Ombudsman schemes). Ombudsmen can examine records, interview witnesses and use professional experts where appropriate. The procedure for investigations can be tailored to the circumstances of the case.

    Ombudsmen provide remedies which are fair and reasonable in all the circumstances, and are not necessarily bound by a strict interpretation of the law or precedent. Law based schemes often end up with firms acting in the same way – rather than focusing on delivering effective resolution of customer dissatisfaction and maximising customer confidence, loyalty and trust (benefiting the reputation of the sector).

  2. Simon Mansell 7th June 2011 at 9:45 am

    Peter is of course right and it needs a man of the law to spell this out to a bunch of regulators who know nothing of human rights. FOS is an attack on the rule of law and an example of what happens when you hand over quasi judicial powers without imposing quasi judicial rules, obligations, accountability and a right of appeal.

    It is true that each generation is obliged to fight, win and retain these rights and that is what you each IFA must do. FOS has no place is a democracy that operates under the rule of law. These rights were earned in blood and given to you in 1948 in an attempt to never repeat the loss of life and human rights ovber two world wars. Even before this, dating back as far as 1215. The consideration paid for these rights was a far higher price than you or I will ever be asked to pay, but only if we remain diligent.

    Universal Declaration of Human Rights
    General Assembly res. 217A (III), 10 December 1948

    Article 6
    Everyone has the right to recognition everywhere as a person before the law.

    FOS is in breach of this!

    Article 7
    All are equal before the law and are entitled without any discrimination to equal protection of the law. All are entitled to equal protection against any discrimination in violation of this Declaration and against any incitement to such discrimination.

    FOS is in breach of this!

    Article 8
    Everyone has the right to an effective remedy by the competent national tribunals for acts violating the fundamental rights granted him by the constitution or by law.

    FOS is in breach of this!

    Article 10
    Everyone is entitled in full equality to a fair and public hearing by an independent and impartial tribunal, in the determination of his rights and obligations and of any criminal charge against him.

    FOS is in breach of this!

    The Magna Carta 1215

    It does not stop there and the above provisions only go to reinforce a document negotiated on the 10th of June 1215, at Runnymede, The Magna Carta. Here I will let the articles speak for themselves. I use their original chapter numbers:

    20. For a trivial offence, a free man shall be fined only in proportion to the degree of his offence, and for a serious offence correspondingly, but not so heavily as to deprive him of his livelihood.

    FOS is in breach of this!

    38. In future no official shall place a man on trial upon his own unsupported statement, without producing credible witness to the truth of it.

    FOS is in breach of this!

    39. No free man shall be seized or imprisoned, or stripped of his rights or possessions, or outlawed or exiled, or deprived of his standing in any other way, nor will we proceed with force against him, or send other to do so, except by the lawful judgement of his equals or by the law of the land.

    FOS is in breach of this!

    40. To no one will we sell, to no one deny or delay right or justice.

    FOS is in breach of this!

    45. We will appoint as justices, constable, sheriffs, or other officials, only men that know the law of the realm and are minded to keep it well.
    These are the chapters at the heart of Magna Carta.

    FOS is in breach of this!

    So there you have it – you are right and they are wrong and that is why you will win and they will fail.


    Simon Mansell

  3. Green Eyed Monster 7th June 2011 at 9:59 am

    Excellent proposal Peter, the most important element of which is bringing the FOS under the rule of law.

    Have you a proposal to make the new FCA subject to the courts, and especially the Human Rights legislation?

    It’s time to stop the ‘outlaws’ running the show!

  4. The Australian FOS uses a ‘panel’, we should do the same, preferably a panel of our peers.

  5. Good idea Evan, but we would get a panel made up of consumer groups.

  6. Many thanks to Peter for all his work which will hopefully benefit IFA’s, he is one of the few who realise the injustice we face and seeks solutions to these acts commited outwith the rule of law, which amount to a breach of human rights

  7. I think I am broadly in favour of what Peter Hamilton has suggested, but will need to read it again a couple of times to get my head round it.
    Thank you do submitting this idea to the Treasury, at least it will make it harded for them to justify the status quo without putting forward their case for it.
    To me, the current system is repugnant and clearly contrary to 100’s of years of English Law (and that is despite never having a complaint go to FOS as we’ve only had one to date at all). It doesn’t even serve the consumer very well as mediation could maintain the client relationship rather than the confrontatial system we appear to have at present.

  8. One of the greatest misconceptions is that advisers are against having an independent dispute resolution body.

    In fact, virtually everybody I talk to is in favour of such a body with the caveat that the current incarnation fails miserably to meet the minimum requirements of justice and fair play.

    This country has always prided itself (or fooled itself) that we have the most balanced and civilised form of justice in the world. Maybe so but the FOS is able to operate outside of the tenets of justice and the rules of law developed over hundreds of years.

    The system is lopsided in favour of the consumer and this ensures not only that miscarriages of justice occur but that they cannot be put right due to the restrictive parameters of the Dispute Resolution rules.

    – A firm is not allowed an oral hearing
    – A firm is not allowed an independent appeal process
    – A firm is not allowed a 15 year longstop on stale complaints
    – A firm is potentially liable for a £500 case fee even if the complaint is rejected
    – Firms fund the service via an annual levy within the FSA fee structure.
    – Consumers are free to level complaints thereby enabling the unscrupulous and opportunistic to take advantage in the hope of a freebie.
    – Consumers who lie and seek to defraud are not reported to the police whereas any firm found doing so would be reported to the FSA.

    Add to this the knowledge that adjudications are as consistent as Labour’s pension policy and you have the template for a depressingly one-sided and unbalanced system.

    Ex Chief Ombudsman, Walter Merricks, once described the ombudsman service as “a one-sided scheme offering an unlevel playing field broadly supported by those playing up hill”. Nobody in the industry would disagree with him.

    Let us consider some simple adjustments which would render the existing system as more balanced and fair.

    a) Make complainants pay a modest fee, say £50, which is refunded if succesful.

    b) Ensure that only the complaint is investigated as opposed to the adjudicator searching avidly for some ‘error’ allowing him to uphold the complaint.

    c) Ensure that the industry works within the same time-limits as apply to the rest of the commercial world

  9. I feel this still too unfairly favours the Consumer.

    They are not required to bear any of the costs (has anyone ever had FOS reject a complaint for being vexatious?).

    Alas, you also mentioned the Ministry of Justice – which seems to be useless (how many Adverts offering free compensation do you see – thats hardly ‘Fair, Clear and No Misleading’!).

    So I think we need to include a cost for a complainant (minor, £100-£250 depending on type/FOS adjudication) and a cost for any Third Party Complaint Firms (equivalent to the FSA regulated firm) – and the winning party gets their money back.

    It’s fairer
    Both parties are more likely to accept any FOS initial ruling
    AND it would reduce the chance of fraud/(or ‘misremebering the truth’) occuring.
    Third Party Complaint Firms would actually be benficial for the industry

  10. Exasperated me 7th June 2011 at 3:27 pm

    A mandatory and binding dispute resolution scheme MUST have an independent appeals process, the FOS often says there is one but a judicial review is NO SUCH THING. Anyone who administers this scheme without any consideration of the law should hang their heads in shame. The regulators are all guilty as charged.

  11. The minstry of justice was discussing a reduction in the longstop for solicitors and accountants to 10 years, whilst still leaving IFAs with the inability to claim theirs at all and possibley in a case in which all three parties could have been involved, i.e. an investment in trust with tax implications.
    How is that right?
    Rather impressive that all those solicitors and accounntants who we do business with wanted theirs shortened, and to deny us the common law defence they can continue to rely on.
    Also ratehr funnt that the F-pack is staffed by so many Solciitors and Accountants (like Lesley Titcombe) and Mark Hoban at teh Treasury.
    How about they lead by example and change their own professional bodies longstop to macth ours rather than dictating our time limits to us as they have done.

    Thank you for you email of 5th November.
    I attach a URL of the Written Ministerial Statement made by The Parliamentary Under-Secretary of State
    for Justice (Bridget Prentice) stating that the proposed reforms on limitation will not be taken forward.
    Should you have any further questions, please do not hesitate to contact me.
    Legal Policy
    Civil Law and Justice Division

  12. One thing that would level the playing field is for claimants to have to pay a fee to FOS where it is found that the claim is frivolous/fraudulent/mischievous or otherwise unwarranted.

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