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