The financial services compensation culture, fuelled by the negative, sensationalist and ill-informed media and furthered by the FSA, is spiralling out of control. Complaints to the Financial Ombudsman Service have doubled over the last 12 months to 98,000 a year.
During the last year, just 25 complaints were thrown out as frivolous and vexatious. This is hardly surprising as the FOS has been earning a £360 case fee from the defendant for every complaint, no matter whether they win or lose the case.
The more complaints the better. A total of 98,000 complaints at £360 per case reaps over £35m a year in fee income. No wonder there is reluctance to change the system.
For many years the complaint fee was higher at £500. A fig leaf has been thrown at defendants, which are now waived the fee for the first two complaints each year. OK, that is something, I guess, but still patently unfair and contrary to EU law on human rights.
Contrast this with the Small Claims Court, for example. The plaintiff pays a court fee and the defendant pays nothing unless he counterclaims. The losing side pays the other side's court fees and loss of earnings for attendance at court. What a fair system. Why can't we have the same system for FOS complaints? Seems fair to me.
At the moment, the plaintiff can complain for free. The defendant pays the fee and, of course, incurs a loss of earnings in defending the case. I propose that the plaintiff pays a fee to the FOS which is only refundable if they win the case. Loss of earnings can be paid to the plaintiff, too, if they win. Obviously, the case fee and loss of earnings become payable by the losing defendant. If the defendant wins the case, then they should receive loss of earnings only from the plaintiff.
There is much anecdotal evidence of people chancing their arms by putting in compensation claims when they know they haven't been missold to. The FSA should put a stop to this because it is illegal to make a fraudulent claim.
According to the FOS, two-thirds of complaints are rejected. I cannot verify the FOS's statistics but my anecdotal experience is that complaints against IFAs result in a much higher rejection rate, probably nearer nine out of 10. I suspect the FOS is adding together complaints against all types of firms. This may be the case, considering just how easily many insurance companies give in to complaints. Let's face it, in many cases it is the with profits policyholders and/or shareholders who are picking up the bill. Certainly, the directors' pay packages do not seem to be affected too much by these compensation bills.
Some might say my proposals are too radical. I am not advocating that there should be no fee at all but I believe the number of complaints would fall dramatically if a) the complainant had to pay a fee which could be forfeited and b) the complainant was made aware that fraudulent claims could result in prosecution.
Someone with a legitimate complaint will have nothing to fear under such a system. As for the chancers out there, they had better watch themselves. They would not want to face prosecution, would they?
Any chance of the FSA implementing these changes? Not a cat in hell's chance. The all-powerful, omnipotent regulator would have too much to lose. Who in their right mind would want to throw away that level of income, together with lots of staff, a multi-million-pound building in Canary Wharf and index-linked final-salary pension schemes for staff?
The one thing that could create change would be if our industry for once took decisive action. Lobbying is the key. Try the IFA Bonus website at www.ifabonus.co.uk, which gives an abundance of useful information including how to lobby your MP and MEP. It can be as quick and easy as an email or a fax. Sheer weight of lobbying can have an effect. And do not forget organisations such as the IFA Defence Union and Aifa, which are both doing a sterling job for IFAs.
When you consider that total daily insurance claims (life, pensions and general) amount to £297m – which is considerably more than the Government pays out in social security benefits to all people who live and work in the UK each day – it really makes you wonder if the lunatics are running the asylum these days.
Tony Byrne is business development director at Wealth And Tax Management