The publication of the joint FSA/Financial Ombudsman Service consultation paper on the two-yearly review of the FOS once again raises the issue of a right of appeal.
There are two reasons why a right of appeal will not benefit the vast majority of IFAs – cost and cost. This may not be a popular message to on the receiving end of an adverse FOS decision but rights of appeal are a two-edged and rather expensive sword.
In general, the FOS is working. In 2004, it resolved 76,704 cases, only 8 per cent going as far as an ombudsman's decision. Of these cases, 37 per cent were decided in favour of the customer and 47 per cent in favour of the firm. This shows that rights of appeal are irrelevant for the vast majority of complaints but if there was an appeals process, it would be used by customers more often than IFAs, particularly as IFAs should be able take a dispassionate view of adverse decisions.
To a certain extent, rights of appeal already exist. Decisions are initially made by an adjudicator. Parties who are unhappy with an adjudicator's decision can refer the matter to an ombudsman.
If the ombudsman's decision is likely to be significantly different, the ombudsman will normally issue a provisional decision so that the parties have a further opportunity to comment before the decision is finalised.
FOS decisions may be the subject of judicial review. The Norwich & Peterborough case held that review by the courts is appropriate where the FOS misinterprets a point of law, makes a decision which is irrational, takes into account an irrelevant fact or fails to consider a relevant fact.
In addition, the independent assessor can review complaints where the customer is dissatisfied by the investigative process or the behaviour of FOS staff. Last year, the FOS was ordered to pay compensation in 28 cases. This remit does not extend to firms and perhaps it should. Having said that, the assessor cannot consider the merits of FOS decisions.
The costs of judicial review are substantial but this leads on to an important point. If there was an appeal procedure, what form should it take and how should it be funded? The consultation paper discusses various procedural options, which I do not propose to repeat, but its comments on cost should sound a warning.
The FSA has suggested that where a firm invokes an appeal process, it should pay, irrespective of the outcome. This means that firms will not have the benefit of a subsidy provided by the annual levy.
The FOS can deal with cases worth over £100,000 but it rarely does so. This alone means that for most cases, a court-based process would be disproportionately expensive. Even an informal process could be expensive as, at this level, lawyers might be required.
On this basis, I do not think an appeals process would significantly benefit firms. There is an exception – wider implications cases. However, a right of appeal is not the answer. In wider implications cases, an informal dispute resolution procedure is inappropriate. The PIA and banking ombudsman schemes made express provision for wider implications cases to be taken to court, provided that the firm agreed to meet the customer's legal costs.
In fact, these provisions were used only three times, most famously giving rise to the decisions on the treatment of windfall benefits in the pension review and Equitable Life's bonus declaration practice.
The FOS rules do not contain such provisions although the FOS can decline to make a decision if it feels an issue would be better dealt with in court. There are no published statistics to show how often this power is used. Experience would suggest rarely, if at all.
Despite this caveat, one cannot have it all. IFAs have a generally speedy, informal and cost-effective dispute resolution process which is popular with both firms and customers.
Burdening this system with an appeals process might result in better decision-making in a small number of cases but customers are as likely to be favoured by this as IFAs and the additional cost is unlikely to be proportionate to the benefit received. On that basis (and unusually) I agree with the FSA's tacit position that an appeals mechanism is inappropriate.
Harriet Quiney is a senior solicitor in Reynolds Porter Chamberlain's financial services team