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Reform the fos to bring justice

As part of Lord Hunt’s independent review of the Financial Ombudsman Service, he was asked to consider whether the FOS should do more to increase its visibility and accessibility to those it is designed to serve.

Lord Hunt made many useful recommendations but his report is flawed because he made no attempt to consider the question of accessibility from the viewpoint of both parties to the disputes being adjudicated on by the FOS. He was concerned only with accessibility by complainants.

He did not start with the fundamental question of what the FOS is for. Is it there to do justice between the parties? He also did not touch on the question of accessibility to justice which is done openly and in public. If he had begun with these questions, he may well have concluded that the FOS has now developed to the stage at which fundamental reform is necessary to decide disputes justly and publicly.

A symptom of his relatively superficial approach to the question of accessibility is the fact that he repeatedly but incorrectly describes the service provided by the FOS as a form of alternative dispute resolution to the traditional court system.

The point about ADR is important. As generally understood in the UK at least, an essential feature of ADR is that it is a wholly voluntary procedure which will achieve a resolution only if both parties agree to it.

Lord Hunt is wrong to describe the FOS as providing ADR for the simple but important reason that firms subject to the compulsory jurisdiction of the FOS have no choice as to procedure or forum if a complainant refers a dispute to the FOS and are bound by its decision whether they agree to it or not.

The complaint-handling schemes in existence before the FOS were based not on statute but on the essentially contractual nature of the relationship between the regulators and the firms.

The Financial Services and Markets Act 2000 established the new regulatory system based on the FSA as the single regulator. The act also provided the framework for a statutory dispute resolution scheme dealing with disputes between firms regulated by the FSA and their customers. The FSA was made responsible for establishing the service. It is firmly embedded in the present regulatory system and makes its decisions on the basis of whatever it considers fair and reasonable, whether or not that is the same thing as the law.

By the time a case gets to the FOS, it is no longer simply a complaint, it is a dispute. Since the FOS has taken over from the previous schemes in existence, both the scope of its jurisdiction and the number of cases it handles has grown. It deals with disputes across most areas of financial services.

Three of the most significant aspects of the FOS are:

  • Access to the FOS for complainants is free.

  • Firms involved in disputes which are referred to the FOS are bound by its decisions.

  • The FOS can make awards against firms of up to £100,000.

    It is instructive to compare the FOS’s workload with that of the ordinary courts and tribunals. In 2006-07, the FOS considered 112,000 cases. It is not possible to make direct comparisons because comparable figures are not available but in the High Court in 2006, just over 60,000 cases were commenced. Only a small percentage of those would ever be considered by a court.

    In the same year, just over two million cases were commenced in the county courts. Again, only a very small proportion would ever be disposed of by the court itself. Excluding family cases, there were about 47,000 small county court trials and about 18,000 more substantial trials.

    Around 103,000 cases were disposed of by employment tribunals, of which 33,000 followed full hearings. It can therefore be seen that the FOS has a significant part to play in dispute resolution alongside the traditional courts and tribunals.

    At about the same time as the FOS was established, the European Convention on Human Rights was given legal force in the UK by the passing of the Human Rights Act 1998. Article 6 provides that: “In the determination of his civil rights and obligations … everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. Judgment shall be pronounced publicly.”

    There can be little doubt that Article 6 is applicable to the FOS because by making a decision in respect of the dispute before it, the FOS will be determining the civil rights of both parties to that dispute.

    All the traditional courts and tribunals comply with the European Convention on Human Rights but the FOS does not. This raises serious constitutional issues. The FOS almost always refuses a request for a public hearing despite its own rule that there should be such a hearing if fairness requires it.

    On June 21, 2005, principal ombudsman and decisions director Tony Boorman told a seminar convened by the Council on Tribunals that the chances of there being an oral hearing were very slim. He estimated that there would be one in every 10,000 cases.

    Many firms that have had cases dealt with by the FOS feel that it is the consumers’ champion. The FOS is not independent of the FSA in important respects and, indeed, one of the FSA’s statutory objectives is the protection of consumers.

    The FOS does not apply the law when deciding cases, it does not deliver decisions in public and does not publish them as a matter of routine. There is no general right of appeal.

    These defects in a scheme operated by a body deciding disputes affecting the rights and property of citizens up to the value of £100,000 amount to a damning indictment of the administration of justice. A major function of the state is to provide access to a full and proper dispute resolution service for all its citizens.

    In relation to all financial services disputes with a value of up to £100,000, the state is failing its citizens. Lord Hunt should have addressed that failure. All other issues of accessibility pale into relative insignificance by comparison. In the interests of justice for both parties to financial services disputes, the time has come to address that failure. The FOS should be reformed.

    This would require legislation, the aim of which would be to create a new system that would meet the consumer objectives that led to the establishment of the FOS but which would be compatible with the European Convention on Human Rights and would bear comparison with other courts and tribunals. The details would need to be worked out but essentially it should be removed from the regulatory regime and become part of the tribunal system run by the court service under the control of the Ministry of Justice. No doubt, it would function as a specialist tribunal, just as employment tribunals are specialist.

    The main features of the present scheme could be retained. The right of access to the new FOS could still be free and funded by a regulatory-based levy. Its procedure could still be informal and largely conducted in writing. Case workers would still be needed and with sufficient manpower it could still be relatively quick. Indeed, the traditional courts could learn a few lessons from the FOS.

    However, the new FOS would have judges appointed in the same way as those in tribunals are appointed. They would apply the law. There would be oral hearings in public if fairness required it. Decisions would always be given in public and there would be a right of appeal on the same basis as available in the traditional court system.

    The FOS would then fulfil its current statutory purpose of being a scheme under which disputes relating to financial services would be resolved quickly and with minimum formality by an independent person. Equal access to justice would be available to both parties to the dispute.

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

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