The FCA’s claim that an EU directive is standing in the way of progress on a long-stop for advisers is a “flight of fancy” which does not stand up to scrutiny, say experts.
In March, the FCA revealed in its 2014/15 business plan that it would consider the case for a 15-year long-stop on complaints to the Financial Ombudsman Service.
But at the regulator’s annual public meeting earlier this month, FCA chief executive Martin Wheatley said the review cannot move forward until issues with the European alternative dispute resolution directive are resolved.
Wheatley said the directive looks at the extent to which a long-stop would be a legal constraint on consumer rights but regulatory experts argue there is nothing in the directive to prevent the introduction of a long-stop.
Under current FCA rules, when consumers submit a complaint to a firm, they have six months from receipt of the firm’s final response to submit a complaint to the FOS. Under the ADR directive, this will increase to a year.
Consumers also have six years from the event to which the complaint relates or, if later, three years from when the consumer knew they had cause to complain.
In civil actions in the courts, however, there is a long-stop requirement that the matter complained about must have occurred in the past 15 years. Advisers have long campaigned for this to be applied to complaints to the FOS.
The ADR directive aims to harmonise dispute resolution schemes across Europe and must be implemented by member states by 9 July 2015. It applies to all industry sectors, not just financial services.
The directive says member states may permit ADR schemes to refuse to deal with a dispute on a number of grounds. These include if the consumer has not submitted the complaint to the scheme within a “pre-specified time limit”, which must not be “less than one year from the date on which the consumer submitted the complaint to the trader”. Experts say while this is different from a long-stop – which would apply from the date the advice was given – it shows the directive recognises the potential for time limits.
The directive says ADR schemes can also refuse to deal with disputes if it would “seriously impair the effective operation of the ADR entity”.
Zurich principal for government and industry affairs Matthew Connell, who worked with Apfa on its 2012 Fair Liability 4 Advice campaign, says the FCA could argue that because a long-stop is not listed explicitly, the directive does not allow for it.
But he adds: “I disagree, because this directive covers hundreds of types of organisations, so to provide an exhaustive list of situations where ADRs can refuse complaints would not be practicably possible.
“The directive recognises the principle of time limits, plus there is a strong case for arguing the lack of a long-stop impairs the effective operation of the FOS by making it fundamentally unfair on advisers.”
Cicero senior associate Alexander Kneepkens says the legislation is a framework directive so gives member states a great deal of flexibility.
He says: “The inclusion of a time limit in the list of reasons for excluding a consumer from an ADR scheme would point towards something like a 15-year long-stop, rather than away from it. There is nothing in the directive to prevent the introduction of a long-stop.”
Clarke Willmott partner Philippa Hann adds: “All the directive says is the time limit cannot be less than one year from when the consumer complained to the firm. There is no reason why the FOS should apply different time limits from the courts.”
Some experts argue the FCA is using the directive as an excuse to delay its review of the long-stop.
Apfa director general Chris Hannant says: “I strongly believe this directive should not prevent the introduction of a long-stop. The FCA is on a flight of fancy. The directive specifically recognises the potential for statutory limits.
“Other member states already have limitation periods on dispute resolution schemes so if the FCA’s interpretation was correct, it would mean wide-sweeping change across a broad range of countries and sectors. If that was the case, the directive would have explicitly ruled out a long-stop, so this is just the FCA’s fervid imagination at work.”
European countries that impose a long-stop on complaints to an ADR for investment intermediaries include Portugal and Italy.
Independent regulatory consultant Richard Hobbs says the directive is a “red herring”.
He says: “The real issue with the long-stop is that problems with long-term products such as pensions may take decades to surface. There is a tenuous link to the directive, which simply provides the FCA with a fig leaf for delay. The FCA is trying to put off a difficult conversation with the industry for another few years.”
An FCA spokeswoman says: “Together with the Government, the Treasury and the FOS, we are con-sidering how the directive will affect the FCA’s rule book and will consult on any changes in the autumn.”
Separately, the directive could lead to an increase in levies because the FOS will be forced to resolve complaints more quickly.
The directive states that ADR schemes must deal with complaints within 90 days of the date on which they receive the complaint file. It says this can be extended in exceptional, highly complex cases.
The directive also says those in charge of resolving disputes must possess “the necessary expertise”, which includes “the necessary knowledge and skills in the field of alternative or judicial resolution of consumer disputes, as well as a general understanding of law”.
The FOS has previously come under fire for a lack of compulsory qualifications for its staff. FOS adjudicators and ombudsmen must be graduates but do not need specific financial qualifications.
Hann says: “There is currently a six-month waiting list for an ombudsman to consider a complaint after an adjudicator decision.
“If the FOS has to process all but exceptional complaints within 90 days, I wonder how it will cope. This could significantly increase its costs while competency standards for staff could also be a real issue.”
A FOS spokesman says, from conversations with the European Commission, it understands the 90-day limit will apply only to adjudicator decisions, not ombudsmen’s, because most ADR schemes in Europe operate an external appeal process.
The FOS currently measures the timeframe of complaints from the point at which it has the relevant information from all parties rather than the point at which it receives the complaint, as the directive indicates with its 90-day limit. Including ombudsman decisions, the FOS currently resolves 44 per cent of cases within three months and 71 per cent of cases within six months.
The spokesman says: “We do not anticipate it will be particularly challenging for us to meet the directive’s time limits.
“We already meet the staff requirement through our training for adjudicators and the expertise we have among our ombudsmen.”
Expert view: Directive leaves room for a long-stop
The argument that could be used for the alternative dispute resolution directive preventing a long-stop is that it lists six circumstances when member states can exclude people from going to an ADR but none are explicitly about a long-stop.
One relates to a time limit and one is a catch-all clause that applies to anything that would impair the scheme’s effective operation. Given the directive applies to all industries, this list is clearly not meant to be definitive.
Also, it is a directive and not a regulation so does not have to be implemented word-for-word. It is more about an intention and I do not believe those writing the directive had the outlawing of a long-stop in mind.
The Government has set out its stall to avoid the gold-plating of EU legislation and to avoid rules that add undue burden, particularly for financial services. This is a good opportunity to show the UK has left its gold-plating days behind.
The directive also states that ADR schemes should be able to refuse to deal with complex disputes that would be better resolved in court.
The UK courts say anything beyond 15 years is too long ago to accurately determine what happened. So the directive imagines the courts dealing with all complaints and ADR schemes only with less complex ones, while in the UK we have almost the opposite situation.
For all these reasons, a 15-year long-stop would certainly be in the spirit of the directive.
Matthew Connell is principal for government and industry affairs at Zurich
The FSA’s long-stop excuses
- January 2003: “We do not consider it is in the interests of consumers to rule out the possibility of complaints being dealt with outside the 15-year period that would apply to court cases. Nor do we consider this necessary to prevent hardship to firms.”
- November 2008: “We have been unable to demonstrate that a long-stop would bring additional benefits to consumers and firms given that the consumer detriment from time-barred complaints is equal to the resulting benefit for firms from [lower] compensation payments.”
- November 2009: “One of the key functions of our regulatory regime is to protect consumers. A long-stop clause may be inconsistent with that regime if it seeks to exclude or restrict any liability a firm may have to a consumer.”
The little-known change to the long-stop for lawyers
Advisers have previously cited lawyers as having greater protection from historical complaints. But the same time limits that apply to the FOS now apply to the Legal Ombudsman.
Before February 2013, the Legal Ombudsman was subject to a limit of one year from the date the advice was given or one year from when the customer could have realised there was cause for complaint. But these limits were increased to six years and three years respectively.
However, the compensation limit remains much lower for legal cases, at £50,000 (up from £30,000). The FOS can award £100,000 for complaints referred before January 2012 and up to £150,000 for those referred after.
A 15-year time limit for negligence claims against lawyers applies in the courts but no such limit applies to the Legal Ombudsman.
Alan Lakey, partner, Highclere Financial Services
It is very convenient for this to pop up now when the FCA is about to enter discussions with Apfa on the long-stop. One could believe the regulator is looking for reasons not to go ahead and it needs to prove those suspicions wrong.
Jason Witcombe, director, Evolve Financial Planning
It seems like the long-stop is dragging on and is not the regulator’s top priority. There should be a way for advisers to retire in peace and it upsets me to hear about advisers in their 70s and 80s who are being pursued by complaints.