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Watchdog must not be a law unto itself

Clarke Willmott partner Robert Morfee says the Financial Ombudsman Service has no accountability

Responding to a report in Money Marketing that my firm had advised that the Financial Ombudsman Service’s procedures were open to criticism, FOS spokeswoman Emma Parker was quoted as saying: “A solicitor paid by Evan Owen (the chairman of the IFA Defence Union) is entitled to their opinion but it is a good thing that we are publicly accountable”.

For the avoidance of doubt, my firm was paid for the advice referred to neither by Evan Owen nor the IFADU.

That notwithstanding, I should like to examine the extent to which the FOS is publicly accountable and to explain why I think that reform is urgently required.

The theory behind FOS is laudable.

The English courts are expensive and inaccessible to the ordinary citizen. There is a need for a more user-friendly civil dispute resolution mechanism. To fill the gap in a number of areas, the idea of the ombudsman – the citizen’s champion – was borrowed from Scandinavia.

In the field of financial services, this has been manifested in FOS, created by the Financial Service and Markets Act 2000.

I believe that the FOS fails in the task for which it was created and that, in its operation and remit, it breaches Article 6 of the European Convention on Human Rights, as adopted by the Human Rights Act 1998, which requires all EU countries to provide dispute-resolution machinery which involves a fair and public hearing within a reasonable time.

As its website proclaims, the FOS is an alternative to the courts. The courts apply the law and the FOS should do likewise. But here FOS falls at the first hurdle.

The Disp rules require that disputes are to be determined according to what the ombudsman considers, “fair and reasonable in all the circumstances of the case”.

It is constrained to take account of the relevant regulations, regulator’s rules, guidance and standards. etc but it can, if it thinks it fair and reasonable, disregard the lot and substitute its own view.

Therefore, the FOS is not constrained by statute and precedent and this inevitably creates inconsistency because what is fair and reasonable to one person is unfair and unreasonable to the next.

Since the ombudsmen and adjudicators are determining cases in line with what they think is fair and reasonable, they inevitably substitute their own judgement for that of the financial adviser at the time. What they should be doing is deciding whether the advice under scrutiny was within the parameters of what was reasonably competent at the time.

Financial services law and practice are complicated. Disputes in this area can only properly be decided by experts who understand the industry and can see through bogus claims and meritless defences quickly.

In a recent interview, chief financial ombudsman Walter Merricks said that around 80 per cent of FOS adjudicators have experience within the financial industry.

No details were given of what that experience might be or what qualifications they hold. Certainly, none are required. He further commented that much training takes place on the job. We are often left with hindsight being applied by an unqualified, inexperienced adjudicator who is substituting his own judgment for that of the financial adviser concerned.

The FOS is overburdened and is often very slow. This prejudices complainants who put their complaints to the FOS because that is the organisation they have heard about in the press and, no doubt, because it is free. The FOS often takes years to make a finding, during which time its limitation period in respect of a complaint to the court may have expired.

The FOS does not advise complainants to go and consult a solicitor to see if they are being prejudiced by FOS delays. Indeed, the FOS positively discourages them from taking legal advice.

Consumers often take their complaint to the FOS and wait years for a result. When they get it, they are often discontented or simply told that the FOS does not have jurisdiction to hear it. They then find that their chances of taking the matter to the civil courts have expired while the FOS was sitting on their case, with no chance of appeal.

European law recognises the principle that there must be a limit on the time in which a complaint can be made. In England, this principle is enforced through the Limitation Act 1980. The act provides for six years in which to bring a claim through the courts and a further three years in which to claim where a claimant has not discovered a loss until a later date.

The three-year extension is subject to a long stop of 15 years, after which no claim can be brought save for in very narrow circumstances.

FOS rules reflected the provisions of the act until 2004, with the abandonment of the 15-year long stop, which resulted in claims against financial services firms becoming possible in relation to advice predating 1989. This means that advisers face the spectre of stale claims through the FOS, which would otherwise be statute barred in the courts.

Financial firms have no evidence on which to defend these claims because, by the time of the claim, files have long since been legitimately destroyed and employees have moved on.

Sales of financial products have, since 1988, required an assessment of the customer’s requirements, knowledge of the customer’s financial circumstances and the consideration of what is appropriate advice to give him. Any dispute over a sale between the complainant and respondent revolves around factual disputes.

Memories inevitably fade and change. They are often educated by wishful thinking. The FOS tries to determine factual disputes on paper. There are practically no oral hearings to resolve differences of recollection between the parties and the FOS has no mandate to hear cross-examination. The complainant’s word on his application form is usually taken at face value. This inevitably leads to mistakes.

This is illustrated in the case brought before the Financial Services and Markets Tribunal by Legal & General against the FSA. The tribunal thought it would be sensible to question some of Legal & General’s supposed disadvantaged customers about the transaction. It found that many of those supposed on paper to have been missold endowment policies had understood the transactions perfectly well and were not missold.

Investigating from the papers only, the FOS is certainly making unnecessary mistakes about what actually happened.

There is no effective appeal against an FOS decision. If they are still in time, a disappointed consumer can relitigate the whole case before the courts. There is no such opportunity for the financial firm, which may be a small IFA, long since retired.

Complaints accepted by the FOS run to over 100,000 new cases a year (out of six times as many initial enquiries). It cannot be supposed that no mistakes are made. Given the poor training and qualifications of the staff concerned, mistakes are probably very numerous. After all, High Court judges make mistakes, and there is a Court of Appeal to correct them. The FSA makes mistakes, and there is an appeal tribunal to keep it in line.

Mistakes made by the FOS, which does not have an appeal process, go uncorrected. On any basis, this cannot be “fair and reasonable”, and requires reform.

The failing of the FOS lies in that consumers who have strong cases and have suffered serious losses are unable to get the redress to which they are entitled by law.

On the other side, the industry is subjected to expense and the strain of unknown and uninsurable liabilities, arbitrarily imposed, to which they ought not to be subjected.

I opened this article by asking if the FOS was publicly accountable. It is not – first, because its mandate requires it to follow a legal regime which has not been approved by Parliament and second, because it is not subject to effective external appeal to enforce fairness and to correct mistakes.

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  1. Hear hear! I had two recent cases before the FOS in which I felt the decision made was poorly thought through. In one case the adjudicator decided to disregard office of fair trading guidance on interpretation of the law. In other news I hear that the ombudsman takes a different view from the court in regard to section 75 liability for PayPal transactions funded by credit cards. This must change.

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