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Who holds the watchdog’s leash?

The Financial Services and Markets Act 2000 provided for the FSA to establish an ombudsman scheme under which disputes relating to financial services would “be resolved quickly and with minimum of formality by an independent person”. The Financial Ombudsman Service was established to operate that scheme.

In relation to the financial services industry, the FOS now performs the same important function as the ordinary courts in deciding disputes between citizens. It deals with the vast majority of disputes between financial services firms and customers.

Like the courts and other similar tribunals, the FOS should comply with the rules of natural justice. One of the fundamental requirements of natural justice is that the adjudicator in a dispute should be independent of the parties and impartial, so that justice should not only be done but should also be seen to be done.

The FOS claims to be independent but there is real concern among those whose disputes are dealt with by the FOS that it is not independent of the FSA and that its relationship with the FSA adversely affects its perceived independence as the adjudicator in disputes.

There is undoubtedly a close relationship between the FOS and the FSA. The regulator was responsible for establishing the FOS and continues to be responsible for ensuring that the FOS is at all times capable of doing its job. It appoints the chairman and members of the board of the company which runs the FOS.

The FOS and the chief ombudsman must both make a report at least once a year to the FSA on the discharge of their functions and those reports must comply with the FSA’s requirements. The FSA must approve the FOS annual budget.

The FSA made the rules which defined the scope of the compulsory jurisdiction of the FOS, including the monetary limit of £100,000 for awards. The FSA makes the rules for the funding of the FOS and it also makes the procedural rules for its operation, including time limits for referring complaints.

The FOS makes the other rules for the investigation, consideration and determination of complaints under the compulsory jurisdiction nut the FSA must consent before those rules are made.

The role of the FSA in relation to the FOS, and its relationship with the FOS, both give the appearance of the FOS being subject to the control of the FSA. The eminent barrister, Lord Neill of Bladon, has said in a published opinion that the features listed above “suggest a structural superiority of the FSA and a corresponding inferiority of the FOS which might be hard to reconcile with real independence”.

This impression is reinforced by the so-called memorandum of understanding between the FOS and the FSA. The latest version of this document was last updated on April 6, 2007 and provides a framework for both parties to co-operate and communicate in order to carry out “their independent roles and separate functions”.

The most important part, headed Co-operation and information-sharing, states that “if the FSA requests it for actual or contemplated regulatory action, the FOS Ltd will give the FSA (for the specific firm concerned) information about the number and types of complaints handled and specific initial and final decisions”.

On its website, the FOS tells us that “the FSA … may decide to offer information to the ombudsman service, for example, on interpreting or applying FSA rules … for it to consider when it decides individual cases”. The reader is entitled to ask, is this the FSA giving directions to the FOS about how to deal with or decide cases?

It is well known that one of the FSA’s four statutory objectives is the protection of consumers but there is no similar or countervailing duty to consider the position of firms operating in the financial services industry. The firm which is defending itself against a complaint referred to the FOS may feel – with justification – that the FOS is an instrument of the FSA in attaining the statutory objective to protect consumers.

It looks as if the FSA makes rules to protect consumers which the FOS then applies but the Act which established both the FSA and the FOS says nothing about the FOS having any role to play in helping the regulator with its job. In this context, it is worth looking at what the FSA and the FOS have said and done in relation to endowment cases.

Since 1999, the FSA has been carrying out a comprehensive programme of work on endowments linked to mortgages, working closely with other industry bodies, including the FOS. Acting together, the FSA and the FOS have made the rules which the FOS applies when deciding complaints about mortgage endowments.

In its progress report on this work which was published in July 2005, the FSA states that mortgage endowments have been a priority for the FSA and the FOS and that they will continue to work together “to manage the volume of complaints and the impact any significant increase may have on consumers [and] the FOS”. None of this dispels the impression of the superior FSA operating with the inferior FOS to further the FSA’s own agenda.

The FSA would probably seek to justify its relationship with the FOS as a legitimate aspect of the carrying out of its own role. The FSA would point to the Act as justification but the relationship between the two bodies raises real doubts about the independence and impartiality of the FOS as a body resolving disputes.

Even if those doubts are not justified, in the sense that the FOS would approach a case with total independence and impartiality, everyone knows, in the words of a former Lord Chief Justice, Lord Hewart, “that it is not merely of some importance but is of fundamental importance that justice should not only be done but should manifestly and undoubtedly be seen to be done”.

The same view was expressed as recently as January 2006 by Lord Justice Mummery in the Court of Appeal when he said “the paramount concern of the legal system is to administer justice, which must be and must be seen by the litigants and fair-minded members of the public to be fair and impartial. Anything else is not worth having.”

The common law insists that all tribunals must obey the rules of natural justice, as these two extracts demonstrate, but now those rules are reinforced and given extra prominence by Article 6 of the European Convention on Human Rights which is now part of the law of this country. That Article provides that “everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal”. There must be real doubt that the FOS meets that standard.

The FOS is an important part of the administration of justice, especially if one takes into consideration the vast area of everyday life covered by the financial services industry, the number of cases the FOS handles and the £100,000 limit of its awards.

The dispute resolution service operated by the FOS needs to be reformed so that there can be no doubt that it satisfies every part of Article 6 and especially that it is and is seen to be independent and impartial by all those whose disputes are dealt with by it.


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