Every case must be treated individually

Financial services regulation has always been of significant interest to readers of this publication, but I never thought it would ever become a major issue for members of the general public in the run-up to a general election. However, the criticism of regulatory structures in the wake of the recent financial turmoil may have changed all that.

The FSA has taken quite a hammering, in the popular press as well as the specialist press, and the Conservative Party is proposing a radical overhaul of the system, with a substantially increased role for the Bank of England. If there is a change of government in the next year, it seems certain the regulatory system will be substantially altered.

I say “regulatory system” because, of course, there is more to regulation than the FSA. I am undertaking a review of the regulation of legal services and I wonder how many people realise just how many firms are now regulated by multiple bodies, at the individual level if not the corporate level?

The introduction of Alternative Business Structures in the legal services sector – which may come as early as 2011 – will create new regulatory challenges and possibly even regulatory program trading. The challenges will be formidable, both for regulators and others who operate in this area.

One such body is the Financial Ombudsman Service (FOS). It is now over a year since I presented my independent review of the FOS to its board. While many of my 73 recommendations were relatively straightforward and sought to address broad questions of transparency and day-to-day operational practice, I also emphasised that the FOS must always keep sight of its original purpose. As its own website explains, “it’s our job to settle individual complaints between consumers and businesses providing financial services …. We don’t write the rules for businesses – or fine them if rules are broken. That is the job of the regulator.”

In light of that clear statement I was fascinated to read the minutes of the latest FOS board meeting on 20 May. The FOS is increasingly concerned about the wider implications (WI) process, which it can trigger when patterns of complaints begin to emerge, possibly suggesting the existence of systemic problems.

What set alarm bells ringing for me in these particular minutes was the implied connection between the board’s desire to “find a better way of dealing with cases with wider implications” and its objective to “explore ways of providing collective redress, including for those who do not complain” (my emphasis).

Returning to first principles, the FOS is certainly part of the broader regulatory landscape, connecting in numerous ways with the regulator and its doings, but it is not, and must not allow itself to be perceived as, some kind of quasi-regulator. Nor is it a claims farmer. The FOS is an alternative dispute resolution service, its decisions binding upon the vendor but not upon the purchaser, dealing with complaints on their individual merits (or lack of them), on a case-by-case basis. During a recession, the number of complaints, like insurance claims, tends to increase significantly, but to my mind that serves merely to reinforce the argument against treating individual cases generically.

Reading the report by the chief ombudsman, Walter Merricks, in the FOS annual review for 2008/9, I was immediately struck by his reference to the recent increase in the FOS’s uphold rate, from 30 or 40% to almost 60%. This is certainly a remarkable change, but one must proceed with care in attempting to make sense of it.

As Walter notes, consumers must first complain to the financial business with which they are unhappy, before the FOS may take an interest in their case.

He is right to argue that a significantly increased uphold rate raises questions about the effectiveness of complaints handling within the financial services sector; but might it not also raise questions about the procedures at the FOS itself?

As and when an incoming government reopens the Financial Services and Markets Act 2000, I am certain the renewed debate will include the ombudsman service. Generally I believe the FOS has done an excellent job, but the closer it stays to its roots and its founding inspiration, the better I believe it does.

The FOS must be acknowledged as an honest broker by everyone involved, on all sides of any argument. That is why, in my report a year ago, I recommended it should be “totally insulated from all aspects of any regulatory decision-making within the [WI] process”.

Properly used, the WI process can help the FOS to play an invaluable role in ensuring systemic problems are identified and ameliorated, without compromising its independence or its objectivity and without turning it into a “quasi-regulator”.

The chief ombudsman is to be congratulated for making this important and timely contribution to the ongoing debate about the future regulation of financial services.