Fair and reasonable? A guide to the changes to the Financial Ombudsman Service

The Financial Ombudsman Service (“FOS”) was established in 2000 as an independent public body whose function is to help settle disputes between consumers and financial services businesses (including banks, insurance companies, investment firms and financial advisors). The FOS’s aims are to “resolve individual disputes between consumers and businesses — fairly, reasonably, quickly and informally."

What is changing?

Awards

From 1 April 2019, the FOS can now award up to:

• £160,000 in relation to pre-April 2019 acts and omissions; and
• £350,000 in relation to post-1 April 2019 acts and omissions.

Both limits will rise in line with the Consumer Price Index (“CPI”) each year, from April 2020, rounded down to the nearest £5,000.

By way of example, in 2017 the CPI was 2.5% which (if the increase in the maximum FOS award was in force at the time) would mean that the pre-April 2019 limit would be unaltered (as 2.5% of £160,000 equates to £400, which would be rounded down to zero). However, the post-1 April 2019 limit would increase to £355,000 (as 2.5% of £350,000 equates to £8,750, which would be rounded down to £5,000).

Jurisdiction

At the same time, the definition of ‘eligible complainant’ has been widened to include:

• Small and Medium Enterprises (“SMEs”):
  • with an annual turnover of less than £6.5 million (the previous limit was €2 million); and
  • either:
    • Fewer than 50 employees (the previous limit was 10); or
    • Less than £5 million balance sheet.

This alone will mean that there are now an additional 210,000 businesses that are eligible to bring a complaint. The FOS estimates that only 30,000 UK SMEs will not be eligible to bring a complaint.

• Individual guarantors/providers of security for SMEs.
• Charities with an annual income of less than £6.5 million (the previous limit was £1 million).
• Trustees of trusts with a net asset value of less than £5 million (the previous limit was £1 million).  

Handling complaints

The FOS has stated that there will be a team of designated SME investigators who will handle complaints from small businesses. This team will be led by a group of experienced ombudsmen.

The FOS has also established two new groups to support the investigators and ombudsmen, namely:

• The Expert Panel — a panel of external experts from the small business sector which can provide additional specialist knowledge and expert advice on cases (e.g. specialist advice on the structures and practices of small businesses). It will be used as a flexible resource to provide support on individual cases.

• The Small Business Advisory Group — an informal group that will bring together stakeholders with an interest and expertise in the SME market. The advisory group will help provide the FOS with additional insight and support, provide context for the SME market, as well as flagging concerns held and challenges faced by SMEs in relation to financial services.

Claims Management Companies

Also from 1 April 2019:

• The regulation of CMCs will be transferred from the Claims Management Regulator (part of the Ministry of Justice) to the FCA.
• The FOS will take on responsibility for complaints about CMCs (this function is currently performed by the Legal Ombudsman).
• However, to address the possible risks of conflicts of interest, FOS case handlers who deal with complaints about CMCs will not deal with complaints where complainants are represented by a CMC.

What is not changing?

Time for bringing a complaint

In order to bring a complaint to the FOS, the complainant must have first raised the issue with the business and have received the business’s final decision on the matter. The deadline for making a complaint to the FOS is six months from the business’s ‘final decision’. However, this decision must be in writing and must state that it is the final decision and refer to the six-month time limit for complaining to the FOS.

In circumstances where a business has not issued a final decision, the complainant can bring a complaint up to six years from the date of the event complained about or, if later, three years from when the complainant knew or could have reasonably known that they had cause to complain.   

Legal precedent

The FOS does not need to follow the strict letter of the law and investigators can base their decisions on what they consider to be fair and reasonable in the circumstances. Further, the FOS is not bound to follow its own previous decisions on a particular matter.

Binding nature of FOS decisions

Once a decision has been reached by an investigator, the complainant can decide whether to accept or reject that decision. If the complainant accepts the decision, it is thereafter binding on the business. Alternatively, if the complainant is not happy with the decision, the complaint can ask for it to be reconsidered by an ombudsman. Also, in circumstances where the complainant considers that (s)he will get a better outcome via the courts, the complaint can reject the decision and commence court proceedings.  

However, the FOS process does not allow for the business to appeal against a decision. The only way for a business to challenge a decision is via judicial review (the legal costs of which are likely to be in the region of £60,000).  

Recovery of legal costs

The FOS is intended to be an easy to use service, allowing complainants to seek redress themselves, without the need to incur legal costs. However, the FOS will in some circumstances allow complainants to recover legal costs/expert fees e.g. if the issues in dispute are very complicated.

However, businesses can never recover the costs that they have incurred in defending a complaint to the FOS.

What are the potential implications of the changes to the FOS?

Increased complexity of disputes

With the FOS’s jurisdiction extending to SMEs, the type of issues that the FOS will be asked to consider are likely to extend beyond traditional consumer complaints and may include financial products aimed at businesses. It is therefore foreseeable that the FOS will be asked to consider more complex disputes then were encountered under the previous regime. However, the establishment of the Expert Panel and the Small Business Advisory Group may assist the FOS in getting to grips with these issues.  

Increased use of third parties and CMCs

The increase in awards and the complexity of disputes is likely to lead to an increased use of third parties (solicitors and experts) and CMCs. As Simoney Kyriakou, deputy editor of Financial Adviser, recently put it “This effectively shines a green light to claims management companies and ambulance chasers to go for gold… CMCs must be rubbing their hands together with glee...”  In turn, businesses may place greater reliance on legal advisors to respond to these complaints. In the event, the costs incurred by businesses in defending complaints will increase.

Insurance premiums

The changes to the level of award available and the widening of the FOS’s jurisdiction are likely to have an adverse effect on professional indemnity insurance premiums for financial services organisations. In particular:

• Some insurers predict that the increase in premium will be between 200% and 500%.
• However, the Financial Conduct Authority’s (“FCA”) estimate is that the increase in premium will be in the region of 140%.

Increased delay and bias

Reportedly, the Dispatches documentary, “Who’s policing your bank?”, which was broadcast on 12 March 2018, was highly critical of the FOS. The main areas of criticism were the delays in the resolution of complaints: lack of training and knowledge of investigators and the pressure on investigators to hit targets (which led to inherent bias in favour of businesses). Evidence submitted to the Treasury select committee in January 2019 suggested that there were 30,000 complaints that were waiting to be allocated to an investigator. Further, there was a backlog of 8,000 investigated claims where a decision had not yet been made. Although the FOS has reportedly recruited 20 additional investigators, at the same time it is going through a voluntary redundancy programme which will see permanent staff replaced with contractors. It is therefore anticipated that the backlog will increase post 1 April 2019.  

Confidence in the FOS

On 23 July 2018, the Chair of the Treasury Committee, the Rt Hon Nicky Morgan MP, wrote to the FOS to express the Committee’s doubt as to whether the FOS was ready for an increase to its remit to cover SMEs. It was further stated that, “Public confidence in the FOS has already been damaged, and it will be damaged further if these changes are rushed through, to poor result.” It is not yet clear whether the problems with delays and the perceived bias of the FOS will be addressed so as to increase confidence in the FOS. 

Access to justice

The changes to the FOS have been welcomed by some groups who consider that SMEs have been priced out of the court process by the increase in court fees following the Jackson reforms. In particular, the increase in court fees to 5% of the sum claimed, for claims in excess of £10,000, capped at £10,000 for claims in excess of £200,000 has made redress via the courts unattainable for some SMEs.

How we can help

The litigation team at Weightmans have been handling FOS complaints, both for and against businesses for over 15 years and are uniquely placed to advise on all aspects of the FOS process. If you would like to discuss the potential implications of the above-outlined changes or if you require advice as to a specific complaint to the FOS, please contact: Ling Ong, Partner on 020 7822 1985 or ling.ong@weightmans.com, or Christy Devon, Solicitor on 020 7822 1940 or christy.devon@weightmans.com.