13th September 2011

Fair play or foul

I have spent a lot of time over the last few months looking at the new regulation.

Perhaps the most alarming thing about it is that, contrary to what we have been led to believe, the changes do not abolish the FSA but merely change its name – to the Financial Conduct Authority.  That means although it will lose responsibility for matters that did directly not concern us, it will continue largely as before.

However, there are some changes. Hitherto, if an Ombudsman issued a decision the complainant had one month to accept it in writing.  If he did not then he was deemed to have rejected it.  Now he need not put it in writing, so anybody could ring up and pretend to be the complainant. It also allows FOS to treat an acceptance received after the deadline as if it was received before it.

My research led me to compare the treatment of IFAs with that of Solicitors.

There are obvious parallels between an IFA and a Solicitors. 

Both are placed in a position of trust involving client assets that can be worth many thousands of pounds and their actions can last many years.  If anything, the figures are potentially higher for a solicitor – possibly running into the millions for a property purchase and whilst a Will, by definition, is intended to be in force until after the client's life ends.

Overall, though, an IFA has far more in common with a Solicitor than with a bank or an insurer.

So I looked at the way the Legal Ombudsman scheme works.

Superficially, it is similar. There is a quango overseeing it, the Office for Legal Complaints or OLC but the Legal Services Act is far more prescriptive about how the scheme operates.  In particular Section 138 specifies that the maximum redress that can be awarded is �£30,000.  That is clearly just one fifth of what FOS will be able to award from next year (and less than the old FIMBRA arbitration scheme could have awarded) but the real significance is that the limit was decided by a Parliament accountable to the country, not a quango accountable to nobody.

The FSA would, no doubt, argue that financial services products are more valuable but I do not think so.  Consider how much a house is worth.  A case I was involved in inadvertently gave one away a few years ago. It did not mean that the solicitor was not liable for the full amount of the loss (or would have been if I had not been able to get it corrected) but my point is that Parliament has deemed a lower limit to be appropriate.

The scheme can determine its fees but Section 136 requires it to make provision so that no fee is payable if it finds in favour of the firm and that the firm had made all reasonable efforts to resolve the complaint prior to it being referred to the Ombudsman – and no fee is payable if the case is out of jurisdiction or dismissed without considering its merits for any reason. This is a stark contrast to FOS.

These rules can be varied, but only with the agreement of the Lord Chancellor (in fact a fee is currently payable on all cases after the first two each year) but the point is that there is still an accountability to Parliament.

The time limits are also fairer. Complainants get one year from when they discover something is wrong – they cannot sit on it and let it get worse.

Interestingly there is no explicit long stop but one reason for dismissing a complaint is “it is not practicable to investigate the issue fairly because of the time that has elapsed since the act/omission”.  To all intents and purposes this has the same effect but goes further.

If a complaint about something that happened in 1988 is made to FOS and no evidence survives, it will make a guess – with no evidence and, increasingly, no understanding of the market at the time.    If an IFA had equivalent protection that could not happen. It would not stop speculative complaints but it would make them a lot less frequent and a lot cheaper to deal with.

The Legal Ombudsman scheme is not perfect – but it is designed to provide a fair arbitration scheme for small professional firms.  FOS is not – it is an amalgam of the old Insurance, Banking and Building Societies Ombudsman schemes (the PIA Ombudsman being, in reality, simply an offshoot of the Insurance Ombudsman).

It is aimed at high volume businesses and it operates on a high volume basis.  Whether it does that properly or not is a question for another time but the charging structure, the lack of proper understanding of the historical market, the inability to appreciate the devastating effects of a slapdash approach to an IFA and the failure to contemplate that complainants and ambulance chasers may actually tell porkies all mean that, for an IFA, FOS is not fit for purpose.

We do need a tool to resolve disputes – but it needs to be a pin hammer not the sledgehammer that has, for the last 10 years, been imposed on us.

The consultation for the new legislation has now closed but your MP has still to vote on it and there is still time to convey that message.

Peter Turner

"Dispusolve" and "The Compliance Cooperative"

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