Background

Introduction

The Financial Ombudsman Service (FOS) deals with complaints relating to four key sectors: banking, investment, personal pensions and insurance. It assumed its powers at midnight on 30 November 2001, a time known as “N2”, and is the largest ombudsman scheme in the world. In its last year of operation it received over 672,814 enquiries and accepted 94,392 cases for investigation. To deal with this substantial workload it around over 900 staff, including 30 ombudsmen.

This part of the site focuses on the work of the FOS on general insurance cases.

Ombudsmen

What is an ombudsman? The word is of Scandinavian origin, and its meaning has been variously translated as “representative” or “grievance person”. In its original form in 18th century Sweden, the role was that of a public official who would personally take up difficulties that a citizen was experiencing with government departments. The word is not gender specific, and nine of the current ombudsmen at the FOS are women.

In the UK, ombudsmen are now commonplace in both the public and private sectors. However, this is a relatively recent development, which owes much to the insurance industry. Prior to 1981, ombudsmen were limited to the public sector, and used the title “commissioner” rather than “ombudsman”. In 1981, three insurers established the first private sector ombudsman scheme - the Insurance Ombudsman Bureau (IOB). This was a voluntary arrangement, open to any insurer prepared to accept the obligations of membership. The concept rapidly gained popularity, with separate schemes being established for banks in 1984 and building societies in 1986. A plethora of schemes followed – for estate agents, removal firms and others. Ombudsmen rapidly became regarded as the gold standard in complaints handling.

Oddly, despite the growing importance of ombudsmen, there is no regulation of the use of the title in the UK. This contrasts with the position in New Zealand, for example, where those wishing to use the title must first obtain permission from a chief ombudsman. In the UK, it is open to anyone to set up an ombudsman scheme, with whatever remit and powers they see fit to bestow. This has led to fears that the concept could be devalued. In 1993 the organisation now known as the British and Irish Ombudsman Association was established, partly to address these fears. Although it has no enforcement powers, this association has set out minimum standards which it believes an ombudsman scheme should meet. The four key criteria are:

  • independence;
  • effectiveness;
  • fairness;
  • accountability.

Formation of the FOS

One of the earliest acts of the Labour government formed in May 1997 was an announcement that it intended to introduce statutory regulation for the financial services industry with a single regulator – the Financial Services Authority (FSA). This move from self-regulation to statutory regulation had important implications for complaints handling. It was decided that a single ombudsman scheme would be created, with membership being compulsory for firms regulated by the FSA. The scheme – later to be known as the FOS – would replace eight existing complaints-handling mechanisms:

  • the Insurance Ombudsman Bureau;
  • the Personal Insurance Arbitration Scheme;
  • the Personal Investment Authority Ombudsman Bureau;
  • the Financial Services Authority Complaints Unit and Independent Investigator;
  • the Office of the Banking Ombudsman;
  • the Office of the Building Societies Ombudsman;
  • the Office of the Investment Ombudsman;
  • the Securities and Futures Authority Complaints Bureau and Arbitration Service.

The FSA consulted on various aspects of the proposed scheme. Those who wish to follow up this early history will find four consultation papers of particular interest:
Consumer complaints (CP4, 1997)
Consumer complaints and the new single ombudsman scheme (CP33, 1999)
Complaints handling arrangements: feedback statement on CP33 and draft rules (CP49, 2000)
Funding the Financial Ombudsman Service (CP74, 2000)

A broad framework for the FOS was set out in the Financial Services and Markets Act 2000 (FSMA), with more detail being provided in the FSA complaints sourcebook (DISP). Delay in implementing the FSMA meant that transitional arrangements were necessary and from 1 April 2001 the FOS dealt with complaints on an agency basis for some of the existing schemes. However, on 1 December 2001, the FOS gained its own powers.

Before proceeding to look at the FOS in detail, it is worth briefly considering its predecessors.

Predecessors

Insurance Ombudsman Bureau

As has been noted, the IOB was established in 1981. It was set up on a voluntary basis by three insurers – Guardian Royal Exchange, General Accident and Royal Insurance.

The inspiration for the scheme came from a paper written by Mike Harris, Assistant General Manager of Guardian Royal Exchange, in September 1975. Harris believed that both policyholders and insurers would benefit from such a scheme:

  • Policyholders would be assured of getting the benefits for which they had paid, and complaints would be brought to light that would otherwise have not been redressed.
  • Insurers would improve their image and retain more business. The industry as a whole might also get an early warning of any potential insolvencies in the marketplace – since it is common for insurers which are in financial difficulties to take a harder line on claims, leading to more complaints.

There is no doubt that the creation of the IOB was a bold move. Its structure was particularly interesting. The IOB had a board comprising representatives from insurers, but between the board and the ombudsman was a council with a preponderance of public interest members. This council was intended to support the ombudsman and protect his independence.

The powers given to the ombudsmen at the IOB were not dissimilar to those currently enjoyed by the ombudsmen at the FOS. However, there are some important differences:

  • Membership of the IOB was voluntary. Although over time the vast majority of insurers joined, some never did so. As a result, their policyholders could not benefit from the service offered by the IOB.
  • The IOB was owned and funded by insurers. Despite the existence of the council, questions were inevitably raised about the IOB's independence. In particular it would have been possible for the insurers to close the scheme at any time they wished.
  • There were limitations on the IOB's jurisdiction. The IOB could not, for example, consider complaints against small businesses and sole traders, or, until its final years, complaints against intermediaries such as brokers. Third-party issues were also outside its jurisdiction.

Initially, the IOB was able to consider complaints about both general and long term insurance. However, in 1994, when the Personal Investment Authority Ombudsman was established, the IOB lost its jurisdiction on long-term insurance matters. When, on 1 December 2001, the FOS took over responsibility for general insurance matters, the IOB was closed.

Status of IOB decisions

Over its lifetime the IOB published its thinking on many key issues in general insurance, along with anonymised details of significant individual cases. There are three key sources of this material:

  • the IOB annual reports or reviews;
  • the IOB bulletins, issued from 1994;
  • the IOB Digest of annual reports and bulletins (which presents much of the material in the above in a structured and cross-referenced form).

The difficulty is in deciding the extent to which guidance issued by the IOB is still of value. There has been no formal statement from the FOS on this point. It is true that there are still ex-IOB staff working at the FOS, who might be expected to have enthusiasm for principles which they helped to formulate. However, there are a number of factors which suggest that the usefulness of the IOB material is limited and diminishing:

  • The FOS has a different jurisdiction and different powers to those of the IOB.
  • Guidance has been issued by the FOS on many issues, and where this is so, it should clearly be followed in preference to that issued by the IOB.
  • Some of the IOB decisions are twenty-eight years old. Industry practice and the approach taken by ombudsmen have moved on.
  • The IOB's annual reports, reviews and the bulletins have not been available in print for a number of years.
  • A positive decision was taken by the FOS in 2005 to remove the IOB material from its website.

Consequently, if the views of the FOS on a particular issue are not known, it is prudent to speak to the FOS rather than rely on an IOB decision. The FOS offers a helpline for consumers and a technical advice desk for regulated firms and professional advisers.

Personal Insurance Arbitration Service 1981–2001

On the day the IOB was launched, eight other insurers announced a rival initiative. In conjunction with the Chartered Institute of Arbitrators, they set up an arbitration facility – the Personal Insurance Arbitration Service (“PIAS”) – to resolve disputes between insurers and policyholders.

PIAS was inevitably seen by some as a “spoiler” operation. At outset it had significant disadvantages when compared to the IOB – for example it initially had a much lower limit on awards, decisions were binding on both parties and the arbitrator had no power to consider what was good practice or fair and reasonable. Although some shortcomings were later addressed, PIAS never captured the public imagination in the same way as the ombudsman concept. Nor was there much enthusiasm among insurers – the number belonging to PIAS remained low throughout its life.

The status of PIAS decisions

PIAS decisions were not published, and were therefore largely known only to the parties involved. They have no influence on current thinking at the FOS.

General Insurance Standards Council 2000–2005

The General Insurance Standards Council (GISC) commenced operations as a voluntary regulator on 3 July 2000. Membership was open to insurers, intermediaries and other organisations involved in general insurance, such as claims handlers. The GISC regulated the sales, advice and service standards of over 6,000 firms which chose to join. It did so through a rule book and two codes indicating the minimum standards of good practice that members should meet in dealing with private customers and commercial customers respectively. For those members which did not belong to an ombudsman scheme, GISC offered a mediation scheme – the GISC Dispute Resolution Service – though the intention was that in time this would be discontinued and complaints would be referred to the FOS.