Powers

Financial Services and Markets Act 2000

The FOS was established under part 16 (sections 225 to 234) and schedule 17 of the FSMA. Here a small selection of the more important provisions will be considered:

  • Section 225 provides for an ombudsman scheme under which “certain disputes may be resolved quickly and with minimum formality by an independent person”. The first two elements of speed and informality are vital to the success of the FOS; the scheme is not intended to operate like a court or tribunal.
  • Sections 226 and 227 provide respectively for the FOS to have a compulsory jurisdiction and a voluntary jurisdiction. The voluntary jurisdiction enables the FOS, where it wishes, to agree with firms that it will accept complaints even where matters fall outside statutory regulation. For example, insurance brokers were not subject to statutory conduct of business regulation – and therefore the compulsory jurisdiction – until 14 January 2005. However, from 1 April 2003, the FOS was prepared to accept those that so wished into the voluntary jurisdiction.
  • Section 228 provides that compulsory jurisdiction complaints are “to be determined by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case”. This is a key power, particularly for insurance complaints. Insurance contract law has the potential to produce unfairness, as noted above, but it is clear that the FOS has in such situations not just a power but a duty to disregard the law.
  • Section 228 further provides that the ombudsman must give written reasons for his decision. These reasons are essential if the parties are to understand the ombudsman's views, and will assist in a challenge if either disagrees.
  • Finally, section 228 contains the rule which makes an application to the FOS a “no lose” situation for complainants. If a complainant accepts the ombudsman's decision it becomes binding on both insurer and complainant. However, the complainant is free to reject the decision and pursue the matters through the courts.
  • Section 229 provides that for compulsory jurisdiction complaints the ombudsman may make a money award up to a set limit – currently £100,000 – or instruct the insurer to take specified steps, the cost of which should not exceed that limit.
  • Section 231 provides that the ombudsman has the power to call for a party to a complaint to produce specified information or documentation.
  • Schedule 17 paragraph 17 provides that a money award made under the compulsory jurisdiction can be enforced through the courts as if it were an order of a court.

Financial Services and Markets Act 2000

Detailed rules for the FOS are to be found in a section of the FSA Handbook called Dispute resolution: complaints (DISP). As with the remainder of the Handbook the actual rules are marked with an R. Those passages marked G are merely guidance, but invaluable in indicating the manner in which rules are likely to be interpreted and applied. For current purposes the following rules are of particular interest:

  • Rule 2.8 imposes time restrictions for the making of complaints. A complainant cannot refer a case to the FOS unless he or she has first obtained a final response from the firm or eight weeks have elapsed since the matter was raised with the firm. Once a final response has been received from the firm, the complainant has six months to go to the FOS. In some cases, of course, a complaint will not be made to the firm. There is then a long-stop restriction that the matter cannot be referred to the FOS more than six years after the relevant events, or, if longer, three years after the complainant became aware or ought reasonably to have become aware that there was cause for complaint. In exceptional circumstances the FOS may allow complainants to bring complaints after these time limits have expired.
  • Rule 2.7 determines who is eligible to make a complaint. Most importantly, the FOS is open not just to private individuals but also to sole traders and small businesses with a turnover of less than £1m. Interestingly, a complainant can be a person for whom a contract of insurance was taken out or intended to be taken out. This opens the door for third-party complaints.
  • Rule 2.6 sets the territorial scope of the FOS's jurisdiction. Complaints under the compulsory jurisdiction can be brought against firms carrying out business from an establishment in the UK. If a firm participates in the voluntary jurisdiction then the scope is widened to include establishments in the EEA where (a) the firm has notified its home regulator, (b) the activity is directed at least in part at the UK, and (c) the relevant contracts are (or, in the case of a potential customer, would be) governed by UK law.
  • Rule 3.3.4 lists no fewer than seventeen grounds on which a complaint may be dismissed without consideration of its merits – for example, that it is frivolous or vexatious, or that it is a complaint about the legitimate exercise of a firm's commercial judgement. There is a further possibility under Rules 3.3.5 and 3.3.6. If the FOS considers that a complaint raises an important point of law, and would be more suitably dealt with through the courts as a test case, it may dismiss the complaint on receipt of a written undertaking from the firm. The undertaking must commit the firm to paying the complainant's reasonable costs if the matter is subsequently litigated.
  • Rule 3.5 deals with matters of evidence. In particular, the FOS is not bound by the rules that would apply in court proceedings. It may exclude evidence that would be admitted in court, and admit evidence that would be excluded. The FOS may also take oral evidence, though hearings are in practice rare.
  • Rule 3.7 imposes a limit of £100,000 on money awards. It also gives the ombudsman specific powers to make awards for pain and suffering, damage to reputation, and distress and inconvenience. The ombudsman is also empowered to award costs “reasonably incurred” by a complainant. This power is exercised sparingly. In general, the ombudsman takes the view that a complainant does not need to be represented when bringing a complaint to the FOS.
  • Rule 3.9 allows the ombudsman to delegate all powers in connection with the investigation of a claim other than the final determination. This leads to the procedure described below.

Principles-based regulation

The FSA has indicated its intention to move towards principles-based regulation – focusing on outcomes rather than prescribing processes. In a speech given in March 2007, John Tiner, chief executive of the FSA, indicated the likely impact for retail general insurance was “a slimmer and more principles-based ICOB sourcebook, with fewer detailed rules”. In Principles-based regulation: focusing on the outcomes that matter, a paper published in April 2007, the FSA indicated that regulated firms had expressed concern about the role of the FOS in a principles-based system:

Some firms are concerned that the move towards principles-based regulation will create greater uncertainty about what their obligations are to consumers, and that they may be held accountable for these by the FOS rather than by us. There is some concern that the FOS may interpret high-level rules and principles differently from us. This could limit the potential benefits from our move to more principles-based regulation.

This issue was picked up in ON61. In a joint article Stuart King (head of retail intelligence at the FSA) and David Thomas (corporate director at the FOS) set out the implications for complaints handling of principles-based regulation. The article points out that the approach taken by the FOS has always focused on outcomes:


Like the FSA, the ombudsman service is concerned with firms providing fair outcomes rather than with the processes firms use. Parliament has decided that ombudsman decisions should be based on what the ombudsman considers fair and reasonable in the specific circumstances of the individual case. When considering cases, the ombudsman takes into account the law, regulatory rules, codes and good practice at the time of the relevant events.

In practice, most decisions are not based on FSA rules:

Ombudsman decisions generally turn on disputes of fact (where the customer and the firm cannot agree what happened) or on legal principles and contract interpretation (as elaborated by courts) – rather than on the detail of FSA rules. Firms sometimes forget that they are subject to the same laws as any other business, and that the FSA rulebook is not a complete description of their legal responsibilities.

However, principles-based regulation may have consequences for the FOS itself, since it is intended that DISP 2 to 4 will be simplified. A consultation paper will be published later this year.