Processes

Stages in case-handling

Both the FSMA and DISP give powers to the ombudsman rather than to the FOS. However, it would require a very large number of new ombudsmen to be appointed if every case were to be dealt with by an ombudsman.

In practice, investigatory powers are delegated, and the ombudsmen consider only that small minority of cases where a final decision is requested. There are therefore up to three successive stages in the standard FOS procedure:

  • The Customer Contact Division deals with initial enquiries. Although it does not investigate complaints, the advice and guidance it offers may lead to cases being resolved. If not, cases are referred to an adjudicator. A useful overview of the work of the Customer Contact Division is given in issue 57 of Ombudsman News.
  • An adjudicator investigates each case and explores whether it will be possible to bring the two parties to agreement through mediation or conciliation. If not, he will issue a “view letter”, setting out an opinion of the matter. Only a small percentage of cases proceed beyond this point, but it is possible for either party, if dissatisfied, to ask for a review by an ombudsman.
  • An ombudsman reviews the case and, if there are no prospects of successful mediation or conciliation, issues a “final decision”. Less frequently, an ombudsman may issue a “provisional decision”. This may be appropriate where, for example, an ombudsman intends to reverse the decision of an adjudicator, and wishes to give the parties an opportunity to make final representations.

Challenges

Decisions of the FOS can be directly challenged through judicial review. It should be noted that the grounds of challenge are limited, and the challenge must be brought swiftly. No successful challenges have yet been brought, although in 2006 Walter Merricks, the chief ombudsman, indicated in Ombudsman News 56 that the number of actions is increasing:

Judicial review appears, suddenly, to be flavour of the month. Not a week seems to go by at present without someone announcing a legal challenge to our decisions or procedures.

There is also an independent assessor who can investigate when either a complainant or a firm is dissatisfied with the service provided by the FOS. This cannot amount to a reconsideration of the original case, but the independent assessor can recommend redress when he or she thinks it appropriate. In the last reported year, the independent assessor received 326 referrals, and in 82 cases recommended that the FOS itself should pay compensation ranging from £30 to £1,400.

Decisions of the FOS may also be subject to indirect challenge on limited grounds. As noted above, a complainant who has accepted an ombudsman's decision has the right to enforce it through the courts. From two cases decided by the High Court in May 2007, it is clear that a regulated firm may defend such enforcement proceedings by arguing that the decision was one which the FOS was not entitled to take. The cases involved directions made by an ombudsman which would, in each instance, have cost the regulated firm more than £100,000 – the maximum monetary award the FOS can make under DISP. The court specifically declined to indicate whether such defences could also be raised on other grounds such as alleged bias or irrationality (See Bunney v Burns Anderson plc and another; Cahill v Timothy James & Partners Ltd (2007)).

“Wider implications” cases

Procedure

The FOS is not a regulator. Its role is to resolve the individual cases which have been referred to it. Nor do its decisions form binding precedents. Strictly speaking, therefore, neither the FOS nor regulated firms are obliged to follow earlier decisions when dealing with similar cases. However, many firms take the view that they should align their practice with that of the FOS. Doing so is likely to protect a firm's reputation, build customer confidence and lead to easier relationships with the FOS and the FSA.

One point of tension has been cases referred to the FOS which involve issues with wider implications, for example where it is known that a case being considered is just one of many involving similar circumstances. In such cases the FSA will wish to consider whether regulatory action is appropriate, and the firms concerned may wish to be satisfied that the FOS fully understands the wider implications involved.

In March 2005 a special procedure to deal with such matters was announced, with the necessary rules coming into force on 1 October 2005. The procedure is set out in detail in a consultation paper issued jointly by the FOS and the FSA: FSMA 2 year review: Financial Ombudsman Service: feedback on CP04/12 and supplementary FOS consultation on procedural rules (CP05/04). This new procedure, described below, replaces less formal arrangements.

Particular individuals within the FOS and the FSA have been nominated to receive reports that an issue has wider implications. Anyone with a legitimate interest may make such a report. The paper does not seek to provide an exhaustive description of what will be regarded as an issue with wider implications. Instead it suggests some indicative factors, whether the issue is a new one that affects:

  • a large number of consumers;
  • a large number of firms;
  • the financial integrity of a firm;
  • interpretation of FSA rules or guidance; or
  • a common industry practice.

Procedure

Where the FOS and the FSA agree that an issue has wider implications there are three possible outcomes:

  • The FSA may conclude that a regulatory solution would be more appropriate than the FOS deciding individual cases. There are of course a wide range of regulatory solutions open to the FSA: from simply clarifying the interpretation or application of a rule, to asking the Treasury to authorise an industry-wide review under section 404 of FSMA.
  • The FSA may decide to offer material for consideration in individual cases being decided by the FOS. If so, the FOS has committed itself to:
    • take appropriate account of any material provided by the FSA, especially if it relates to the interpretation or application of FSA rules; and
    • give the parties an opportunity to comment on any FSA material on which the ombudsman intends to rely.
  • The FSA may decide not to become involved. If so, the FOS will consider whether to obtain evidence from two experts – one nominated by the industry chairman of the relevant industry liaison group and one nominated by the chairman of the Financial Services Consumer Panel. The FOS may seek input on particular factual or technical issues. However, the experts are free to add points they consider relevant and are specifically required to consider any of the following issues that are appropriate:
    • how widespread and long-standing the commercial practice in question is, and the reasons why the practice was adopted;
    • the numbers and types of firms and consumers affected by a particular practice, and their legitimate expectations;
    • the interpretation of relevant rules or codes of practice, and what was generally accepted industry practice, at the material time;
    • the potential consequences for the industry and consumers if the ombudsman were to uphold or reject a particular practice in the individual case; and
    • the potential effect and practicability of different options for redress, if the case were upheld.

Case studies

Case studies may be found on the dedicated website Ombudsman and FSA established by the FOS and the FSA. These illustrate both where the wider-implications procedure was applied and where it was judged to be inappropriate.

Further information may be found in an article in ON57. This states that the FSA recognises that as it moves to a more principles-based approach there is likely to be an increase in the number of wider implications cases where it considers possible regulatory action.