Response to HM Treasury consultation on the review of the Financial Ombudsman Service

Consumer Scotland is the statutory body for consumers in Scotland. Established by the Consumer Scotland Act 2020, we are accountable to the Scottish Parliament. The Act defines consumers as individuals and small businesses that purchase, use or receive in Scotland goods or services supplied by a business, profession, not for profit enterprise, or public body.

Our purpose is to improve outcomes for current and future consumers, and our strategic objectives are:

• to enhance understanding and awareness of consumer issues by strengthening the evidence base
• to serve the needs and aspirations of current and future consumers by inspiring and influencing the public, private and third sectors
• to enable the active participation of consumers in a fairer economy by improving access to information and support

Consumer Scotland uses data, research and analysis to inform our work on the key issues facing consumers in Scotland. In conjunction with that evidence base we seek a consumer perspective through the application of the consumer principles of access, choice, safety, information, fairness, representation, sustainability and redress.

The Consumer Principles are a set of principles developed by consumer organisations in the UK and overseas.

Consumer Scotland uses the Consumer Principles as a framework through which to analyse the evidence on markets and related issues from a consumer perspective.

The Consumer Principles are:

• Access: Can people get the goods or services they need or want?
• Choice: Is there any?
• Safety: Are the goods or services dangerous to health or welfare?
• Information: Is it available, accurate and useful?
• Fairness: Are some or all consumers unfairly discriminated against?
• Representation: Do consumers have a say in how goods or services are provided?
• Redress: If things go wrong, is there a system for making things right?
• Sustainability: Are consumers enabled to make sustainable choices?

We have identified redress and information as being particularly relevant to the consultation proposal that we are responding to.

Overview

Consumer Scotland welcomes the opportunity to respond to the HM Treasury consultation paper on Review of the Financial Ombudsman Service (FOS). It is essential that consumers have trust and confidence in financial services products and providers, together with the redress and regulatory systems overseeing them. The FOS plays an important role in this process, helping consumers have confidence that they will be treated fairly when things go wrong.

Ensuring that consumers have access to an effective complaints and redress system is essential to ensure that things can be swiftly put right when they have gone wrong. It is particularly important in complex markets like financial services where there is often a significant knowledge gap between consumers and firms and where there is significant potential for consumers to experience financial detriment.

Ensuring that consumers can access financial products and services, which are provided in a fair and transparent way, can help consumers participate in many other areas of life, whether it be running businesses, buying products or property or paying day to day bills.

It is clear that there are issues in the existing redress landscape and that consumers may have issues navigating it. The Financial Conduct Authority’s (FCA) Financial Lives Survey found that, when respondents were asked about the experience of complaining to their provider, 34% of those who raised a complaint or attempted to do so found the process very or fairly difficult and 23% were unable to raise a complaint.[i]

We support the objective of ensuring that the FOS is a simple, impartial dispute resolution service which can quickly and effectively deal with complaints against financial services firms. We agree that the updated redress framework should ensure coherence across the work of the FOS and the FCA, which will benefit consumers.

Our response to the consultation focuses on:

• our preference to retain the fair and reasonable test,
• our strong concerns regarding the imposition of an absolute limit longstop for complaints and
• the importance of ensuring that consumers, including those in vulnerable circumstance, are not negatively impacted by any changes to the redress system. 

More holistically, we have concerns that the proposed introduction of  a number of further formal processes to the complaints system, such as referrals, pauses and requests for FCA clarification and registrations, will collectively lead to the development of a more formal, rules-based, less accessible complaints system for consumers. While acknowledging the desire for more certainty, we wish to emphasise the need for the system to be flexible, accessible, fair and to take account of consumer’s individual characteristics.

The determination of complaints brought to the Financial Ombudsman Service

Fair and reasonable test (Q 1 – 4)

Currently, an ombudsman determines complaints based on what is, in its opinion, fair and reasonable in all the circumstances of the case, taking account of the law, FCA rules and guidance, codes of practice and good industry practice. The consultation sets out the government’s intention to legislate to make clear that, where conduct complained of is in scope of FCA rules, compliance with those rules, consistent with the FCA’s intention for what those rules should achieve, will mean that a firm has acted fairly and reasonably.

Consumer Scotland favours retaining the current fair and reasonable test. We note that it is used across a number of other ombudsmen schemes, such as legal services, and is well understood. We agree with the view of consumer groups, as detailed in the FCA and FOS consultation paper,[ii] that the fair and reasonable test is essential for protecting consumers, particularly in complex markets like financial services. We suggest that any breach of consumer law should also be relevant when assessing what is fair and reasonable in the circumstances of any case.

We do not believe that FOS is currently prevented from considering whether a firm has complied with the relevant FCA rules in determining what is fair and reasonable. While more explicit references to FCA rules may provide a greater degree of certainty and clarity for industry, it is important that this does not delay justice for consumers or lead to the use of an inflexible, rule-based system.

Consumer Scotland would welcome more clarity about what the practical differences in consumer outcomes would be under the proposed changes to the fair and reasonable test. For example, what impact would the proposed changes have on FOS taking individual consumer circumstances, such as vulnerability, into account?  What may be reasonable for one consumer, may not be for another. Consumer Scotland would be concerned if decisions were to be made with regard to any hypothetical “average consumer” as this may not sufficiently take into account the real world needs of many consumers. We consider that a move towards a more rule-based jurisdiction does not sit comfortably with the requirement on firms to consider the Consumer Duty and it its focus on ensuring better outcomes for consumers.

Adapting the Fair and Reasonable Test

Consumer Scotland would prefer greater certainty to be delivered by more extensive use of guidance to firms, including the use of worked examples of good and poor practice, drawing on common drivers of complaints. This could also be addressed under the supervisory model where a firm is showing an increase in complaints driven by particular practices or processes.

Referrals to the FCA on the interpretation of FCA rules (Q 5 – 8)

The government has concluded that any issue of law or regulation which has wider implications for consumers and firms is a regulatory issue and should be given due consideration by the regulator – particularly as in such cases a regulatory intervention (which would have general application) may be more appropriate than awarding redress in respect of individual complaints. The FCA may request that the FOS pause the handling of affected complaints while it determines an appropriate response. Consumer Scotland is of the view that any referrals made to the FCA seeking clarification on the interpretation of rules should be in accordance with strict timetables in order to avoid unnecessary delays and potential detriment being caused to consumers. It will be important that monitoring of FOS case levels takes place to ensure that a demonstrable rise in first tier resolution is occurring in practice. It is important to ensure that decisions, and the financial consequences of redress being ordered, are not simply being delayed by referrals.

It is also proposed that parties would be able to request a referral after the FOS initial assessment but before a final determination so that, where relevant, the FOS can consider whether or how the FCA’s view impacts their case determination. It is crucial that this provision does not simply become used as a de facto appeals mechanism where a party is unhappy with the initial assessment. Again, this provision appears to us to introduce an additional procedural step, and element of complexity, which does not align well with the ethos of an ombudsman service which is designed to be simple, free, and accessible. Although the referral option is in theory available to both parties, we consider that it is far more likely, in practice, to be used by firms, who are familiar with the wider landscape and the FCA’s detailed rules. For this reason we do not support the proposal. If the proposal does proceed then detailed criteria will be required to support its appropriate use, along with monitoring of its effects.

Institutional Arrangements (Q12)

One option the government is seeking views on is whether there would be benefits to making the FOS a subsidiary of the FCA, so that both organisations become part of the same corporate group. Consumer Scotland opposes any such merger of structures as we consider it is important that consumers are able to be confident that the FOS is independent of government, industry and regulators.

Time limits for referring complaints to the Financial Ombudsman Service

Longstop for complaints to be lodged (Q 13 – 14)

Currently the FOS can only consider a complaint referred to it within 6 years from the event complained of or, if later, within 3 years from the date on which the complainant became aware (or ought reasonably to have become aware) they had cause for complaint. The FOS can still accept out of time complaints if they consider the complainant’s failure to complain within the time limits was due to ‘exceptional circumstances’ or if the firm consents.

The government considers that setting out an absolute time limit in legislation would provide greater certainty for all parties around the maximum time within which a complaint can be brought to the FOS. However, it also recognises that there may need to be limited flexibility to depart from this in exceptional circumstances where longer timeframes are justified, for example, longer-term products such as pensions, mortgages and long-term investments. In keeping with the objective for the FOS to operate as a simple dispute resolution service that quickly and effectively deals with complaints, the government proposes to introduce an absolute time limit of 10 years for bringing cases to the FOS. Consumer Scotland strongly opposes the imposition of a 10 year absolute limit for bringing complaints. There are already time limits set, however these provide appropriate discretion based on when consumers should reasonably have been aware of the events. We note that this is consistent with ombudsmen practices in other sectors such as legal services, which also impose strict time limits but allow complaints where a consumer was excusably unaware, with the relevant time limits running from when consumers were, or should have been, aware of the grounds for complaint.

We agree with the concerns of consumer groups, as outlined in the FCA and FOS consultation paper, that changes to the existing time limits could widen the gap between more informed and engaged consumers and others, including consumers in vulnerable circumstances, who may only become aware of an issue after publicity some years later.[iii] We would welcome the publication of data relating how many and what kind of cases would be excluded if the 10 year absolute limit longstop was to be implemented. Publication of this data would allow for greater understanding of the level and nature of impact on consumers that would occur as a result of the imposition of the proposed longstop.

Many financial services products are “lifetime” products or services. For services such as long term investments, life insurance and protection policies and pensions, it is possible that harms may go undetected for a long period of time and so it is essential that consumers are not left without redress in the event of provider failures. This is important in order to support consumer confidence in the system, which will encourage engagement in the financial services sector, supporting economic growth.

Consumer Scotland views the proposed backstop option (detailed in the FCA and FOS consultation paper) of going to court as insufficient to protect consumers. There are considerable power and resource differentials between providers and consumers and the expense and delay associated with court action, and the potential liability for judicial costs, means that many consumers will not view this as a viable option. In many cases civil legal aid will not be available. The introduction of such measures may have the unintended effect of driving consumers towards the use of professional representatives or claims management companies, which runs counter to other measures being proposed and implemented to manage such claims.

Mass Redress Events (Q 15 – 17)

Consumer Scotland welcomes the approach to mass redress events (MRE). We support the aim of ensuring these events are identified earlier, allowing the FCA to implement any appropriate market-wide response effectively and to ensure that there is minimal disruption for consumers and firms throughout this process.  We welcome the desire to address issues more proactively, putting in place measures to allow firms to resolve issues at first tier. This would remove the need for consumers to enter into complaints processes and allow firms to more quickly tackle systemic issues.

We broadly support the proposal outlined in the FCA and FOS consultation to consider potential MREs against a framework of 6 criteria, all commonly identified in past MREs. We also agree that these criteria should not have rigid thresholds applied, in order to allow flexibility of approach.  We support calls made in response to the previous FCA and FOS consultation for more proactive communications from regulators and complaints bodies with consumers and media and the provision of independent advice to consumers to allow them to identify their rights and take any necessary actions within the required timeframes.[iv]

We broadly support the potential to pause active complaints in order for the FCA to produce a ruling or advice that offers consistency, which would ultimately allow larger number of complaints to be processed more effectively, and reduce the risk of events overwhelming complaints systems. However, it important that this does not cause unnecessary delays to consumers. We recommend that the FCA monitors this in order to identify if it is resulting in consumer detriment due to disproportionate or unnecessary delays.