Regulatory enforcement mini-series part 4: Should firms be concerned about FOS complaints?

Nathan:

Hello and welcome to the Ashurst Regulatory Enforcement podcast. I'm Nathan Willmott and I'm joined here in the Fruit & Wool Exchange in London by two fellow specialists in financial services regulation, my colleagues Adam Jamieson and Paul Ryan-Brown. Thanks very much, Adam and Paul, for joining me today.

Now, together we have many, many years of grappling with regulators and other authorities on contentious regulatory matters, representing financial services firms, as well as their senior management. And our mission for this podcast series is to share with you the new approaches and strategies that we're seeing in contentious financial services, to highlight any areas of concern about how the regulators and authorities are conducting their investigations and handling complaints, and to suggest what they should be doing differently to ensure that they act both fairly and effectively. And today's topic is the Financial Ombudsman Service. And I'm going to start Paul with you, with a question, what is it that firms are really worried about with the Ombudsman at the moment?

Paul:

I think that, traditionally speaking, firms have probably been less worried about the FOS, in particular because it was obviously set up as a place where customers could bring quite low-value, often very low-value complaints, which would be resolved outside of a formal court process and in a more informal manner. I think what we're seeing now is FOS decisions having significant impacts on businesses, and I think there are a couple of reasons for that: The first, I think, is the rise in prominence of claims management companies. These are firms which book build quite large groups of complainants and then bring those complaints almost sort of à la group action in the FOS.

Those claims management companies often adopt very aggressive strategies and will bring complaints or issue complaints in the FOS, even if they're very sort of, on the surface, very speculative. Irrespective of the merits of those claims, firms will incur a complaint handling fee per complaint. So that's a sort of £750 fee. If there are a very large number of those complaints, then that can be very high. So I think the rise of claims management companies is one point. I think a second, probably recently there have been a number of quite high-profile decisions, final decisions in the FOS, most notably motor finance.

And I think what we're seeing with that is the ability for FOS decisions to effectively reset regulatory standards. So firms have to take into account FOS decisions in their own complaint handling process. So you have this strange situation where the FOS is making its decision based on what is fair and reasonable in the circumstances. And that may well... Well, that is a lower threshold than strict regulatory rules and legal principles. And based on those FOS decisions, firms may be under significant pressure to start accepting complaints where they otherwise would reject them, and I think they are two real areas.

Nathan:

Yeah, and I guess the first time we saw that in a massive way was payment protection insurance, and that process of standards imposed by the Ombudsman then making their way back into, really, the standards that were required to be adhered to by firms, and as you say, ensuring that complaints are handled consistently with the outcome that they would expect from the Ombudsman. And now, that's fed through into most recently a wider implications case being motor finance. And that in itself has then triggered further FCA action.

Paul:

Yes, so on the same day, actually, the FOS published two final decisions in relation to motor finance commissions. The FCA announced that it would be intervening and using its powers under section 166 of FSMA to appoint a skilled person to effectively review the agreements in place between motor dealers and lenders, to assess a number of things, but including whether there was indeed widespread harm caused by discretionary commission arrangements.

And you can look at the FCA's intervention in a number of ways. I mean, the FCA, in its paper, said that really what it was doing was intervening to ensure, really, that there was some consistency to the decisions being made. But you could also interpret the FCA's intervention as it taking back control of what is a very important market issue, and wanting to ensure that it applies its own sort of rigorous analysis and a more sort of legal analysis of the issues, rather than leaving it to the Ombudsman to decide. I mean, we've heard some firms discuss that if they were forced to pay out compensation on the terms that the FOS awarded in its final decisions, then they would effectively go bust.

Nathan:

Yeah, I think I saw the figure of £16 billion as being one industry-wide estimate of the cost of this issue. And so the FCA has, as you mentioned, appointed a skilled person to collect this information about how the finance was sold and the agreements in place. And then, they've also tried to put on hold the flow of those complaints from firms through to the Ombudsman.

Paul:

Yeah, I mean, the reason the FCA gave in the paper is that once a complaint has made its way into the FOS system, it's very hard for that complaint to be dealt with by way of, for example, an FCA collective redress scheme. And one of the things the FCA is considering as part of its consultation or part of its intervention is whether some form of collective redress scheme might be appropriate in the circumstances.

Nathan:

Yeah.

Paul:

So what the FCA's is trying to do is ensure that as many consumers are left within scope of its collective redress jurisdiction, rather than sort of already caught in the FOS jurisdiction.

Nathan:

Yes.

Adam:

It's interesting. With all of these issues now, wherever there's a market-wide issue, everything that comes falls in the shadow of PPI. I think in terms of how that was dealt with, some of the challenges, there was obviously a mix in PPI between people going through the County Court system. Obviously, there was then Ombudsman complaints, there were new handbook rules as to how Ombudsman complaints should be dealt with. And I think the FOS have learned lessons from that, and the FCA inevitably as well have learned lessons from that. I'm interested, Paul, on the County Court side, are you still seeing litigants going that route, rather than through the FOS, or is it predominantly people who've got a claim or a complaint against a regulated firm? Are they tending to favour the FOS over the County Courts?

Paul:

So you definitely do still see claims management companies litigating in the County Courts, and motor finances is an example of that. I mean, the FCA points to County Court claims as well in its policy statement. I think a lot of claims management companies and other litigation firms have found it quite difficult to successfully bring group claims in the County Courts, which makes it sort of-

Adam:

Is that procedural?

Paul:

I think it's a procedural thing. I mean, there are obviously mechanisms in English litigation for group actions. You can get a group litigation order, for example. But I think firms have struggled to do that with these sorts of claims, where actually, depending on the way you look at the issues, they're quite fact-specific, and in many consumer cases, courts actually have to look at each individual customer's circumstances and their customer journey in isolation. And I think firms have struggled to bring successful group litigation for these sorts of claims in the courts in a cost-effective manner. The FOS, of course, provides a sort of quasi-forum for group litigation, because whilst, technically speaking, there's nothing akin to a group litigation order or sort of collective proceedings for competition claims in the CAT, what you can do is you can issue very large numbers of complaints and without any cost to doing so.

And what the FOS is then often doing is managing those complaints in a way that a court might manage group litigation. So selecting one or two test cases to decide certain important issues in those complaints, with the intention of then rolling out those findings more widely across the board. And that's something the FOS did with motor finance is that they picked a couple of test cases or test complaints, and then obviously we never saw how they then rolled those out to all of the other complaints waiting, because the FCA intervened at that point.

Nathan:

How do the dynamics of settlement change, depending on whether you're in the County Court or the FOS? I always think it's quite interesting. From a cost perspective, obviously, there's an impact, but just more generally, strategically, are you more likely as a complainant to get a settlement whether you go one route or the other, do you think?

Paul:

I think that there's always more of a tendency to settle litigation. Part of it may just be the psychological element of being in court and wanting to avoid a public trial. I think that it's probably a bit of a misconception, actually, but I think people are more worried about precedent risk in court litigation.

Nathan:

It's ironic that, isn't it?

Paul:

Yeah.

Nathan:

Because the precedent risk for the Ombudsman is absolutely massive and can have huge financial implications for firms.

Paul:

Absolutely. And I mean, technically speaking, County Court judgments are not binding. County court judgments do not bind other County Court judges. And so I think there is this real misconception, as you say, Nathan. I mean, as we discussed earlier, an adverse FOS decision can force firms, really, into having to reconsider how they adjudicate similar complaints.

And if you're dealing with, for example, a complaint in relation to a product, say, rather than something which is very particular to an individual customer, in the light of the current consumer duty backdrop, you could see firms having to reconsider the products they're offering, whether or not they actually need to go back and carry out some form of root cause analysis, and potentially even implement some form of redress for customers. And while, arguably, the same could be said if a County Court decides on a particular issue, I don't think they should be treated any differently.

Nathan:

Yeah, yeah, and what do you make of the quality of the decision-making processes within the Ombudsman? So obviously, they have to decide things based on what's fair and reasonable, all the circumstances, but we've seen, in a whole raft of cases, them imposing their own views on what firms should be doing in terms of how they sell products, how they categorise clients, for example, where firms have considered that they are abiding by the very clear rules that the FCA has imposed.

The FCA has been in, often, looked at those, and has provided its commentary on those standards, and then it gets to the Ombudsman, and you have individuals who put their own view in terms of what firms ought to be doing, which can be significantly at odds with what both firms believe they should be doing, what market practice is, and what the FCA has told them they should be doing. And then, that can lead to huge consequences for firms. Do you think that the people making those decisions at the Ombudsman have got the right qualifications, got the right skillset to be making such wide-ranging decisions?

Paul:

I mean, I think it's fair to say that you see a lot of inconsistency with FOS decisions, both at the adjudicator level, so the first level of their sort of complaint handling, and also at the Ombudsman level. And I think a lot of it really, Nathan, you touched on it, comes back to the fact that they are adjudicating complaints based on this notion of what's fair and reasonable. And both of those thresholds are incredibly subjective.

Adam:

It's inherently unpredictable, isn't it? I'm quite surprised actually that the uphold rate is what it is. I was looking for the last published complaints data from the FOS, a 35% overall uphold rate, which I actually would've expected it to be slightly higher than that.

Nathan:

I suspect that may reflect the fact that firms do settle complaints. Where they think they're fair complaints, they will settle that at the complaint handling stage, rather than allowing them to be referred to the Ombudsman.

Adam:

That's true.

Nathan:

It may be that, as a result-

Adam:

Perhaps in the post-PPI world, those internal complaints procedures are perhaps stronger than they once were, such that if a firm feels they ought to pay compensation, then they do so, and resolve it at that stage.

Paul:

But of course, it's interesting, because the risks of taking something all the way, of escalating something all the way to the Ombudsman, the risks are, going back to your question, Adam, about County Court versus Ombudsman, the risks are arguably higher in the FOS, because of course, if the Ombudsman upholds the complaints, then your options as a firm are very limited. You're stuck, really, with judicial review. And we've obviously seen one of the banks seeking to judicially review the FOS's decision in motor finance, but you're stuck with judicial review.

And as we know, it's very, very difficult to judicially review FOS decisions, particularly given that if they found or if one of the bases for their decision is that something was unfair or unreasonable, it's very hard to challenge those findings, because-

Nathan:

Yeah.

Paul:

Because they're subjective, and it's not necessarily sort of misapplying a very strict legal principle, which is backed up by case law and the like. So firms find themselves are in a very difficult position, whereas in the County Court, you can appeal, and you can appeal all the way up, obviously, as we know, to the Supreme Court. So the risks, in a sense, are higher than in the court system, because you've got this precedent-setting organisation, but without really any right to appeal.

Nathan:

Yeah, and to make an obvious point, the courts are required to apply the law, whereas the Ombudsman isn't. They're required to take into account the law, but they don't have to actually apply it. And so as you say, the judicial reviews that have been successful have been those focused on the issue of their jurisdiction, to hear the complaint initially, and then, to a lesser extent, on the compensation methodology that's applied. But in terms of that middle ground, in terms of, "Well, is this fair and reasonable, and all the circumstances?" it has to take be a pretty off-the-wall sort of decision in order for a court to be willing to interfere with that.

Adam:

There is more transparency, I think, around where the FOS might come out on certain issues, too, than perhaps there has been in the past, and perhaps that flows from PPI, but there are obviously decisions that are published. They also, just on the website, express examples of the types of complaints, and their views on certain issues, which I think are quite helpful both for complainants, but also for firms to look at, to see what type of view the FOS is going to take.

Nathan:

Yes. I mean, I think you're right, it's helpful for them to see it, but it's not helpful in terms of some of those decisions reached, because those circumstances where they're at odds with market practice and accepted interpretation of the regulatory obligations, where it goes further, there is that clarity.

Adam:

That's where you've got a market issue, isn't it? I think.

Nathan:

Absolutely.

Adam:

And that's where industry bodies, et cetera, need to be looking at that quite closely. If there's a divergence between market practice and the FOS's views of something, or the regulatory standards. Then, you've got a legal challenge.

Nathan:

Yes, and that's where I want to ask you both, so there's a desirable aspect to Ombudsman, in terms of dealing with individual cases of unfairness to customers, and I think we'd all agree that that's a sensible mechanism for dealing with those sorts of complaints. What would you substitute or how would you change the current Ombudsman regime, where there are those wider implications issues, in order to avoid billions of pounds worth of compensation being paid in circumstances where firms were doing what the FCA had clearly indicated they ought to be doing? How would you adjust that jurisdiction?

Paul:

I mean, I think one way you could handle it I think already falls within the FOS's jurisdiction: I think the FOS does have jurisdiction to refer complaints to the court system, so they can refer particular issues, particular legal questions to the court. They can effectively outsource the decision-making.

Nathan:

And do you see them doing that?

Paul:

Well, I haven't seen them doing it recently. I mean, I suppose by analogy, it's a bit like the way in which the FCA might seek to use the financial services market test case scheme, like they did in COVID, with certain insurance-

Nathan:

Yeah.

Paul:

Yeah, insurance issues.

Nathan:

Yeah, yeah, insurance.

Paul:

I think that's quite sensible. Difficult legal issues. Ensuring that you get a sort of well thought-out second opinion on them by a judge, I think there's real value in that.

Nathan:

But would you favour an approach that takes some of those issues away from the Ombudsman, in circumstances where they have wider implications for the industry? I know there's the scheme in which the Ombudsman is meant to discuss issues with the FCA, where they have wider implications, but would you favour, for example, an automatic referral to the court of cases where there are thousands, for example, of similar issues?

Paul:

Systemic, yeah.

Adam:

The Ombudsman needs to be able to resolve financial services complaints or disputes. That's the purpose of it. That's why it's been set up, for that mechanism. Now, obviously, that becomes more challenging for it as an organisation where there's complex legal and regulatory issues, or complicated fact patterns, and the stakes are higher where you've obviously got high volume. So where there are those types of issues, I think it's right for them to press pause, for them to consider it.

Frankly, they ought to really be consulting, to get the right opinions, both legally from regulators, et cetera, on that issue, and take a very considered view. And also, thinking about where there have been cases that have gone through the court system on the same or similar facts, taking that into account as well, because what everybody wants, I think, is consistent decision making, as well as fair decision making, both to those raising the complaints, but also to those firms that are dealing with them.

Paul:

And I think if you were resolving some of these issues through the court, you would expect there to be quite detailed expert evidence. For example, potentially from economists looking, if you take something like motor finance, an economist may, for example, give a view on potential overcharge. They may look at what the counterfactual would've been, had rates been flat fee rather than discretionary.

And this is the sort of evidence that you would expect a court, not necessarily the County Court, but sort of High Court and above, to be grappling with, and to be really considering. And while the FOS obviously has the powers to ask for evidence, and firms have the right to submit evidence, I think it's just not really the done thing. So by the time you get to the decision-making point, actually, the FOS doesn't really have all of the evidence that it needs to properly consider the issue, particularly around points like compensation.

Nathan:

I agree completely. I would favour a system where it's identified that a particular issue is going to have those wider implications that the decision is still left to the Ombudsman, but that there is a process where you have a proper detailed hearing of the issues, in which the FCA has a chance to put in submissions, firms in the industry have a chance to put in submissions, and proper arguments can be made, I think, in person rather than writing on not just the narrow issues, but what market practice is, what the implications would be, so that when the Ombudsman makes a decision that is going to have massive ramifications for the industry, it can do that on a properly considered basis, rather than the current position, where it's making that case on the papers, in relation to one individual complaint, but which then has to be followed in a raft of other cases.

Paul:

And of course, you do, in a way, firms do have that, or sometimes have that opportunity to make those submissions, both throughout the complaint process, but also if the Ombudsman decides to publish a provisional decision, it would be fairly common in those circumstances for firms then to make representations, to try and change the Ombudsman's mind.

But as we all know, by the time the Ombudsman's got that far, and assuming that their provisional decision is that they will uphold the complaint for various reasons, I think it's often a bit late by then to change their mind. They've already expended considerable resource getting to that point. They may have a backlog of similar complaints that they want to deal with. So they're looking for a decision which is going to make their life easier. And so if firms leave it that late to start making detailed representations to the Ombudsman, it really can be too little, too late, I think.

Adam:

Can I give you an Ombudsman stat? So this year, inquiries and complaints received by the Ombudsman, 340,000, going back to PPI, 2013, 2014, nearly 2.4 million they had that year.

Nathan:

Yes.

Adam:

So from a capacity perspective, the Ombudsman ought to be able to be dealing with things in a quick and efficient way, because that deluge that they had from PPI has finally cleared.

Nathan:

That's right. And I think, as you said earlier, Paul, the FCA learned lessons from PPI. It felt like the industry did, that the goalposts were being moved after the event, and that the regulator lost control of that issue. And I think the s166 review, the process, with a view potentially to either imposing an industry-wide compensation scheme and/or commencing a test case before the courts is an attempt by the FCA to retain some control over that issue.

Paul:

I mean, we've obviously talked quite a lot so far about claims or complaints where there are very large volumes of a similar complaint, with a sort of systemic risk.

Nathan:

Yeah.

Paul:

I think one of the other interesting things that we're seeing in the FOS at the moment is perhaps more sort of well-known litigation claimants inside litigation firms, seeking to bring slightly more high-value complaints in the FOS, rather than the High Court or the County Court. And there are obviously limits to that, because there's a sort of £430,000 limit for more recent complaints. But we've certainly had discussions with claimant-side law firms, who you would see commonly in the High Court, Court of Appeal, et cetera, actually considering using the FOS as the forum for their complaint, rather than the courts.

And I think they're really attracted to this lower threshold of what's fair and reasonable in all the circumstances. And I think they're also attracted to the fact that, really, the startup costs, the barriers to entry of getting your complaint into the system are much lower. You don't pay a court fee, you don't have to particularise your claim or your complaint in the same way that you are required to do under the court rules in litigation, and I think that can be quite attractive to firms. There's also no adverse cost risk. So if you are bringing a complaint which is on the more speculative side, you can do so without worrying about being on the hook for your opponent's costs.

Nathan:

And you get to the end of the process, and if you're unsuccessful, that doesn't preclude you then bringing a legal claim.

Paul:

Exactly.

Nathan:

You get two bites of the cherry.

Paul:

And I think the sort of complaints that sort of fall within this category are things like debanking complaints, where there's potentially more value, closeout complaints, where customers have allegedly lost quite a lot of money, because they were closed out of a position. And you can see the reasons why the FOS is quite an attractive jurisdiction in that respect, for bringing those complaints.

Nathan:

Absolutely, yeah. And so just to finish off, there's obviously a lot of unhappiness across the industry in terms of the Ombudsman jurisdiction. Do you think that with the focus on the competitiveness of the UK financial services system, do you think that there will be any moves from Treasury to make changes to that jurisdiction, or do you think they will allow it to continue as is?

Paul:

I think there's, obviously, the FOS came out with a recent consultation paper, and one of the things they're looking to potentially do is start to start charging claims management companies and other professional representatives who are bringing large groups of complaints into the FOS.

Nathan:

You think that's to discourage unmeritorious-

Paul:

Yeah, I think it was about 20% of all complaints in the FOS system at the moment come from claims management companies. So I think what the FOS is looking at is potentially trying to keep a lid on the very large volumes of complaints which are making their way into the FOS, many of which aren't upheld and are seen, both from the firm's perspective and the Ombudsman's perspective, as being quite speculative. So forcing claims management companies to put their hand in their pocket and take on some of the risk may discourage that, and actually ensure that the right complaints, going back to Adam's point, the right complaints in this very important jurisdiction for consumers are making their way into the system and can be prioritised.

Adam:

I mean, it should be a cost-effective way of dealing with a whole range of disputes and of complaints. So it would be interesting to do an analysis of what type of Ombudsman there are in other jurisdictions in relation to financial services. Maybe that can be a part two, but I think it would be, if the alternative is litigation through the courts, that's not necessarily a great solution, either. So I think it would be a shame, in a way, to curtail the FOS. But obviously, there's always tweaks that can be made in terms of making sure that there's a good process that works for everybody.

Paul:

And ensuring it's not being abused, I think.

Nathan:

Yeah, absolutely. I'm afraid that that's all we've got time for in this edition of the Ashurst Regulatory Enforcement podcast. Many thanks to you, Paul, and to you, Adam, for sharing your experiences and insights with us today. And a big thank you to you for listening to this podcast. We hope you found it interesting and useful. As always, if there's anything that we've discussed that you have your own views on, then please do reach out, drop us an email or give us a call. We would love to hear from you. Thanks very much, bye.