THE ROLE OF THE FINANCIAL SERVICES OMBUDSMAN
INSURANCE INSTITUTE OF IRELAND
ROYAL DUBLIN SOCIETY
26 MAY 2010
I would like to thank the Insurance Institute of Ireland for inviting me to speak here today at their inaugural breakfast seminar "Financial Regulation in Ireland: A New Foundation."† This is in fact my first public statement on the plans I have for the office I took up only two months ago.
The Financial Services Ombudsman, in its current form, has now been up and running for 5 years.† It has a track record of decision making and an extensive record before the courts.† It is only appropriate that at this point, as the office prepares to enter its next phase of development, that we take stock and reflect on what demands are currently being made on the office and to chart a way forward.
TRENDS ON COMPLAINTS
The workload of the office has recorded a steady year on year increase from its inception. In the last full year, 2009, complaints increased by over 20% from 2008 and stood at 7619. 2010 complaints are marginally down (12%) from 2009 levels, but it is too early to determine if this trend will continue. †
The trend in insurance complaints tells it own story.† †Insurance complaints rose by 40% in 2009. The majority of these complaints were in relation to investments which rose by over 100% (from 621 in 2008 to 1309 in 2009). There was a general increase in insurance complaints received, but these are more in line with increases year on year since the Bureauís establishment.
In relation to Payment Protection Policies and Mortgage Protection Policies†complaints received in 2009 doubled over 2008 levels (351) and the expectation is that 2010 will see a levelling off but no decrease from 2009 - we have already received 163 such complaints this year.† †
Year on year the output of the office in terms of complaints resolved and findings made has increased, but, it simply has not kept pace with the increased demands made on the office and a significant backlog of unresolved complaints exists.† † At the start of 2010 the Bureau had 3,400 complaints on hand. On average , it take s 9 and Ĺ months from the date we receive a complaint to the date we issue a Finding. Of course, some complaints are resolved at an earlier stage and this obviates the need for us to make a Finding. During the first 5 months of the year, the size of the backlog has stabilised --meaning that now we are effectively keeping up with demand (at least for the time being) but we have not yet begun to clear the backlog.
I am pleased to note that we have had very few complaints made relating to the recent floods and none to date on the Icelandic ash clouds. Let us hope that these issues can continue to be resolved by means other than the complaints process.
A UNIQUE JURISDICTION
The Role of the Financial Services Ombudsman is multi-dimensional, to say the least
"In order to command trust and do its job effectively, the FOS must be competently and efficiently run; and it must be seen to be competently and efficiently run. It must also be demonstrably even-handed in its processes and judgements, and it must achieve balance between a series of seemingly competing objectives: exercising discretion in its decisions without falling prey to charges of arbitrary or capricious behaviour; adhering to consistent, fair and reasonable principles whilst always treating every individual case on its individual merits; offering an informal alternative to the courts whilst also operating within the rule of law; and playing its full part in the statutory and regulatory landscape, without ever falling into the trap of attempting to usurp or supplant lawmakers, courts or regulators." (Hunt Review, UK Financial Services Ombudsman, 2008).
I believe that the challenges of meeting those competing objectives are even more difficult in Ireland than in the UK, since here, the courts tend to take a more active role in intervening in regulatory matters than they do in the UK.
Our unique jurisdiction is grounded in our legislation.† Section 57BK (4) of the Central Bank and Financial Services Authority of Ireland Act 2004 provides that the Ombudsman is:
"entitled to perform the functions imposed, and exercise the powers conferred, by this Act free from interference by any other person and, when dealing with a particular complaint, is required to act in an informal manner and according to equity, good conscience and the substantial merits of the complaint without regard to technicality or legal form."
The Ombudsman can make a Finding on what he believes is fair and reasonable in the particular circumstances the case, in this regard Section 57CI. -2 of the Act states:
A complaint may be found to be substantiated or partly substantiated only on one or more of the following grounds: (c) although the conduct complained of was in †† accordance with a law or an established practice or regulatory standard, the law, practice or standard, is or may be unreasonable, unjust, oppressive, or improperly discriminatory in its application to the complainant".
We are not a court.† We have a different remit.† And this is well recognised by the courts. In Hayes v Financial Services Ombudsman & Ors, unreported, High Court, 3 November 2008, McMenamin J stated:
"What has been established, therefore, is an informal, expeditious and independent mechanism for the resolution of complaints. The respondent (Ombudsman) seeks to resolve issues affecting consumers. He is not engaged in resolving a contract law dispute in the manner in which a court would engage with the issues. The function performed by the respondent is, therefore, different to that performed by the courts. He is enjoined not to have regard to technicality or legal form. He resolves disputes using criteria that would not usually be used by the courts, such as whether the ††† conduct complained of was unreasonable simpliciter; or whether an explanation for the conduct was not given when it should have been; or whether, although the † conduct was in accordance with a law, it is unreasonable, or is otherwise improper (see s 57CI(2)). He can also make orders of a type that a court would not normally be † able to make, such as directing a financial services provider to change its practices into the future. Thus, he possesses a type of supervisory jurisdiction not normally vested in a court. These observations are to be borne in mind when considering whether the decision made by the respondent was validly made within jurisdiction." (Page 14).
The courts to date have accorded our findings a certain measure of deference on appeal. The standard test of an appeal against us so far is that set out by the High Court In Ulster Bank Investment Funds Limited v Financial Services Ombudsman, 2006 the court stated that
"To succeed on this appeal the Plaintiff must establish as a matter of probability that, taking the adjudicative process as a whole, the decision reached was vitiated by a serious and significant error or a series of such errors. In applying the test the Court will have regard to the degree of expertise and specialist knowledge of the Defendant." (Page 9).
This standard of review is frequently referred to as "curial deference" and is, I believe, fundamental to the office carrying out its unique jurisdiction.† If we are to be informal, expeditious and independent - the essence of our unique jurisdiction, our findings must have their own integrity and cannot be seen as simply the preliminary stage of a two stage process -- finding to be followed by an appeal to the High Court.† High Court appeals are not informal and are not expeditious.† Costs of such appeals are prohibitive for most lay litigants.† If we are to preserve our unique role, we must defend appeals intelligently.† If we have made a mistake, we will move at the first opportunity to consent to quash our decision, have the matter remitted to us, and correct our finding.† Where we have not made a mistake, we will defend ourselves vigorously and seek costs against the losing party where we prevail.††
When I joined the Office in March, we had 38 High Court Appeals and 2 Supreme Court Appeals pending.† We are in court every week.† What is clear to me is that the Courts have become acquainted with us, know our job and - while holding us to account as they should - are mindful of our unique role - namely, our relative informality and the imperative that we provide a timely and impartial service for those who complain to us.†
This is taken from an attendance note of an ex tempore high court judgment delivered recently:" The availability of the complaints procedure is of significant importance to those † with accounts in banks and financial institutions. These procedures should be dealt with speedily. They can arise out of events which may not be hugely significant in themselves, but nonetheless cause bother to the account holder. The public must be assured that the person making the decision is neutral and fearless. The investigation must be proportionate, which is to be objectively judged in the context of the person who is seeking damages".
The recent decision of the Supreme Court in the Davy case is of course a very important one and worthy of careful study.† The Supreme Court upheld the decision of the lower court, quashing our original finding.†† The procedures of the office had already been changed two years ago following those High Court decision.† These revised procedures are in line with the Supreme Courtís decision.† Furthermore there is much in the Supreme Courtís decision that supports the work of the Office and it confirms the view of our jurisdiction as set out by the High Court in Hayes.† The decision confirms the informality of our procedures, our guiding principle of fairness and how we are not required to mimic court procedures. (Davy, p. 52) †Accordingly, after the Supreme Court decision in Davy, the office continues to operate on the same trajectory that we set for it before the Supreme Court decision.
THE WAY FORWARD
It is taken as a truism in the world of the ombudsman what our role is.† We are not a consumer advocate.† We are not an industry advocate.† We are the fair adjudicator.† For us to perform that role it is vital that our decisions are grounded in sound principles applied consistently and in a transparent and predictable manner.
Legal principles must always be our starting point of analysis.† Our own Act and the Financial Regulatorís Consumer Protection Code will be our usual starting point.† Of course, we must also be mindful of the whole sweep of legal and equitable principles as well as regulations relevant to our particular subject matter of decision making.† We will renew our engagement with the Financial Regulator to take advantage of the expertise of that office.† Our independence is not in doubt.† But, we will engage with others to enhance our own expertise and improve the quality of our decision making.† The office needs to be, and to be seen to be, a centre of excellence in the understanding and application of the consumer code and financial regulation to consumer complaints.
We also need be mindful that we have equitable jurisdiction as well and are not bound by "legal technicality." †We may make an adverse finding against a financial service provider even if its conduct was in accordance with a law or an established practice or regulatory standard -- provided of course it was unreasonable, unjust, oppressive, or improperly discriminatory as to its application to the complainant. But I am a firm believer that where we invoke equity and fairness in our decisions, we do so clearly, transparently and where appropriate and only after having examined the legal position.†
My own background in regulation and the field of law and economics also informs me that we need to be minded of the larger role that we play in the operation of financial markets.† ††Contracts and the rule of law properly understood provide the basis for wealth creation by facilitating a market of voluntary exchanges. Arbitrary decisions by regulators or courts undermine the principles of contract, can make parties more reluctant to enter into agreements and can frustrate our ability to create wealth. This inevitably hurts consumers.† †Capricious decision making has a social cost apart from and above the loss experienced by a particular side to the previously struck bargain which is undone.†
The Office is here to deal with the information asymmetry between consumers and financial service providers. †It is that information asymmetry that grounds our unique jurisdiction.† It is the information asymmetry that underpins our informal and expeditious procedures.† †It is by understanding that information asymmetry that assists us in bringing coherence to the legal and equitable framework designed for consumer protection. †††For us to adjudicate fairly, we must understand the respective roles of financial service providers and consumers in the light of each particular contract and the relevant circumstances. †
We need to be mindful of those situations where it is fair to place an onus on the financial service provider to highlight certain information to the consumer. Of course, there will be other circumstances where the consumer must step forward and make a full disclosure.† It is that proper allocation of responsibility and risk that frequently is at the heart of our decision making.
If the financial crisis has taught us anything, it is that we need to be better at analysing and allocating risk.† This applies not only to financial service providers, but also to regulators as well.
Accordingly, we have begun to undertake in the office a review of our methodologies of decision making.† We are striving for robust, consistent results consistent within our special jurisdiction.† We are doing that, while at the same time dealing with the steady flow of work and managing not to fall further behind. This review will continue and will accelerate once we have our full complement of senior staff - a Deputy Ombudsman and a legal adviser, both expected to join us later this year.
However, robust consistent decision making only brings us less than half the way to where we want to be.† It is not sufficient for us to improve our decision making. We must so a better job of communicating how we make decisions to our stakeholders.†† We must engage with our stakeholders as to how we make decisions, what factors we take into account.† We are aiming for transparency and predictability.
Accordingly, I can announce to you today that we will undertake in the second half of this year a new form of engagement between the Ombudsman and our stakeholders.† We will put out to public consultation guidance notes on our approaches of decision making.† We need to work with you to bridge the gap between our methodologies and your practices.† Of course, such a review must include engagement with complainants and consumer groups to better understand their particular circumstances and vulnerabilities.
Such a process of engagement is, of course, never complete.† The problems we confront are not constant.† The introduction of new products and changed circumstances will always test our abilities to manage our competing objectives.
But, I am a firm believer that we will better meet these challenges by openly setting out our methodologies, by engaging with our stakeholders and moving towards greater transparency and predictability of decision making.
I invite you to join with me in this endeavour.
Our goal is to move towards a system where complaints are dealt with at an earlier stage in the process than they are now, and to eventually see fewer complaints as industry practice aligns with our work.
ONE FINAL ISSUE - AMENDMENT TO OUR LEGISLATION
Our Act does not explicitly address the power of the Office to name financial service providers in relation to its adjudication, public education or reporting functions.† In fact, certain provisions indicate the contrary.
† Investigations are to be conducted in private (57CC)
† Findings are to be given to the complainant and FSP only (57CI(7))
† Reporting functions limited to summary of complaints and review of trends/patterns (57BS)
The Office has taken the view, supported by external legal advice, that it does not have the legal authority to name firms under the current legislation and it will not do so until the legislation is changed.† That is the prudent course of action to take.† However, this has implications for the effectiveness of the work of the Office.
Pursuant to its reporting functions, the Office publishes detailed summaries of anonymised complaints. The summaries contain considerable detail of the complaints and frequently contain findings that the activities of certain unnamed firms have fallen below (and sometimes considerably below) relevant legal, regulatory, equitable and ethical standards.†
I believe that this method of operation of the Office is inconsistent with our overall statutory objectives and is ultimately not sustainable.† According to our mission statement, the overall goal of the Office is to "enhance the overall environment" for the financial services sector.† We are here to promote the integrity of the financial services industry in the eyes of the public.† It is difficult to understand how this can be achieved if our public profile can be characterised as the publicising of industry wrongdoing while simultaneously shielding the wrongdoers from public accountability.†† If certain firms are operating unscrupulously, why canít the public at least know who they are?† Why does the Office in fact refuse to tell the public who the wrongdoers are?† How we contribute to promoting the integrity of the financial services sector if our public interventions only reinforce the public perception of the ineffectiveness of the current regulatory regime?†
Accordingly, I think it is important that the Office changes the way it conducts its business.† This in turn requires a legislative framework that allows it to operate successfully so that it is in a position to fulfil its Mission going forward.
Important Considerations Going Forward
In considering any amendment to the legislation to permit the Office to name financial service providers subject to an adverse ruling - and to permit the Office to set out details of such an adverse ruling - it is important to bear in mind certain policy considerations relevant to any such "naming and shaming" provision:
† Nothing should be done to unduly compromise the ability of the Office to carry out its unique, informal and expeditious approach to adjudication.† Accordingly, an obligation on the Office to publish all its findings (in their entirety) would be counterproductive as it would necessarily lead to delays and would make it more difficult for us to carry out its work.
† Nothing should be done to discourage complainants from coming forward.† Any publication system must protect the identity of complainants.
† Consideration must be given as to how the Office can carry out its reporting functions in a meaningful way under 57BS of the Act. Publication of detailed summaries of anonymised individual findings alone is unlikely to be helpful to an aggrieved public.
We are of the view that, at a minimum, the Office should have the express statutory power to name firms against whom an adverse ruling has been made.† The disclosure permitted should include the following:
† Name of firm
† Name of product/service at issue
† Nature of complaint upheld (i.e. mis-selling/breach of contract etc.)
† Amount/type of award/direction
A separate disclosure may be required when a firm does not comply with a finding within the allotted time.
However, it will be necessary for the Office to go beyond this template approach in making disclosure in the context of its 57BS reports.†
What do we have in mind here?† In publishing such reports, the Office should be able to draw upon its experience in investigating and adjudicating complaints and come to conclusions that may, but do not necessarily involve, the naming of firms.† For example, if in the previous period, it had come to our attention that a problem had developed in the sale of a particular financial product - that there was widespread public confusion - we should be able to point this out and thereby educate the public and this may require the naming of firms in this context.
The Office should be in a position to further explain and contextualise the raw information that it publishes about named firms in tabular form.† For example, the total number of adverse findings against a financial service provider should be put in the context of total amount of business sold (relative market share). This is the minimum that could be expected of us as a responsible, effective public body.
Finally, in a few cases, it will be necessary for us to publish findings - with necessary redactions made to protect the identity of the complainant as appropriate. Here, publication will be required by a compelling public interest, such as the give the public information in order to prevent future losses.† The criterion should be the protection of the consumer and the public interest.† We are not a regulatory authority and not here to penalise wrongdoing - that is the remit of the Financial Regulator and other state bodies with enforcement powers. However, we should be in a position to make disclosures where there is a compelling public interest to do so.
The financial crisis has placed us and everyone else in the financial regulatory sector under increased scrutiny. †This is only appropriate.† We have a unique jurisdiction and play an important part as one piece of the framework of financial regulatory.† Operated at its best, we should be an early warning system for the framework as a whole as we have the opportunity to see problems developing before they may come to the attention of others.†
We look forward to working with the Financial Regulator to improve the quality of our decisions and to ensure that we fulfil the role expected of us in the overall framework.
But, I also look forward to working with you.† We have a common goal - to enhance the environment of the financial services markets in Ireland.† I am confident that if we all work towards meeting those responsibilities, that our goal can be achieved.