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Modernising the Financial Ombudsman Service

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The joint Financial Ombudsman Service (FOS) / Financial Conduct Authority (FCA) Call for Input Modernising the Redress System (CfI), issued on 15 November 2024, appears to be an attempt by both entities to put on a united front despite underlying tensions.

Its opening statement is that “The current redress framework works well for individual customer complaints about specific issues” and any “challenges” are confined to “mass redress events” (a term upon which it later seeks input as to what it actually means). If not provocative, then the underlying assumption that all is otherwise working well portrays a lack of awareness. Whether justified or not, some believe that an informal process of dispute resolution, with wide and subjective decision criteria and and which is able to depart from the law, is only appropriate for disputes involving relatively modest amounts; certainly not for the current limit of £430,000. Despite the CfI’s title, it is also difficult to reconcile the concept of modernisation in its accepted sense with some of the issues upon which it seeks consultation. One would have expected mention of some areas relating to the role of technology in improving FOS processes and workflows.

Some matters in respect of which input is requested are generic in nature and not peculiar to mass redress events. Issues relating to role of CMC’s, a firm’s perceived advantages to delay providing redress in respect of a patently valid complaint and the need to review DISP after a 10 year hiatus, apply to single focussed complaints as well as to mass redress issues.

Chapter 3.11 seeks input into a suggestion that the circumstances under which an ombudsman’s final decision, following that of an investigator, can be requested is to be very much restricted. At present there is a clear distinction between the role of an investigator and that of an ombudsman. What is mooted will be the binding nature of a determination of someone who is not an ombudsman.

A key underlying issue driving the consultation is how to deal with matters where FOS and FCA do not agree on “certain FCA requirements”. Some may interpret this as poorly coded language that FOS needs to fall into line with FCA’s thinking.

Back in 2012, there was a (high level) attempt to amend section 225 Financial Services and Markets Act 2000 (FSMA) by obliging FOS to “.. act in a way which is compatible with the FCA’s strategic and operational objectives and regulatory principles”. That proposed amendment did not make it to the statute books, having been resisted in a House of Lords debate. A principal point made was that it was for FCA to interpret its own objectives and that it was not “.. desirable that [FOS] should be put into the position of having to interpret them”.

As is well known, section 228 FSMA provides that complaints, referred to FOS and within its jurisdiction, are to be “determined by what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case”. That fair and reasonable basis is then developed further within DISP 3.6, in particular the factors to be taken account of in DISP 3.6.4R.

It appears that a desired outcome from this process may be that FCA is able to exert more influence on FOS than it currently does as to the application and interpretation of its rules. If so, then this will presumably be within the confines that FOS can still upheld a complaint against a firm despite it having complied with all regulatory rules and guidance. FCA has a track record of being inconsistent in the interpretation of its own rules; the extent of the obligations of SIPP operators being a recent example.

On a positive note, a review of DISP is a welcome opportunity to tackle many issues both of a jurisdictional and operational nature which need review. These include the gap between being a consumer and a micro-enterprise for some business related investments of personal pension funds under the eligibility criteria of DISP 2.7 as well as the lack of longstop in the DISP 2.8 time limits.

The response deadline of 30 January 2025 shows an intention to move forward expeditiously. Some of the CfI’s ideas would need changes to FSMA as well as DISP.

Stuart Brothers Lawyer Punter Southall Law

Stuart Brothers

Consultant

Stuart Brothers specialises in retail financial services regulation, particularly in relation to complaints handling and FCA Handbook DISP related matters.

Prior to joining Punter Southall Law, Stuart undertook an interim role as a legal counsel for the Financial Services Ombudsman (FOS). That role involved advising on a wide range of issues arising under DISP including ambit of FOS jurisdiction, application of fair & reasonable criteria, time limits, eligible complainant criteria, application of Consumer Duty principles, reviewing draft provisional and final decisions and judicial review actions.

Stuart’s FOS role followed 35 years experience in financial services regulation which included acting as a lawyer within the legal department of the AMP group of companies, managing director of London Life Limited and as director in the Banking & Finance group of KLegal (associated law firm of KPMG) where Stuart advised investment and banking clients on matters arising from the implementation of Financial Services & Markets Act 2000.

Stuart was also general counsel to a SIPP administrator for 17 years. Stuart also had a prominent role in litigation relating to the sale of interest rate hedging products from 2010, which included  writing an article for the Law Society Gazette on the regulatory review and redress scheme and giving a presentation to a joint party Parliamentary group on the topic. Stuart’s work on that area was quoted in the Telegraph and Financial Times.

Areas of expertise

  • Complaints handling – case file reviews, final response letters, dealing with FOS, business process review into complaints handling for companies within AMP Group;
  • Investment and pensions, particularly SIPP and SSAS products;
  • Application and interpretation of FSMA/FCA Handbook;
  • Regulatory perimeter issues, including RAO exemptions;
  • FCA thematic reviews (Consumer Duty/suitability/non-standard investments);
  • Defined benefit transfers – suitability (DBAAT), appointment of skilled persons under section 166 FSMA, redress methodology, section 404 scheme (BSPS);
  • Intricate SM&CR/SYSC matter – issues raised by FCA Supervision Group in relation to governance structure of a wealth management LLP, in particular relating to scope of SMF27 roles and controller issues;
  • FCA requests for information, including under section 165 FSMA;
  • Threatened FCA action under section 176 FSMA (mortgage broker);
  • Compliance with conduct of business rules (COBS, MCOB, ICOBS, FPCOB);
  • Whistleblowing reports investigated by FCA;
  • Remuneration structures, particularly post RDR;
  • Issues arising from potential allegations of “phoenixing” and “lifeboating”;
  • VREQ’s and OIREQ’s, including an insurance broker’s alleged non-compliance with CASS rules;
  • Minimum capital requirements including IFPR and ICARA and issues arising from PI exclusions and wind down planning;
  • Demarcation of responsibility for and supervision of appointed representatives;
  • Introducer appointed representative agreements;
  • Insurance Distribution Directive issues;
  • Arrangements with non-regulated introducers (SIPP & SSAS clients);
  • Structuring of cash flow planning company to fall within regulated activities exemptions in relation to investment platform arrangements;
  • Implementation of Consumer Duty;
  • FCA review into decumulation following pensions freedoms;
  • With profits funds – actuarial discretions (guaranteed annuity rate products) and distribution of insurance long term fund; and
  • Setting up of film finance scheme (non-CIS).

Regulatory Transactional Work

  • Section 178 FSMA change in control issues, including challenges by FCA in relation both to disposers and acquirers;
  • Regulatory due diligence – directly authorised firms, appointed representatives, SIPP administrators;
  • Warranties and indemnities in share and asset sale agreements for FCA regulated entities;
  • High profile disposals of an IFA and SIPP administrator (2022/23);
  • Joint venture between IFA and fund manager for provision of discretionary fund management services;
  • Agreements for white-labelling of platform services; and
  • Responsible for regulatory due diligence exercise of UK subsidiaries of Australian Mutual Provident (AMP) for AMP’s listing on Australian Stock Exchange.

Financial Services Dispute Resolution

  • Case on restraints in a pensions and actuarial services outsourcing contract Quantum Advisory Limited v Quantum Actuarial LLP in High Court [2020] EWHC 1072 (Comm) and Court of Appeal [2021] EWCA Civ 227;
  • Interest Rate Hedging Product (IRHP) claims against investment banks, including cases against Barclays Capital and HSBC which were covered by Daily Telegraph (Harry Wilson);
  • Application for the use of expert evidence in a IRHP mis-selling claim (Battrick v Royal Bank of Scotland plc [2013] EWHC 2277 (QB)); and
  • LIBOR manipulation action (Longford Securities & Equities (K&T) Limited v Royal Bank of Scotland plc).
[email protected] 07990 039856
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