This book is about the Financial Ombudsman Service (or ‘FOS’). The FOS is probably the main form of alternative dispute resolution for customers of those who are subject to financial regulation. In this way it provides an important way of resolving a wide variety of claims and complaints.
The purpose of this book is to look at the principal issues that arise when the FOS is asked to determine a complaint, as well as touch on how the FOS relates to other dispute resolution procedures, most notably litigation.
The concept of an ombudsman first appeared in Scandinavian countries. Sweden has had some form of ombudsman for over one hundred and fifty years.1 But it was not until the Parliamentary Commissioner Act 1967 that the institution first made its way to Britain. The purpose of that commission was to provide a method of investigating and remedying complaints about central government that were brought through members of the House of Commons. Over time, its role expanded. Complaints can now be brought by members of the public, and it is today called the Parliamentary and Health Service Ombudsman. It allows complaints to be made against a wide array of government departments and services, as well as the NHS.
Since the first ombudsman in 1967, there have been a number of ombudsman spring up to regulate other industries. Many – such as the Legal Services Ombudsman and the Housing Ombudsman – have statutory bases. Others are purely voluntary.
The FOS falls into the former category, though as will be seen many organisations sign up to its so-called ‘voluntary jurisdiction’ and would otherwise fall outside the scope of its mandatory powers. Principally, the FOS’s legal basis comes from the Financial Services and Markets Act 2000 (‘FSMA’). That legislation updated the existing law of financial regulation (which largely came from the Financial Services Act 1986). It created the Financial Services Authority (‘FSA’) to oversee regulation (now known, since 2012, as the Financial Conduct Authority (‘FCA’)). The 2000 Act also created the FOS, bringing together a wide array of existing ombudsman (including the Insurance Ombudsman and Banking Ombudsman). Until 1 December 2001, the FOS applied the rules of the scheme under which the complaint would previously have been brought. Since that date, it has applied the provisions in DISP, to which we shall now turn.
The FOS’s rules and procedures are principally set out in the FCA Handbook. Specifically, they are contained in the chapter called ‘Dispute Resolution: Complaints’ (or ‘DISP’, as it is known).
The FCA Handbook is made under the FCA’s powers pursuant to the Financial Services and Markets Act. It is a form of secondary legislation. It is divided into a series of sections. Its scope is wide, covering everything to identifying who falls within the scope of regulation, to the standards and duties with which they must comply, and what happens when things go wrong. This last issue is where the FOS comes in.
DISP is that part of the Handbook that deals with complaints brought against respondents before the FOS.2 It contains both ‘Rules’ and ‘Guidance’. The former are denoted by the presence of an ‘R’ after the relevant provision (e.g. 1.1.1R). The latter are denoted with a ‘G’. In general terms, rules create binding obligations on those who provide financial services in the UK, often referred to below as ‘firms’. But guidance is not binding in the same way. Instead, it sets out explanations, information as to what may be needed in order to ensure compliance, and recommended (but not mandatory) conduct.
Many words within the FCA Handbook are defined terms: all such defined terms are italicised in the text and, when viewed online, can be clicked to show the definition. When considering FCA Rules and Guidance it is important to consider such definitions.
The FOS is a corporate body (in fact a limited company) known as the Financial Ombudsman Service Limited. It is the ‘scheme operator’ required by s.225 of FSMA to oversee and run the ombudsman service.
At the head of the FOS is a chairman and the board, whose members are directors of the FOS. Each are appointed and liable to be removed from office by the FCA.3 The complaints themselves are determined by a series of ombudsmen and adjudicators. FSMA makes provision for a Chief Ombudsman,4 who is responsible for leading the panel of ombudsmen. Both the FOS and the Chief Ombudsman are required to submit a report each year to the FCA on the discharge of their functions.5 The FOS is also required to produce annual budgets and plans.6
Each of the documents that the FOS is required to produce can be found on its website.
The FOS website7 contains a whole host of information. Much is aimed at complainants, who are generally acting ‘in person’ (i.e. without lawyers). For those subject to the FOS’s jurisdiction and those who advise them, more detailed information can be found in the FOS’s ‘online technical resource’, which sets out guidance on a range of issues such as how the decision making process works to how the FOS calculates compensation. This guidance is obviously more detailed than that which can be found on the consumer-friendly parts of the FOS website.
The Ombudsman News is a regular publication from the FOS discussing contemporary issues facing the FOS. Each issue also includes case studies on a particular topic, giving guidance to how the FOS reached its decisions in particular complaints. Recent editions have looked at regular complaints arising out of travel insurance,8 or accounts being used as ‘money mule’ accounts.9
When considering whether the FOS complied with the rule of law, the Court of Appeal in R (Heather Moor & Edgecomb) v FOS  EWCA Civ 642 appeared somewhat concerned by the fact that decisions were not (at that time) published by the FOS.10
However, since 1 April 2013, the FOS has published the final decisions of ombudsmen, on http://www.ombudsman-decisions.org.uk/. If one is looking to understand what the FOS is likely to think ‘fair and reasonable’ (the standard the FOS applies when determining a dispute) in particular circumstances, it is therefore possible to see the approach taken in previous cases. FOS decisions are not precedents, but if a party wants to argue for a particular result, it can be useful to show how very similar facts have been dealt with previously.
There have also been occasions in the past when the FOS decided to publish anonymised provisional decisions, in areas where it was seeing multiple complaints. So, in October 2012 the FOS was starting to see an upswing in complaints relating to interest rate hedging products and it decided to issue two provisional decisions on typical facts, setting out its approach. Final decisions on the same facts were then published in July 2013 (still anonymised). This approach may have been necessary before the database of decisions was introduced, and is probably no longer such, but these publications were useful in telling the industry the FOS’s view on typical and repeated fact patterns.
There have been occasions on which the FOS’s approach to determining complaints has not only differed from the law as applied by the courts (see Chapter 11), but where the law has subsequently followed the FOS’s approach. In particular, there had been longstanding criticisms on English law’s approach to minor non-disclosures when applying for insurance policies, and breaches of warranties within insurance policies. The FOS led the way in adopting a more flexible approach than that used in the courts, and that approach subsequently found its way into the Consumer Insurance (Disclosure and Representations) Act 2012 and the Insurance Act 2015.
Otherwise, FOS decisions do not give rise to binding precedents.
The relationship between the FOS and the FCA is principally set out in Schedule 17, part II of FSMA.
Paragraphs 2 and 3A of that Schedule imposes a series of basic duties on the FCA. They include, amongst other things:
A duty to take such steps as are necessary to ensure the FOS is capable of exercising its functions.
Making rules defining the FOS’s compulsory jurisdiction.
Making rules defining the FOS’s voluntary jurisdiction.
Specifying the maximum amount which the FOS is able to award as compensation.
Approving rules made by the FOS determining how costs of complaints are to be allocated.
Appointing and removing members of the FOS’s board.
The FCA is also required to exercise its various functions in a way which is consistent with ensuring the FOS constitutes an ‘ADR entity’ within the meaning of the EU’s Directive 2013/11/EU on Consumer ADR.
Further detail as to the relationship between the FOS and FCA can be found in a memorandum of understanding entered into between them on 18 December 2015.11 The purpose of that memorandum is to describe how the two bodies are to cooperate with each other in performing their functions under paragraphs 2 and 3A of Schedule 17 of FSMA. The memorandum was required to be executed pursuant to paragraph 3A(2) of that Schedule in FSMA.
In broad terms, the memorandum sets out that whilst it is the FCA’s duty as regulator to ensure that its relevant markets function well, it is the FOS’s duty to operate a scheme under which disputes can be heard. According to the memorandum, the purpose of the FOS is to enable disputes to be resolved quickly and with minimum formality.12
The memorandum also sets out the way in which the FOS’s governance is to be handled.13 This provides further guidance as to how the FCA is to exercise its functions over things such as reviewing the FOS’s budgets and reports, and appointing the FOS’s directors. Paragraph 14 of the memorandum provides details of how the FOS and FCA are to cooperate so as to ensure that their approaches are ‘complementary and consistent’. There is also an agreement for the FOS and FCA to disclose information with one another for the purposes of them helping to discharge their functions.14
1Wade & Forsyth’s Administrative Law (11th Ed., OUP) p. 70.
2See the Introduction to DISP.
3FSMA, Schedule 17, Part II, paragraph 3.
4FSMA, Schedule 17, Part II, paragraph 5.
5Schedule 17, Part II, paragraph 7 of FSMA.
6Schedule 17, Part II, paragraphs 9 and 9A of FSMA.
8Issue 143, January 2018.
9Issue 139, January 2017.
12See paragraph 6.
13Paragraphs 11 – 13.
14Paragraphs 18 and 19.