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The Financial Ombudsman Service (FOS)/ Financial Services Compensation Scheme

The Financial Ombudsman Service (FOS)

FOS is the independent dispute resolution service for complaints about financial services. If a customer is unable to resolve a dispute with an FSA-authorised firm, they can refer their complaint to FOS, at no cost to themselves.

The complaints handling process

The FSA rules lay down the requirements for FSA regulated firms. The definition of a complaint is wide-ranging. It is:

'any expression of dissatisfaction, whether oral or written, and whether justified or not, from or on behalf of an eligible complainant about the provision of, or failure to provide, a financial service.'

The current rules require complaints to be acknowledged within five working days, and updates to be issued four and eight weeks following receipt if the complaint has not previously been resolved. Once a firm issues its final response letter it must include details of how the complaint can be referred to FOS. These details must also be included on the letter sent eight weeks after receipt of the complaint, if the complaint has yet to be resolved at this point.

Proposed changes to the complaint handling rules. FSA is currently consulting on a number of changes to the rules around complaint handling in its consultation paper CP06/19. It is essentially a relaxation of the rules, for example, FSA is proposing that the rule requiring complaints to be acknowledged within five working days be changed to one requiring the an acknowledgement to be made 'promptly'. The changes are proposed as a result of the FSA's need to implement the European Markets in Financial Instruments Directive (MiFID) and the FSA's move to a more principles-based regulatory regime.

FSA's proposed changes for complaints handling include:

Changing the criteria for 'eligible complainants'.
Reducing the prescriptive rules around firms' acknowledgement of complaints and holding replies.
No longer requiring a firm which forwards a complaint (to another firm to deal with) to tell the complainant of this in a 'final response'.
Shortening the module focusing more clearly on firms' central obligation to treat complaints promptly and fairly.

AMI has responded to this consultation on members' behalf. We shall keep you informed of any rule changes that come out of this consultation. Members can find further information on CP 06/19 here.

FOS funding

Firms who have cases referred to FOS have to pay for the case to be handled by it, regardless of whether or not the complaint is upheld. Access to FOS is free for consumers. During the consultation process for mortgage regulation, AMI successfully campaigned for mortgage intermediaries to receive two free Ombudsman cases each year, resulting in the majority of mortgage intermediary firms paying only the general levy.

At present 70% of FOS's funding comes through the case fee system, with the balance through the annual levy. Each regulated firm has access to two cases free. The standard case fee has remained at £360 since 2002 with the special case fee being £475. AMI has long campaigned for a review of the Ombudsman's funding strategy and our lobbying on this front has been successful. In May 2006 FSA and FOS published a joint discussion paper on the future of the FOS funding.

Having secured the review the next task was to ensure the options to emerge favoured AMI members. The discussion paper set out a variety of options, from A to K. AMI believes that Option F is the fairest deal for members and the one that will remove the worry of paying case fees for the vast majority of members.

AMI's preferred option - Option F - comes with a levy of £175 and five cases free. Case fees of around £480 would be payable for the 6th and every subsequent case each year. It is expected that this would also apply at appointed representative (AR) level, so each AR firm would also have five free cases. It meets AMI's objective of removing the worry of case fees from the majority of member firms and is also based on a firm fee, rather than a permission basis.

Complaints against mortgage intermediary firms have been relatively low since 'Mortgage Day' but they are on the increase and could rise rapidly in a short space of time. AMI has conducted research amongst members and the vast majority believe complaints will rise in the future and that claims management companies will increasingly target the mortgage market. Therefore, while Option F would mean a higher levy for most members AMI's view is that this equates to an 'insurance policy' which (with a case fee of £480) would require only one complaint to prove its worth.

You can view a copy of AMI's response to the FOS funding review discussion paper here.

The next step will be the publication of a consultation paper with firmer proposals. AMI continues to follow development closely and this section will be updated as and when new information is available.

Members can get more information on the Ombudsman Service here.

Members are advised to sign up to FOS's regular publication, Ombudsman News, which will give information on the work of the Ombudsman and provide helpful advice on how to deal with complaints. Ombudsman News can be accessed here.

Ombudsman News 55 provides an update on how FOS has dealt with complaints made against mortgage intermediaries since they came under its compulsory jurisdiction on 31 October 2004. It outlines FOS's experiences to date in dealing with complaints involving mortgage intermediaries and includes a number of case studies.

Members can access this article here.

Financial Services Compensation Scheme (FSCS)

The Financial Services Compensation Scheme (FSCS) is the UK's statutory fund of last resort for customers of authorised financial services firms. This means that FSCS can pay compensation if a firm is unable, or likely to be unable, to pay claims against it. FSCS is an independent body, set up under the Financial Services and Markets Act 2000 (FSMA). Like FOS its service is free to consumers. More information on the FSCS is available here.

Information for firms is available here. This covers latest news and publications. FSCS also publish a regular Industry Newsletter.

FSCS funding

AMI members may not currently experience the same financial pressure as IFAs in respect of contributions to the FSCS but AMI believes the funding regime requires urgent reform to ensure it is fair, affordable and sustainable for the future. AMI and our sister trade body, AIFA, lobbied hard for a review of how the FSCS is funded. A Discussion Paper (DP 06/1) was published in 2006. AMI has submitted a response to the FSA's Discussion Paper 06/1 on the Financial Services Compensation Scheme (FSCS) Funding Review.

The Discussion Paper can be viewed here.

The current system of funding creates a disproportionate burden on certain sectors of the industry while allowing others, who have pecuniary or mutual financial interest in the area of business affected, to avoid their fair share of the costs. AMI believes that if a firm profits from the manufacture or distribution of a financial product, they must also carry some of the potential liability.

AMI's preferred funding option as outlined in the discussion paper is Option B. This option moves away from the current funding system (broadly based on the regulator's contribution groups: A.18 -mortgage lenders, advisers and managers, A.19 - insurance intermediaries) to one based around five broad classes of business: life and pensions; securities, mutual funds and derivatives; deposits; general insurance; and mortgages.

Option B addresses the issues created by major market failures in a way which is sustainable and recognises that all participants have a financial interest. It recognises that all participants in the UK financial market benefit from the scheme, and therefore should, albeit to a limited extent, contribute to funding for other classes of business.

A consultation paper on the funding of the FSCS is expected early next year. We will keep members informed on further developments with the funding review.