President's Lunch
9th December 1999
Address by Walter Merricks, Chief Ombudsman, Financial Ombudsman Service The new single Ombudsman scheme is being created by the Financial Services and Markets Bill. Bringing together eight existing ombudsman and complaint handling schemes, the Financial Ombudsman Service will provide a single port of call for consumers to resolve disputes between them and their financial services providers, removing the potential for confusion and making it easier for the public to have their grievances heard. 

The schemes to be brought together include both the Insurance Ombudsman Bureau and the PIA Ombudsman Bureau which deal with the vast bulk of personal lines insurance disputes in the non-life and life sectors. We shall also include the Banking and Building Societies Ombudsman schemes. They also receive a number of complaints about insurances alleged to have been missold when those institutions act as intermediaries. In addition we shall take in the schemes dealing with complaints about investment management and about securities.

The new arrangements build on the substantial achievement of the present schemes. It is a real tribute to the insurance industry that it had the foresight voluntarily to establish the first scheme - the IOB, nearly 20 years ago. At that time only the public sector had ombudsmen - the Parliamentary Commissioner and the Ombudsmen for local government. To pinch the name and idea for the private sector was a bold and brave pioneering stroke of insight. The IOB model formed the basis for the Banking Ombudsman five years later, and the Building Societies scheme a year after that. Then following the Financial Services Act of 1986 schemes were created covering the investment business field.

What were the key elements established by the founders of the IOB? What were they seeking to achieve? The scheme was created with the aim of enhancing the reputation of the industry for fair dealing, and the main features were agreed with the consumer organisations. First, that the decision of the Ombudsman should be binding on the respondent company -not merely a recommendation. and there should be no right of appeal. Second that the financial limits of the ombudsman's awards should be set at £100,000. Third, that the service should be free to policyholders. Fourth that the powers of the ombudsman should go beyond the terms of the contract, and should permit a decision to be made on the basis of what in the ombudsman's view, would be fair and reasonable in all the circumstances of the case. Fifth that the complainant's legal rights would remain intact in the event that his or her complaint was not upheld.

All these elements are now embodied in the scheme proposed in the Bill - decisions binding the firm but not the complainant, financial limits, a free service, and a fair and reasonable jurisdiction. It is remarkable that a service set up as something of an experiment so relatively recently should have become such an accepted part of life within the financial services industry that it is seems only natural that the Government should seek to put it onto a permanent statutory footing.

Nor has this success story been confined to the UK. The idea of ombudsmen for financial services has spread across the world to many commonwealth countries and European states- Banking or insurance ombudsmen or both now exist or are planned in Australia, New Zealand, India, South Africa, Ireland, Malaysia, Hong Kong, Singapore, Mexico, Belgium, Denmark, Germany, Greece, Finland, Italy, the Netherlands, Norway, Sweden and Switzerland. In the UK we have statutory ombudsmen for legal services, and private sector schemes for estate agents and funeral directors.

How large will the new organisation be?

It is anticipated that the new service will be the largest ombudsman scheme in the world, with a budget of around £20 million and some 400 staff. Unlike the IOB it will be a compulsory scheme, so that every insurer will be obliged to participate and contribute funds to its operation. As you perhaps know a small number of insurers stood outside the IOB, preferring to make available to their dissatisfied customers an arbitration service. I have to say that that service was not widely used, and the Government has, rightly in my view, preferred the ombudsman model.

We will have both a compulsory jurisdiction and a voluntary jurisdiction. All insurers will be part of the compulsory jurisdiction, as will those providing banking services and regulated investment services. The voluntary jurisdiction will allow us at a later date to bring within the service complaints about insurance intermediaries. The General Insurance Standards Council, recently set up as a self- regulatory body to set standards for intermediaries and insurers, is anxious that those of its members who will not be within the compulsory jurisdiction should be required, as a condition of GISC membership, to join the new service. Although we may not be able to make this available when we open for business in the autumn of next year, I hope it will be not long thereafter.

Where are we now?

The Bill is proceeding through Parliament at present -our clauses were approved by the House of Commons standing committee last week -and the aim is to obtain Royal Assent by Easter and to bring the Act into force in the Autumn -and the date when it comes into force is known in regulatory circles as N2. Between now and N2 we are operating as it were as a shadow body, but quite an active one. We are complying with the provisions of the Bill as laid out. For instance the Bill empowers the Financial Services Authority to appoint directors of a body corporate to run the scheme, and it has done so. The Board so appointed would be empowered by the Bill to appoint a chief ombudsman, and, following the usual procedure for public appointments, it proceeded to do so, and I took up my post in August.

My role as chief ombudsman is to lay out the structure for the new service and to lead the ombudsmen within it. The Bill provides that there should be a panel of ombudsmen. and the first appointments to the panel have been made: in the new service there will be three main divisions, banking and loans; regulated investment business; and insurance. The principal ombudsman to head the insurance division is to be Tony Boorman, currently Deputy Director-General at Ofgem -the Office of Gas and Electricity Markets. He will take up his new post at the end of February. I am pleased that the expertise of the IOB will largely be transferred intact to the new organisation, and I expect there to be no great changes with regard to the lines of approach previously followed by me and my predecessors.

In April next year we, that is the new organisation, will take over all the 320 staff of the existing schemes, and we will all move to our new headquarters building in South Quay, Docklands. Between then and N2 we will continue to operate within the legal framework of the current schemes, and we will be harmonising our procedures in readiness to exercise a unified jurisdiction as soon as N2 happens. As you can imagine there is quite a lot to do. This is something like a merger but in a merger there is normally an existing body, the acquiring company, into which the body to be acquired is merged. We are having both to create the new acquiring central organisation and to merge the other bodies at the same time. My friends in commercial and professional management tell me that no one in the industry or the professions in their right minds would attempt a merger between eight firms all at the same time however tempting the rewards.

Last month together with the FSA we issued a consultation paper outlining issues such as the scope of the scheme, the detailed procedural rules, and how it should be funded. This, the 33rd consultation paper, describes our progress to date and is open for response until mid February. Next month we shall be hosting a workshop for the industry and consumer organisations as part of the consultation process to hear any concerns and to report on where we have reached.

What legal issues arise in the creation of the new Service?

Until recently the IOB created few legal issues that would be likely to demand the attention of practising lawyers. Offering as it does a form of alternative dispute resolution avoiding the courts, lawyers were rarely engaged on either side. Effectively the IOB deprived the profession and the courts of any business going in the field of first party personal lines insurance disputes.

And when one company, Aegon Life, decided to seek judicial review of an ombudsman decision, the Divisional Court ruled that the bureau, being a private body of which membership is voluntary, was not susceptible to judicial review. The company's remedy lay in resigning from the scheme if it was dissatisfied, not in the supervisory jurisdiction of the High Court over public bodies.

Our new scheme will however be very different in its constitution. We shall be a body created by statute in which participation will be compulsory - at least for most participants. We shall certainly be judicially reviewable, and we shall have to comply with normal due process requirements, not just as a matter of good order and practice, but as a matter of law. And as a result of Article 6 of the European Convention on Human Rights, and the Human Rights Act, we shall be obliged to offer hearings if parties wish it where their civil rights and obligations are at stake. At first sight this seems rather strange. Only the respondent firms are bound by ombudsman decisions. It seems slightly incongruous that insurance companies and banks should be able to claim the benefit of "human rights". Anybody less appropriate to claim a human right is difficult to imagine. Yet it is quite clear in the jurisprudence that corporate bodies can assert human rights as well as individuals. So if a company disputes an ombudsman decision, it can demand a hearing. So too can a complainant, even though the complainant would not be bound by an unfavourable decision. Why is that, you may ask? It appears

So we shall certainly need in administering our scheme to be conscious of public law issues about due process, disclosure of information, fair treatment, as well as data protection and freedom of information. Not exactly our usual stamping ground of insurance law issues such as non-disclosure, or utmost good faith. It will be quite interesting to see how the courts react however when faced with challenges on judicial review to the substance of decisions we may be making - particularly if the basis for those decisions is not the construction of a policy term or the application of settled law principles, but a view of what is fair and reasonable in the particular circumstances of the case.

The courts' treatment of the Pensions Ombudsman is not altogether encouraging. Admittedly the Pension Ombudsman (who will retain his separate jurisdiction over occupational pensions and will not be merged into the new scheme) has a wider jurisdiction -indeed an unlimited financial jurisdiction, and an appeal on point of law lies to the High Court against his decisions. But under the legislation empowering him, his right to require steps to be taken by pension trustees or administrators looks at first sight to be very wide. But a series of decisions by the courts look to have narrowed the scope of his jurisdiction somewhat.

I have largely referred to the experience of the IOB and its role in general insurance. But the position of the PIAOB will be equally interesting. Its terms of reference currently contain no provision for a "fair and reasonable jurisdiction, and PIA Ombudsman decisions are firmly based on the terms of the contract, and more often on the regulatory principles enshrined in PIA rules or those of its predecessors, Fimbra and Lautro. The investment sector has of course been that with the largest volume of complaints - mainly about pension and other misselling. These have to be analysed against both a regulatory background (has there been a breach of rules?) and against the legal background of tortious and contractual liability . So there will be new departures here in the life insurance sector and ones which lawyers will be interested to watch.

I hope I have said enough to whet your appetite for what is to come. As products are packaged more and more, investment and insurance and loans together, it makes less and less sense to provide disjointed redress. Of course there are distinctive features to insurance contracts, as there are to banking services. We are not operational yet, but when we are I do believe that we will be able to continue to

that in creating the scheme, and conferring on consumers the right to have their complaints adjudicated by an ombudsman empowered to make awards beyond that which the courts could make, Parliament has conferred a species of civil right, which in turn gives rise to the right to a fair hearing.

bring an underpinning of confidence in insurance by offering access to independent redress: that can bring substantial benefits both to consumers and to the financial services industry.
 
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