Ombudsman's powers under review

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The Independent Online

In response to behind-the-scenes complaints from financial services companies, the Cabinet Office is investigating whether the powers of the Financial Ombudsman Service should be curbed.

The FOS was set up under the Financial Services and Markets Act 2000, the workings of which are being generally reviewed by the Government. However, this is a separate inquiry by the Cabinet Office's Better Regulation Task Force. The Independent understands that this has arisen from informal dinners held at 10 Downing Street, at which directors of financial businesses have claimed that FSMA is working unfairly against them. They say the FOS bends over backwards to favour consumers, and under FSMA there is no appeal.

Banks, insurers and investment companies have voiced unhappiness that FOS verdicts are too likely to be biased in favour of the consumer, who pays nothing to complain while it can cost thousands of pounds for companies to defend their behaviour. The most prominent headline on the home page of the FOS website reads: "How to complain".

A Cabinet Office spokeswoman said: "The BRTF is aware of the concerns of the financial services sector and will be exploring these as part of its current study of regulatory creep. This is due for publication in the summer."

The Cabinet Office defines regulatory creep as "regulation, or compliance with regulation, that goes beyond its original source of authority". The overall inquiry was announced last month, covering a range of industry bodies, government departments and other regulators. None was named.

David Arculus, chairman of the BRTF, said: "We want to find out how and why the scope of existing regulation gets extended beyond its original intention. Sometimes it might be by guidance that is intended to clarify but actually ends up making the regulation even more burdensome."

Among the topics the inquiry was looking into was the problem of banks being over-zealous in seeking proof of identity from customers in response to the money-laundering regulations. Now the growing powers of the FOS are coming under the same microscope.

"There are some issues that have arisen," a spokeswoman for the FOS said. "We are not a regulator, and the question of appeals from our decisions is being looked at."

FSMA set up the Financial Services Authority as the UK's financial regulator, setting rules for conduct in the sector. However, complaints by the public about money products and services are directed to FOS, an independent offshoot of the FSA.

But, because there is no appeal against FOS decisions except by the lengthy and expensive process of judicial review, the Ombudsman has in effect become a court of last resort and therefore a maker of rules through the precedent its verdicts often set.

The Cabinet Office would like to find a compromise which offers some form of appeals procedure without revising the FSMA. But it is understood that any such dilution of the FOS's powers would be regarded as a slap in the face by the agency and would encounter stiff resistance from the chief ombudsman, Walter Merrick.

The FOS spokeswoman added: "We are a strange constitutional animal and, given our uniqueness, we are going to be part of people's considerations in this area. We are discussing with the FSA whether we can be even more careful about not treading into regulatory territory."

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