Andreas Whittam Smith: If you have a complaint against your bank, come to me

'Nobody in the City used to give a second's thought to complaints. They settled them as they thought best'
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The Independent Online

A financial institution dealing with the public was fined £1.3m last week for failing to handle complaints properly. That gives an indication of the importance which is now attached to making sure that mistakes are rectified. Then, last Saturday, the Financial Ombudsman Service (FOS) received its full legal powers. Its task is to provide consumers with a free, independent service for resolving disputes with financial firms.

Nobody in the City used to give a second's thought to complaints. Financial institutions settled them as they thought best. It was hit and miss. For institutions could assume that complainants were unlikely to go to law; the legal system was too complex, expensive and slow. Complainants would have to content themselves with summary justice.

The first sectors to realise that this wasn't good enough were general insurance and then banking. Twenty years ago, they set up voluntary ombudsman schemes, they financed them and secured their independence. Similar arrangements were subsequently made in other parts of the financial services industry. At the same time that the Chancellor of the Exchequer, Gordon Brown, declared that there should be just one financial regulator rather than many – which led to the creation of the Financial Services Authority, which also got its legal powers on Saturday – he stated that there should be just one ombudsman service in place of the six existing schemes.

Here is a typical complaint, if one example can be made to serve for an enormous volume and variety. Mr X wanted to borrow a bit more than £10,000 while he waited for some payments to be made to him during the course of the following months. Then he would repay the loan. This is a classic transaction. It has been described in banking text books for hundreds of years.

Mr X shopped around for the best deal he could find. The lender he identified said that its quotation included the cost of a payment protection plan. Reasonably enough, given the short time span of the transaction, Mr X said he didn't wish to take the extra insurance. Well, said the lender, if you don't take the insurance, this might prejudice the loan arrangement. And so, as the deal still looked good, Mr X agreed to be insured.

Then Mr X become ill and had to go to hospital. How fortunate, he thought, that I took the extra insurance. I can make a claim. Alas, he had been misled. There was an unusually long waiting period on the policy of 180 days. He hadn't been told that there was a range of waiting periods from which he could chose. Or that if he picked a more appropriate period, the cost would have risen so that the overall transaction would no longer have been the cheapest. It turned out, too, that the lender was connected to a household name insurance company. It seemed to view banking primarily as a means of selling more insurance. Its sales people had an incentive to achieve insurance sales in a high proportion of their banking transactions. Mr X complained that he had been the victim of misselling and of poor complaints handling.

From the complainant's point of view, as compared with the courts, the FOS has several advantages in dealing with cases of this kind. While it takes into account legal rights and any industry codes, its ultimate test is whether the transaction was fair and reasonable. This means that, while the small print in documents covering a specific agreement is important, the ombudsman also pays attention to other matters. For instance, what was stated in any promotional material would be important. Or what has become established as good industry practice.

The FOS is also comparatively speedy. It aims to resolve at least 70 per cent of the cases which go to full investigation within six months. In addition, its staff are trained to look for early resolution of disputes through mediation and conciliation between the parties. The service is free to complainants, being financed by a compulsory levy on the industry. Unlike the courts, too, the FOS can make awards for any distress or inconvenience the complainant has suffered.

However, the FOS is not, as such, a consumer champion. Rather, it tries to level up the famous playing field by providing the individual customers of financial institutions with a means of having their complaints properly examined. It has substantial powers in relation to financial institutions. But it is, finally, an independent service for resolving disputes. It is strictly neutral. In practice, it upholds about one third of the cases it investigates. Two thirds do not succeed. Mr X, however, did obtain redress. The ombudsman ordered the provider of the loan to repay the insurance premiums, to make good any interest that had been wrongly charged and to compensate Mr X for the inconvenience he had suffered. Final score: David one, Goliath nil.

The writer is the chairman of the Financial Ombudsman Service

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