Regulation  

15 years on, how has Fos performed?

15 years on, how has Fos performed?

May’s publication of the Fos Annual Review for 2014/15 marks a sort of 15th birthday for the Financial Ombudsman Service.

It only legally came into existence at midnight on 31 October 2001. However, it had in May 2000 produced its first Annual Review, dealing with its efforts in setting itself up and covering the schemes that it was absorbing.

What you think of Fos depends largely on which end of the telescope you view it from. As a small IFA, the ombudsman’s power to make an award of £150,000 is potentially business-destroying. It is little comfort to know that IFAs receive 1 per cent of the total number of cases dealt with by Fos. The IFA sector loses 39 per cent of cases – well below the office average of 55 per cent, but worryingly 3 per cent above the average for non-PPI cases. However, that figure is a distortion, considering how few IFAs can afford to offer compensation when it appears to be due for much more than basic administrative disasters. On top of this, the sector suffers from a group of failed advisers whose upheld complaints lead them into FSCS default and a further levy on the industry.

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Fos is not fun for an IFA in trouble with past mis-sales from departed advisers. Ombudsman staff hate rogues who recommend non-mainstream investments without understanding them. However, to Fos, IFAs represent low case numbers considering their role in distributing financial products. Adjudicators are keen to help because they know that most small firms have little or no experience of ombudsman procedures. The problem is that actual and potential human error is involved in every part of the process. With big institutions, that does not matter – bad wins and losses cancel each other out. But for a small IFA, erratic decision-making of the type often seen in county courts can be fatal.

Most IFAs would happily make the ombudsman disappear. That is until they need to help a client who is a victim of their predecessor. Then, their viewpoint changes. In territories such as Hong Kong, where there is no effective ombudsman arrangement, customers are powerless, so they demonstrate outside the banks instead. Anyone who thinks that the courts provide alternative redress should read the costs order in the Rubenstein v HSBC case, which required an interim payment of £600,000 for a claim worth £112,000. Without Fos, most consumers would not have an effective way to vindicate their rights.

Much urban mythology surrounds Fos decision-making. Firstly, parliament gave it the power to make decisions on the basis of what was fair and reasonable, and – in spite of two major changes to the legislation – has never changed that. Secondly, most ombudsman decisions of significance would come out the same or similar to those of a court. The big difference concerns the approach to distress and inconvenience payments where, if anything, Fos could be more consumer-friendly, and the law makes almost no sense.