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Complaint Handling Update

  • United Kingdom
  • Financial services disputes and investigations
  • Financial institutions - Retail finance


In September 2018, we welcomed speakers from the Financial Ombudsman Service and the FCA to our complaint handling and claims management regulation event. Chris Busby’s vodcast gives a summary of the themes discussed. It was a timely event following the independent review of FOS and preparations for the FCA to take over the regulation of Claims Management Companies (CMC). The vodcast also covers emerging trends to look out for in the coming months.

Since the event, there has been a number of significant developments, including FOS extended jurisdiction for SMEs, a proposed increase in the FOS monetary award limit and further preparatory work for the regulation of CMCs by the FCA.

Extended jurisdiction for SMEs

On 16 October 2018, the FCA published a policy statement on small and medium-sized enterprise access to the FOS (PS18/21). PS18/21 is likely to affect owners and managers of SMEs, charities and trusts, as well as providers of financial services and business support to them. PS18/21 contains a summary of feedback received to the FCA's January 2018 consultation on SME access to the FOS (CP18/3) and the FCA's response. The FCA has changed the approach consulted on by:

  • Relaxing its proposed eligibility criteria for SMEs so that the definition of an eligible complainant in the Dispute Resolution: Complaints sourcebook (DISP) means an SME will only have to meet the turnover test and one of either the headcount or balance sheet total tests. This is likely to mean around 210,000 additional SMEs will have access to the FOS (a 4% increase on what was previously proposed).
  • Allowing the FOS more time to prepare for the changes and allowing the FCA more time to consider the changes as part of its wider consideration of the FOS' business plan and budget for 2019/20.

The FCA intends to finalise these rules before the end of 2018 and for them to come into force on 1 April 2019. A post-implementation review of the finalised rules is expected to commence within 24 months of them coming into force. 

The timetable is quicker than might have been expected after the Treasury Committee raised concerns about whether FOS was ready for this wider jurisdiction.  However, the timetable is conditional on considering whether FOS is ready to proceed.  The report due from FOS by the end of 2018 on its actions post the independent review by Richard Lloyd will be a key consideration.

There is a useful summary in PS18/21 (page 15) summarising how FOS will handle the complaints. FOS plans to create a ring fenced unit with 20 SME investigators, dedicated legal resource, a panel of external experts and an SME advisory group with representatives of the SME sector. There will also be a dedicated microsite and phone-line for SME complainants.

The likely impact of this change will be a significant increase in business related complaints being handled by the FOS.  It is the most significant change to FOS’s jurisdiction for several years. FOS estimates that it will receive an additional 1,300 complaints per year as a result of this change.  This seems low given the significant increase in eligible complainants and is inevitably difficult to predict with any accuracy.

FCA and FOS consult on increasing FOS award limit

The FCA has published a consultation paper, jointly with the FOS, on increasing the FOS award limit (CP18/31). The deadline for comments is 21 December 2018. In CP18/31, the FCA and the FOS propose changes to ensure that more complainants receive fair compensation when the FOS upholds complaints.

The FCA has estimated that there could be around 2,000 complaints upheld by the FOS each year where the amount of compensation the FOS determines is due is above the current £150,000 award limit (although this estimate is subject to a number of assumptions). If firms do not voluntarily pay compensation above the award limit, complainants could be suffering an aggregate financial harm of around £113 million each year. The FCA believes it is unlikely that the individuals and small businesses who are eligible to complain to the FOS would have the means to pursue firms for unpaid compensation through the courts.

As a result, the FCA proposes to increase the award limit for the FOS's compulsory jurisdiction, from 1 April 2019 (to coincide with FOS’s proposed wider jurisdiction for SMEs), to:

  • £350,000 for new complaints (complaints about acts or omissions by firms on or after 1 April 2019). It is not felt to be reasonable to have a backward looking increase other than inflation related.
  • £160,000 for all other complaints (complaints about acts or omissions by firms before 1 April 2019, and which are referred to the FOS after that date). This award limit reflects changes in inflation since the £150,000 limit was put in place in 2012.

The FCA also proposes that, from 1 April 2020, both proposed award limits should be automatically adjusted to ensure they keep pace with inflation. The limit will remain at £150,000 for any complaints referred to the FOS before 1 April 2019. The limit was last increased in January 2012 from £100,000 to £150,000 (the first change since 2001). The proposed increase to £350,000 is substantial.

The FCA’s justification is based on a review of 40 high value complaints to FOS where the average redress was £305,000 but the range was £150,000 to £921,000.  The sample includes complaints by micro-enterprises and covers higher value areas such as interest rate hedging products, pensions, home insurance, life and critical illness and business interruption insurance. FOS has assumed that SMEs under the new wider jurisdiction will not have significantly higher value complaints on average. Even at £350,000, FOS estimates that about 500 complaints would still be above the limit.

There is a discussion in CP18/31 around whether increasing the limit could mean FOS attracts more complex cases which give rise for particular expertise. This is likely to be an area of particular concern for both complainants and respondents.

The FCA states that it considered whether to restrict the limit to certain types of complaints.  It concludes that this would lead to additional risks such as judicial review challenges and it would be difficult for firms to understand. The increase is not solely attributed to the change to FOS’s jurisdiction for SME disputes and is positioned as dealing with existing consumer detriment where firms do not follow FOS’s recommendation by paying sums over the £150,000 limit.

UK Finance report on SME complaints

UK Finance has published a report following the review into the complaints and alternative dispute resolution landscape for the UK’s SME market. Appointed by UK Finance, the report was produced by Simon Walker, former Institute of Directors (IoD) Director General, Professor Christopher Hodges and Professor Robert Blackburn. The report recommends new routes for SMEs to challenge banks without going to court. There are four principle recommendations:

  • Creation of a new division within FOS tasked with resolving SME-bank disputes, and a new expert advisory body to advise the FOS on legal and banking issues
  • A voluntary ombudsman scheme to support larger businesses that are not ‘eligible complainants’ to the FOS and a separate voluntary scheme to consider legacy SME-bank disputes that arose following the 2008 Global Financial Crisis and have not been eligible for other forms of dispute resolution
  • Real time data links the SME unit within FOS, the FCA and key government departments to provide advance warning of potential issues
  • A formal process, supported by senior representatives of the major banks, that seeks to achieve reconciliation and closure where they meet a representative sample of affected SMEs, listen to and acknowledge the loss experienced by those businesses and commit to a new system of dispute resolution and other measures to ensure past issues do not infect their future relationship.

UK Finance will now consider the recommendations and work with the industry, government and regulators to determine next steps to take those recommendations forward. The findings of this report align with the FCA’s proposals in respect of extending FOS’s jurisdiction but go beyond this to address other SME complaints that will not be caught by these proposed changes. Further developments in this area appear likely.

Independent review of FOS

FOS appointed Richard Lloyd (Vice Chair of Money and Mental Health Policy Institute and former Which? executive director) to carry out an independent review and produce a report into its practices following the concerns identified in the Dispatches programme and subsequent correspondence between FOS and the Treasury Select Committee. The report, published on 12 July 2018, addresses the issues identified in the Channel 4 programme, as well as considering wider risk management in FOS such as governance structures, whistleblowing procedures, culture and staff objectives.

The report concluded that overall “FOS provides an effective and essential service for many thousands of people” and that there is no evidence of bias and that FOS acts independently through its Ombudsman as required by legislation.  However, the report acknowledges that FOS continues to encounter major challenges to balance the competing demands it faces and as such recommendations for improvement were identified. These included casework capability, staff development training, increased focus on culture and morale, building a technical capability for data analysis, the Board should lead the development of a new strategic plan and updates made to policies and procedures regarding quality assurance. The Board must publish its progress against the recommendations by the end of the year.

The report recommended that FOS “check an appropriate sample of casework, to make sure that decisions made during the early stages of the reorganisation were handled in accordance with the controls and standards put in place at the time”. FOS’s plans for this review were set out in correspondence between Caroline Wayman, Chief Ombudsman and Chief Executive of FOS and The Rt Hon Nicky Morgan MP, Treasury Committee Chair and published by the Treasury Committee. The first stage of the review will be undertaken by Deloitte and will comprise a sample exercise to check decisions against the relevant controls and standards. The second stage, conducted by Carol Brady MBE, will involve a further review of cases which were not handled in accordance with the relevant controls and standards to examine the outcomes and consequences on consumers.

Mrs Morgan, on behalf of the Treasury Committee, has expressed concerns over the scope of the review and commented that the review will place too much emphasis on process and sets an extremely high bar when assessing cases by requiring outcomes to be both unreasonable and irrational, meaning the review will do little to help restore public confidence in the FOS. FOS’s progress report is awaited with interest.

Regulation of CMCs

Responsibility for claims management regulation will pass from the current Claims Management Regulator, CMR, (part of the Ministry of Justice) to the FCA on 1 April 2019 under the Financial Guidance and Claims Act 2018 (the ‘Act’), which received Royal Assent back in May. Garry Hunter is the new Head of Claims Management at the FCA.

The Act also transfers responsibility for the handling of complaints about CMCs from the Legal Ombudsman to FOS, when CMCs will also become subject to the rules in Dispute Resolution: Complaints sourcebook (DISP). The FCA and FOS published a joint consultation in June 2018 on the rules and guidance applicable to CMCs under the new regime. The consultation closed in the Summer and the policy statement is expected shortly.

The FCA proposes to carry across many of the existing CMR rules, with amends where appropriate, but will also apply new standards in certain areas.

The key proposals include:

  1. CMCs requiring temporary permission to carry on claims management activities post 1 April 2019 will need to make applications for permission between 1 January 2019 and 31 March 2019, applications for full permission will then need to be made post April 2019. The authorisation regime will be rigorous and the threshold conditions will include the willingness of the firm to engage with the FCA, keep proper records and assess the suitability and expertise of individuals at the CMC;
  2. Introduction of Claims Management Conduct of Business Sourcebook (CMCOB) which will set out the new conduct standards including those relating to marketing, pre and post contractual requirements, fee cap and requirements of Professional Indemnity Insurance;
  3. CMCs will need to provide customers with more information before a contract is agreed, including details of fees, overview of services, free alternatives to their services and 14 days’ cooling off periods;
  4. CMCs will need procedures for dealing with vulnerable customers and must keep customers updated throughout their claims;
  5. All calls and electronic communication must be recorded and there will be a prohibition on cold/nuisance, unless explicit consent has been received;
  6. Clear and not mis-leading marketing, including transparency on fees and how they are calculated;
  7. Prohibition on presenting claims which are fraudulent, have no arguable case, frivolous or vexatious;
  8. New requirements to protect client money held by CMCs which will be included in the Client Assets Sourcebook (CASS);
  9. CMCs will become bound by the FCA’s principles which includes the obligation of treating customers fairly; and
  10. A consultation on the extension of Senior Managers and Certification Regime to CMCs has also been published by the FCA with comments requested by 6 December 2018.  The FCA proposes to implement the SMCR by having a small number of senior roles within Senior Management Functions who must be approved by the FCA and maintain a Statement of Responsibilities.  If something goes wrong in an area they are responsible for, they must take “reasonable steps” to stop this from happening.

The Act also introduces a fee cap of 20% of the compensation awarded/recovered for a customer in respect of PPI claims. The cap applies to those engaging in “regulated claims management services”, which will include lawyers. However, this cap will not apply to “reserved legal activities” which includes litigation so at complaint stage, there will be a cap of 20% which will cease upon the commencement of litigation.

The changes will drive higher standards across the CMC industry and are intended to address the harm to customers highlighted in the Brady Review, the Financial Lives survey and reports produced by the CMR and Legal Ombudsman. The FCA is keen to create a level playing field for CMCs so that those who become authorised all meet the higher standards and those who cannot do so, stop trading. The aim is to have an effective CMC market that can hold firms to account in an appropriate way.

The independent review of FOS highlighted the highly litigious nature of many CMCs including threatening and in some cases bringing judicial review actions against FOS where they do not agree with its policies. An increased use of ‘mass’ Data Subject Access Requests by CMCs has also been seen, with requests being made in some cases about individuals who are not customers.  The FCA has been asked to look at these trends before FOS takes on the role of considering complaints about CMCs.

Sharing of information between FOS and FCA

A recent decision of the Complaints Commissioner focused on whether sharing of information between FOS and the FCA had led to improper influence. Whilst it was determined that no improper influence had occurred, the Complaints Commissioner recommended that the FCA consider with FOS whether:

  • there should be clear guidance about the circumstances in which information may be shared between FOS and the FCA in advance of final ombudsman decisions;
  • there should be any limitations on information sharing between the two bodies (or within them); and
  • where the FCA is sharing information with FOS, the norm should be that this will be made known to the parties and the reasons for any exceptions being recorded.

The FCA has published its response, noting that it will take forward the recommendations made.

Complaint handling trends

Consumer credit complaints have increased significantly, driven in part by affordability complaints against payday lenders and in other areas such as home shopping, timeshares and rent to buy. Complaints in relation to the sale of solar panels are expected to remain a common theme with many CMCs pushing for greater redress than that offered by many remediation schemes offered by firms. Complaints in relation to premium levels on insurance renewals are expected to continue and complaints involving the sale of ex-fleet insurance rental vehicles and PCP end of term expected to increase. With increased digitisation, complaints arising from operational failures and cyber attacked are likely to emerge as a growth area.

On 15 October 2018 the FCA wrote an open letter to the CEO’s of high-cost short-term credit firms asking that they review their internal complaint handling procedures against the recently published determinations by FOS to ensure that they have effective processes in place (in line with DISP 1.3.1R). The FCA has suggested that firms take remedial action to ensure that on-going lending is compliant and to consider whether proactive redress to consumers who have not complained is appropriate.   

On the horizon

The FCA’s consultation published in June 2018 proposes that payment service providers deal with complaints in accordance with DISP and where the complainant is unhappy with the outcome, that FOS have jurisdiction to consider the complaint. The consultation has now closed and the FCA’s response awaited. It is expected that a new code will be published in early 2019.

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