The Future of the FOS - Independent arbitrator or consumer champion?

The Financial Ombudsman Service ("FOS") was set up to provide an independent dispute resolution scheme for consumers and firms engaged in the financial services industry.

Although the need for the FOS is widely accepted, concerns have recently been raised about the scope of the FOS's power and whether its independence is being threatened.

The Scope of the FOS' remit
The FOS's compulsory jurisdiction originates in s226 of the Financial Services and Markets Act ("FSMA") and provides the FOS with a broad remit regarding complaints. Specifically, s228(2) says that "a complaint is to be determined by reference to what is, in the opinion of the ombudsman, fair and reasonable." This could potentially involve ruling on any aspect of a transaction, from the advice given to consideration of the appropriateness of the fee charged. Arguably, only when a fee is significantly out of line with market practice or a product is missold should the fee charged be subject to adjudication.

The final decision of the ombudsman is not subject to appeal and can only be overturned by judicial review. A complainant can however decide not to accept the FOS's decision and issue proceedings through the courts. This apparent imbalance has been criticised.

There have been calls for a more transparent internal review process within the FOS. Only last week in his report "Opening Up, Reaching Out and Aiming High, An Agenda for Accessibility and Excellence in the Financial Ombudsman Service", Lord Hunt completed his seven month review of the FOS with recommendations for greater transparency. However, Lord Hunt stops short of recommending an official FOS appeals process as suggested by some advocates.

An official appeals process within FOS would not only involve an extra layer of bureaucracy but would, arguably, be fairly pointless as it would still involve deciding the case on the same widely drawn principles. Given the FOS's wide remit, the only way this can be effectively and independently constrained is through the judicial review process.

The IFA community made strong submissions to Lord Hunts' review asking for Lord Hunt to consider:

• the compulsory fee, which is payable to the FOS regardless of the outcome of the investigation;
• the suggestion that cases should be publicised and that a precedent system should be introduced;
• concerns over the FOS's perceived independence.

Compulsory Fee
Small IFA firms may find the £400 case fee particularly unfair. Interestingly, requiring 'innocent' firms to pay a case fee is the FOS's rule and is not a right derived under FSMA. The compulsory fee also has the undesirable (but understandable) effect of firms deciding to settle all claims under £400 on commercial grounds rather than merit. Arguably, in cases of little merit, the FOS's application of the fee is unjust and unlawful. This is particularly pertinent given the criticism FOS has faced over not adequately 'vetting' complaints to filter out those without substantial merit.

A recent case considered these factors. In Financial Ombudsman Service Ltd v Heather Moor & Edgecomb Ltd District Judge Mark Rutherford found for the Defendant, and held that "FOS's case fee rule is unfair in principle and in practice." Moreover, he held that the Ombudsman cannot delegate to a more junior level of staff the decision to dismiss a complaint without examining its merits. While this decision does not set a precedent, and the FOS is currently appealing it, it may ultimately persuade the FOS to adapt its practices accordingly.

Lord Hunt considers the charging regime and concludes that the option of charging vexatious claimants would be too much of a disincentive to consumers to use the FOS. The option to charge firms on loss of a case would create a danger of an economic incentive for particular decision-making. Unfortunately, Lord Hunt does not deal substantively with the finding of District Judge Mark Rutherford, and therefore does not address the question of whether the existing charging structure is unlawful.

The FOS bound by precedent?
The FSA has, in the past, expressed a desire to see the FOS's system become more transparent and consistent, and suggested publication of the FOS's decisions and a precedent style decision making process. Members of the financial services industry have voiced concerns over this concept.

So far the FOS's approach has been to assess a complaint based on the details of the case, and not strictly in accordance with the FSA rules. There is a very real concern that in choosing the route preferred by the FSA the FOS would simply become another quasi-regulator creating yet another set of rules and principles for the industry to follow. Ultimately this would undermine both the FOS's statutory freedom to decide on the particular circumstances of the case and the objective under section 225(1) of FSMA to provide a scheme where disputes are "resolved quickly and with minimum formality".

Whilst initially recognising the need for the FOS's discretion to remain untrammelled by binding precedent, Lord Hunt goes on to recommend a system recording and publicising its general approach to particular matters and anonymous cases setting out principles to deal with significant issues. Moreover, he also recommends that the FOS publicise "'mock-ups' of how the FOS might respond to possible future complaints categories" . Arguably, this could allow a system whereby the FOS is influenced by its earlier published decisions, thus undermining its statutory agenda, and also potentially by theoretical future decisions, a concept conflicting with a fundamental rule of law.

Consumer champion?
In its eagerness to appear approachable and accessible to consumers, there is a risk that the FOS could be seen as a consumer advocate, jeopardising the impartiality necessary for its role. There have been concerns about the current practice of providing standard complaint forms accompanied by fact-sheets for 'popular' complaint topics.

It is arguable that this type of information should be provided by consumer agencies not by the independent arbitrator in such complaints. A proactive 'outreach' programme aimed at vulnerable or less represented consumers as proposed in the Hunt Report, could be seen, by both consumers and industry members, as an invitation to 'have a go' and obtain compensation from a financial services provider.

While it is accepted that consumers should be made aware of the FOS and the role it undertakes, any publication of its activities must be carefully managed, ensuring that the consumer is made aware of its role as an independent body.

Lord Hunt raises the prospect of the FOS being viewed as a 'Consumer Champion' and reiterates that "the credibility of the service depends on it maintaining the trust of all its stakeholders in the even-handedness of its adjudications." Nevertheless, a key proposal within his report is to address the imbalance of knowledge and power between a consumer and a 'company'. He therefore proposes that "an outward-looking and ambitious communications strategy can perfectly well co-exist with internal alternative dispute resolution systems that are fair and balanced and are also recognised by all concerned as being fair and balanced."

It remains to be seen whether the FOS is able to achieve what appears to be fundamentally opposite objectives.