13th May 2008

Financial Services: FOS or Farce

With the recent Northern Rock debacle adding to the dissent amongst the ranks for firms in the financial services industry, specifically the legions of small firms who are 'regulated', often to within an inch of their financial survival - if not worse - one could justifiably wonder which will give first; the FSA and FOS or the small firms.

Large firms have back up that their smaller counterparts do not; legal teams, teams of complaints handlers that, handling a higher level of complaints, mean they are most likely to be au fait with FOS procedure and, of course, be best placed to defend complaints or, conversely, admit defeat and pay up where miss-selling is clear. They have the financial resources to pay compensation without fear of the coffers running dry and running the risk that homes may be lost. In short, they can accept the status quo - and do - because they can afford to.

Compare this scenario with small firms who, amongst other things, only have to have been faced with a small number of complaints since N2 to have seen their PI insurance premium escalate exponentially and, what is worse still, in some cases see the excess on each case rise to near the £100,000 'maximum' amount of a FOS award. What does this mean in practice? For such firms, one 'binding' award by an Ombudsman could potentially ruin them. For those retired advisers that are, so to speak, out of the loop, this may be especially true. Imagine the scenario. 30 years in the financial services industry. Always compliant, no complaints and retirement just before N2 and the birth of the FOS. You could be forgiven for thinking that sleeping dogs would be left to lie. But no. Not in this industry.

So the retired IFA has a complaint made out against them and an award made. The unwitting IFA, having retired prior to N2, has probably made good provision for his retirement, and understandably so. But, does this include having to make good even one award for £100,000, which is apparently common place with pension transfer cases? No. What happens? With no run off PI insurance, which appears reasonable after retirement, that one award could bankrupt the retired IFA at worst, leave him with very little pension provision or saddle him with a mortgage for life. Fair and reasonable? I think not. Farce? Absolutely!

In reality, mortgage endowment awards are somewhere in the region of £3-7,000 on average. So, instead of the one hit which wipes the adviser out it is, as one of my former adjudicator colleagues pointed out, ' death by a thousand cuts'. If the retired adviser can afford it, all well and good. If not, who knows where it can end.

Compare this with those firms that are still trading. The FSA makes the rules. The FOS enforces the rules. The firms pay for the privilege of being regulated and for having their disputes 'dealt' with fairly and reasonably by 'experts'. But by whose definition of fairness or reasonableness? At least with the courts, the tests laid down by which such cases are judged have evolved over time so they can at least be said to reflect today's principles when a decision is made. The fairness and reasonableness meted out by FOS however depend on the perception of the Ombudsman dealing with your complaint at the time, with each having their own views. What does this mean in practice - it is subjective and to be crude it could be said to depend on 'who you get on the day' as to whether you will have an award made against you or not. And if a firm refuses to abide by the award what happens? Well, it would appear that the FSA can close them down, leaving the firm to sue the Regulator - if it has the resources.

You could all be forgiven for losing the will to live at this point, never mind the will to fight. Who am I to speak, as an unregulated entity who cannot be closed down? What authority do I have, and what am I trying to achieve? My answers are simple; personally, I cannot abide injustice. Professionally, I will not accept it. If the FSA and FOS are big enough to dish it out, then they will have to be big enough to take it, and take it they shall. Yes, I am unregulated. But, I am still bound by confidentiality. In this instance, despite taking my obligations immensely seriously, as all of you no doubt do, I firmly believe that there is a public interest - which includes the firms - that overrides any confidentiality I may owe to FOS. So whilst I may be unregulated, I can still be sued. Whether FOS and the FSA will take me on, with the knowledge of what I might say, remains to be seen.

In closing, what I will say is this. FOS has only been around for 7 years. Just as quickly as it came, it can go. Until it does, all is not lost. There are those of us around that know how the system works and are best placed to help those of you that do not. Remember this though, the best form of defence in this particular case is not attack. If you attack FOS, verbally or in writing, you are more likely to persuade them that if you are this unreasonable with them, it is more likely than not, on the balance of probabilities, that you were so with your clients. Stay objective, stick to the facts and let them tell the story. This is your best form of defence and your best means of achieving a fair result, and not one that is based on farce!