We previously considered HERE the impact the Consumer Duty will have on firms' complaint handling processes (under DISP 1). Where complaints are then referred to the FOS, how will it interpret and apply the Duty?
How will the FOS approach the Duty?
Acting to deliver 'good outcomes' does not (of course) mean that all complaints must be upheld, and the FOS will not expect firms to do so. One of our main questions (and concerns) is whether the FOS will uphold individual decisions based on perceived 'system and control' type failings. We already see a level of inconsistency; often we see the FOS state that certain complaints involve a 'regulatory' issue, more appropriate for the FCA (should it choose to investigate).
How, though, will the FOS approach the Duty given the nature of acting to deliver good outcomes requires understanding how a firm has acted and why. This may mean looking at the policies and procedures and considering if they satisfy the requirements under the Duty.
The FOS is (seemingly) mindful of industry concerns, and has publicly stated that it is working with the FCA to ensure a "consistent and complementary approach". The FOS has an inquisitorial jurisdiction, however, and when investigating complaints it can 'cast the net' very widely, far beyond the remit of the original substance of the complaint.
Will the FOS consider policies and procedures and/or internal justification for a firm's approach to the Duty? Will the FOS consider if a service actually provides fair value (rather than in comparison with an investment or insurance switch)? If the FOS considers the various relevant elements which go to a firm's customer journey, then this is likely to be a significant development and the number of upheld complaints could increase sharply, with serious systemic liability ramifications for firms. More generally, there is (understandable) concern within the market that the FOS's determination of requirements and expectations under the Duty may be more stringent, or go beyond industry's reasonable expectations.
How, when and to what extent will the FOS consider a firm's governance and approach to designing a product when determining if a complaint should be upheld? Decision making at the FOS can be variable and inconsistent already, and Final Determinations are very hard to challenge with judicial review the only recourse with a nearly impossibly high bar. Decisions made by the FOS in relation to individual complaints can and do have significant ramifications – the decision in Berkeley Burke and the impact on SIPP providers being one example – but if the FOS ventures into the territory of determining that a product design is unsuitable, the implications could be significant and much more so than a decision about an individual complaint.
The FOS is on record as stating that where complaints it deals with have 'wider implications, it will share those issues with the FCA. What expertise does the FOS have to consider and determine these issues, bearing in mind:
- the informality of the jurisdiction;
- the relative inexperience of most Investigators;
- the lack of required qualifications for Ombudsmen; and
- the lack of expert evidence?
The vagueness of the Consumer Principle and Outcomes, combined with the arbitrary decision making of the Ombudsmen is a recipe for potential trouble for respondent firms.
Taking 'target markets' as an example, will the FOS expect to see the firm's policy and procedures to consider whether the target market was correctly defined? What expertise and/or information will FOS have to determine that it is wrong? The FOS is supposed to be a non-expert and informal adjudication service. How will it assess whether the complainant fell within the target market, and/or if the firm should have known that they did not? Will the FOS uphold a complaint from an investor outside the target market without more? How would this apply to different firms offering different service levels? There may be concern for execution only firms being held to a standard they cannot reasonably meet. The FOS's role is not to conduct this sort of regulatory analysis but, whether deliberately or not, we anticipate it may (in due course) stray into this territory.
Another difficult example is 'fair value'. There is already some consideration of pricing when assessing the suitability of investment advice (particularly advice involving a pension or investment switch and the associated costs of a different product, service or wrapper). If the FOS makes a finding that a product did not offer fair value, what is the appropriate compensation? Taking an investment for example, would the FOS say that the product should not have been purchased and, therefore, any losses arising from the investment should be compensated? Alternatively, will FOS say that the investment should have cost, say, 1% less per annum and, therefore, the compensation is a return of the additional 'unfair' costs? If the latter, how do firms split this up through the distribution chain or will the respondent to the complaint be deemed fully responsible?
Firms should also take heed of the fact that the FOS can make awards for distress and inconvenience (D&I); even where complaints are not upheld, the FOS can make an award if it determines a complaint has not been handled in line with the higher standards imposed by the Duty. The FOS has shown willingness to award D&I where there is no legal basis for compensation and in ever increasing amounts. With the 'customer support' Outcome to complain about, we can expect ever more and higher D&I awards.
Finally, what is the impact of prior decisions? The FOS is not bound by precedent, but the FCA's non-handbook guidance makes clear (at 5.17) that firms are expected to take existing decisions and guidance from the FOS into account and to apply the same approach where cases present similar facts. The FCA has stated that "Where the [FOS] has made a decision relevant to the case(s) at hand, [the FCA] will consider a firm to be acting in bad faith if it delays paying redress where this is due but instead waits for the [FOS] to make a further decision. [The FCA] expects firms to pay redress promptly in those circumstances" [emphasis added]. This will make challenging poor quality FOS decision making even harder – and if it is 'bad faith' to await a further decision, relevant Senior Managers will be understandably concerned.
Alignment with the FCA?
The FCA has stressed a number of times that it is working with the FOS to ensure there is consistency between the FCA's position and FOS's decision making (1). The last Wider Implications Framework (2) log shows that the Duty is one of the key areas currently being discussed by various regulatory bodies, including the FCA, the FOS and the FSCS. That said, the FCA also stresses the FOS is a separate body with separate aims and obligations and so even this provides only limited assurance. The FCA addressed this point directly in PS 22/9, saying, at para 4.7: "Some respondents felt that the term ‘good outcomes’ was too subjective and that, as a result, the Financial Ombudsman Service might take a different view to the FCA on what this means. Others suggested that consumers would interpret ‘good’ as synonymous with ‘favourable’, and it will be important for the FCA to manage consumer expectations…We will continue to work with firms, consumer organisations and the ombudsman service to ensure that there is a consistent interpretation of requirements under the Duty, and that it is properly understood and embedded during the implementation period."
Impact on Professional Indemnity Insurance
Insurers that provide PI will be keeping a close eye on its implementation, and impact on the process for handling claims and complaints – and on the outcome of those complaints. Underwriters will no doubt ask questions about the impact and implementation of the Duty at inception and renewal, with firms needing to demonstrate to their PII providers, as well as to the FCA, that they fully understand the implications of the Duty and the changes required.
As well as the impact on firms obtaining cover, PII providers will also need to be mindful of the impact of the Duty when claims are made under those policies, bearing in mind the FCA's view that PII cover is there to protect a firms' customers. The recent 'Dear CEO' letter sent to PII providers in anticipation of the British Steel Consumer Redress Scheme made clear that he FCA will consider insurers' response to claims through the lens of the Duty, and the requirement to deliver good outcomes for retail consumers. Additionally in the FCA's view, ensuring that PI policies respond appropriately is part of the insurers' duty to ensure that customers are compensated for any harm they may have suffered.
The Duty does not apply retrospectively, so there may be a 'lag' before we see any real changes at the FOS. However, whether with changing views on historic pension advice, SIPP due diligence or affordability criteria for certain types of consumer credit, we expect there will be an evolution over time to delving into a firm's approach to the Duty in general and the evidence firms and their senior managers have to satisfy themselves that the firm was compliant.
Whilst we would expect the FOS to stay relatively high level on such points, even adopting a lighter touch approach could be a particular concern for firms: if the FOS finds fault with a firm's Consumer Duty governance then it has a significant chance of being a systemic issue (at least to some extent). There are serious questions as to whether the FOS is the right body to consider those issues, let alone determine them in circumstances when the FCA will then require firms to apply the FOS decision generally. If it does, firms will want to push back to the FCA, both individually and via trade groups.
At the very least, the Duty will make it easier for the FOS to justify upholding complaints. It will also, in our view, make it easier for the FCA to criticise a firm's approach. This is particularly the case should a category of clients be disadvantaged, and there will be more focus on ensuring that does not happen.
Finally, complaints handling is often seen as a good indicator of a firm's culture. If firms help and deal with clients correctly when things go wrong, then it can go a long way to show a firm putting its customers first. In the context of the Duty, and the Duty's specific aims, this will be more important than ever.
- (1) For example, at para 1.39 of PS 22/9: "We have engaged with the ombudsman service throughout the development of the Duty and in finalising the rules and guidance. We expect to work closely with the ombudsman service throughout implementation, including by ensuring it has the opportunity to participate in our wider work with firms and other stakeholders. Both we and the ombudsman service work on the basis that firms should be held accountable against the standards that prevailed at the time of the problem."
- (2) https://www.financial-ombudsman.org.uk/who-we-are/work-other-organisations/wider-implications-framework