A handle on complaints

Walter Merricks, chief ombudsman of the Financial Ombudsman Service, has had a wide-ranging career. He has worked as a solicitor, university lecturer, legal journalist and broadcaster, as well as an insurance ombudsman. Although varied, he says his various appointments have always had a common theme - improving access to and the administration of justice.

He is, however, keen to point out that the FOS is not a people's champion. "We do not act on behalf of the consumer. We resolve disputes and it is wrong to see us as a consumer's champion. We level the playing field between consumers and firms by offering a free service to consumers, but we look impartially at complaints," he says.

The FOS is an independent organisation, set up under the Financial Services and Markets Act 2000. In 2001, it took over the duties of the Insurance Ombudsman Bureau, which had been voluntarily set up and funded by the insurance industry. Its remit is now compulsory but the organisation follows the same model and continues to be paid for by the industry.

The FOS has now replaced the complaints handling schemes of the Banking Ombudsman, Building Societies Ombudsman, Investment Ombudsman, Personal Investment Authority Ombudsman and the Securities and Futures Authority Complaints Bureau. General insurance brokers will come under the compulsory remit of the FOS from 5 January 2005, when the Financial Services Authority starts regulating the industry.

Merricks says rumours that brokers will face exorbitant case fees regarding spurious complaints are untrue, and he is keen to reassure brokers that the FOS offers value for money.

He says: "We offer a service that is much better than the civil courts. As a lawyer I know that the FOS is much more accessible, far less costly and gets to grips with the issues much faster."

Brokers that are members of the General Insurance Standards Council or the Institute of Insurance Brokers may face scrutiny by the FOS for policies sold before regulation. The Treasury is consulting on who should deal with the transitional complaints that arise after regulation but refer to products bought before January 2005.

Its consultation paper, Mortgages and General Insurance Regulation: Transitioning Complaints is considering whether to do nothing (in which case consumers may bring claims before the courts), set up an industry-led solution, or pass legislation to give the FOS jurisdiction.

Merricks argues that the best solution is to bring transitional complaints under its remit to allow for a seamless transition of cases. He says this will not include policies purchased from brokers that are not self-regulated, but argues these brokers will not be at an advantage.

Merricks also acknowledges that there could be a gap in consumer protection regarding policies sold by travel agents. Although complaints about travel insurance that concern an insurance company are already referred to the FOS, complaints that relate to travel agents will not come under its remit. This is, however, a Treasury decision that is subject to review.

The FOS is encouraging brokers to sign up on a voluntary basis before January 2005, and currently has 302 mortgage and general insurance brokers registered. It is due to announce its second series of broker roadshows, which will take place between March and July in the South-east. Further nationwide events will be held later in the year.

Merricks says: "Registration is free and the vast majority of brokers that sign up voluntarily are not going to receive any complaints so it is a good deal. Firms get kudos from joining and also gain good public relations. It presents an opportunity to gain a head-start on how we operate and access training on how to handle complaints."

He continues: "It is extremely simple to join - brokers just fill in the registration form. We then visit to explain how the service works and provide training on complaint handling. Visits usually last half a day."

Public service

Although some insurance commentators believe consumers should make a contribution to case fees, the government recently confirmed that the FOS will remain free of charge for the general public.

The FSA is currently consulting on the funding of the FOS and broker levies are expected to be announced shortly. Levies currently produce around 30% of the total cost of funding; the FOS and case fees make up the remainder.

Merricks says: "We work with the FSA and share information in a range of areas. Put simply, the FSA makes the rules and enforces them, and we deal with civil claims. The general levy varies and is modelled according to the volume of business and profitability. For insurance companies, for example, it is calculated according to gross premium income.

He explains: "The principle is that every firm should make a contribution - the general levy. In return, firms can inform customers that if they have reason to complain they have recourse to an independent ombudsman paid for by the firm. By joining, brokers demonstrate confidence in the service they provide."

Merricks says: "It is likely that brokers will not be required to pay a general levy until March 2005, when the FOS financial year begins. Those that sign up now are effectively getting a year's free membership."

In addition, brokers will receive the first two cases free of charge, though case fees from then onwards are £550 per claim. Merricks believes this will result in a fairer system with firms that produce the most complaints paying more.

He says: "Large firms expect to have more complaints brought against them due to the volumes of business conducted. However, there are several firms that only receive a few complaints, if any."

Initial stage

The case fee charged to regulated firms is currently £360. This becomes chargeable after the complaint has exhausted the company's internal complaint procedures, has gone through the FOS sifting process and has been found to be within the remit of the FOS. Around 50% of cases are disposed of at this initial stage.

Merricks says: "An experienced caseworker will look at the merits of the case and in most instances will contact the party that is not likely to succeed to try and find a solution. For example, we would contact the broker and suggest they have not dealt with a policyholder fairly and ought to give them a refund. Or we would contact the customer to say it is unlikely the ombudsman will uphold their complaint."

When a solution cannot be quickly found it becomes chargeable and cases are passed to an adjudicator who will file a formal report after investigating both sides of the claim. If the parties are unhappy with the report the case can be passed to the ombudsman panel, which has 25 members, six of whom are experienced in insurance disputes. But, according to Merricks, only 10% of complaints usually reach this stage.

Even if a complaint is not upheld, and in around 60% of chargeable cases it is found that there has been no wrongdoing, firms still have to pay the case fee. Merricks says this is necessary to keep the case fees down. He explains: "If we only charged for complaints that had validity, the case fees would have to go up. The ombudsman operates on an inquisitorial basis. It gathers the information from all parties and decides what is fair and reasonable in all circumstances, taking into account any relevant law, regulation, code of practice or good industry practice in force at the time of the event being complained about."

FOS decisions are legally binding on firms and it can award up to £100,000. If the consumer is still unhappy they can pursue the claim in the civil courts although, Merricks says, this rarely happens.

He says the FOS employees have vast experience of dealing with insurance disputes. As well as lawyers, a large number of employees have previously worked in brokerages or insurance companies.

"With first-hand experience, our employees know how difficult some insurance matters can be to resolve. We are by no means a soft touch - we know there is substantial insurance fraud and don't fall for sob stories. We reject many more complaints than we uphold and know what is a fair result," he states. "We have a substantial base of experience to arrive at decisions that those in the industry recognise, even if they don't agree with every one. Also, unlike the courts, cases are private and we don't produce league tables or publish the names of firms."

Merricks says the FOS has been able to reduce the cost of handling individual cases from £753 three years ago to £507 due to increased productivity and reduced overheads. It receives 500,000 enquiries a year, of which 10,000 relate to insurers and most complaints involve non-payment of a claim.

Poor administration

Merricks believes the majority of complaints regarding brokers will also relate to non-payment of a claim. This is likely to involve the insurer arguing the client is not covered because the broker has not advised them properly. Merricks expects to see complaints regarding poor administration such as getting addresses wrong and not sending cover notes.

He says: "The complaint may not even concern the broker - often people don't understand the difference between insurers and intermediaries. For example, when a claim is not paid it is the insurer that is not paying and not the broker. Some brokers are worried that consumers could make inappropriate complaints against them.

"Most firms will be able to sort complaints out themselves. We are not here to deal with complaints where people have suffered a minor inconvenience or where they have lost a only a small amount of money.

"We are also not here to get involved with commercial decisions such as complaints about increasing premiums or a refusal to provide cover. These are matters for the market."

Merricks says he wants to reassure brokers that the FOS only gets involved when consumers have lost a significant amount of money or have suffered a serious inconvenience.

This includes cases "where a person's life has been turned upside down because of the wrongful actions of a firm, which has failed in its duties toward a customer," he says.

As brokers will have to adapt to the FOS anyway, he urges firms to take advantage of this year's free membership, get up to speed on complaints handling and be one of the first to offer clients free access to an independent ombudsman service.