Essential element?

- Gary Meggitt and Neiha Modessa, solicitor and legal assistant,
- 08 Feb 2002
- Indicative reading time: 3 minutes

Gary Meggitt and Neiha Modessa explain why the FOS is set to play a major part in the smooth running of the insurance industry, in the wake of post-N2 regulation.

Insurance brokers may be forgiven for overlooking the Financial
Ombudsman Service's coming of age on N2, 1 December 2001, when the
Financial Services and Markets Act 2000 came into force. Brokers have been
preoccupied with the protracted squabbles over the fate of the General
Insurance Standards Council and then with the Treasury's announcement that
the Financial Services Authority is to supplant the GISC as the sole
regulator for general insurance sales.

Brokers might argue the FOS is just the Insurance Ombudsman with a new
name, but they would be wrong. The FOS operates a statutory ombudsman
scheme for the resolution of customers' complaints. This replaces eight
previous ombudsman schemes, including those of the Personal Investment
Authority and the Insurance Ombudsman Bureau. The FOS, which is funded by
levies on firms, covers insurance, investments, banking and loans.

The IOB is now part of the FOS and the Insurance Ombudsman is now the
Principal Ombudsman (Insurance).

Compulsory changes

The most significant change from the IOB regime is that membership of the
FOS is compulsory. As a FOS spokeswoman stated in the September edition of
Professional Broking: "Come November, joining us will be compulsory and
those one or two insurers that have not done so will have to." Moreover,
insurers are bound by the FOS' rulings on the claims of policyholders.

A complaint may not be made to the FOS until the respondent firm has had
eight weeks to consider it. The FSA requires firms to implement
appropriate internal complaint-handling procedures. Hence, the FOS will
refer the matter back to the firm unless it has already given the
complainant its final response. In addition, complaints must generally be
made to the FOS within six months of the firm's final response.

The right to complain to the FOS is granted only to private individuals
and certain businesses - those with an annual turnover of under £1m. These
complainants must also be, or have been, a customer of the firm in
question.

The FOS exists to assist parties who would find it difficult to seek
redress through the courts, rather than to replace the courts.

If the complaint is covered by the scheme, the FOS will first consider
whether it should be dismissed without consideration of its merits. There
is a lengthy list of grounds upon which the FOS may dismiss a
complaint.

These include where there is an ongoing, fair and reasonable offer of
compensation or the matter has been, is being, or would be dealt with more
suitably by the courts or some other dispute resolution process.

The decision to dismiss a complaint is entirely within the FOS's
discretion, although the complainant has the right to make representations
before the decision is made and must be given the reasons for any
dismissal.

Early resolve

If a complaint proceeds, the FOS seeks to resolve it at the earliest
possible stage by the most appropriate method. If it cannot be settled by
mediation, both the complainant and the respondent insurer can make
written representations before the FOS issues its provisional
assessment.

If both parties accept this provisional assessment, the matter ends
there.

If not, the FOS will issue a final determination after any further
appropriate representations. Either party or the FOS may call for an oral
hearing and the FOS may require a party to produce any documents that it
deems necessary to resolve the matter.

The process of reaching a final determination is an informal one. There
are, for example, no rules on how oral hearings should be conducted,
although the FOS must comply with the European Convention on Human Rights'
fair trial safeguards. Moreover, the FOS makes its decisions on the basis
of what is 'fair and reasonable' rather than on strict legal rights and
wrongs.

Thus, the FOS' decisions may differ from those of the courts. Indeed,
despite the Court of Appeal's decision in Hayward v NU, the FOS maintains
that insurers cannot simply reject the claims of policyholders for motor
theft where car keys have been left in the ignition.

As Ombudsman's News, April 2001, stated: "The test of 'going away' from a
car cannot be precisely formulated ... (a theft) is not sufficient to
demonstrate that a policyholder was not close enough to make a theft
unlikely." It added: "We expect insurers to word exclusion clauses
clearly ... and to highlight them for the policyholder. Where they fail to
do this, we are unlikely to agree that they are entitled to reject the
claim." The FOS' approach to policyholders' claims is clearly more
sympathetic than that of the courts.

Bound by rulings

Respondent insurers are bound by FOS rulings on policyholders' claims,
unlike the voluntary IOB regime. The FOS can award policyholders up to
£100,000 plus interest and costs and these awards may be enforced by court
order. In addition, the FOS can make a non-binding recommendation to the
firm that it makes an even larger payment to the complainant.
Alternatively, it may direct the firm to take particular steps, with the
aim of "fair compensation for the loss or damage".

Complainant policyholders can reject the FOS' decisions while their
insurers cannot. In addition, insurers cannot appeal FOS decisions. They
will instead need to establish grounds for judicial review - that a final
determination is unreasonable, irrational or unlawful. Alternatively,
insurers could argue that the FOS had contravened the Human Rights Act
1998, which incorporates the ECHR into UK law.

Hence, if a FOS decision contradicted Hayward v NU or the ECHR, an insurer
could resist any enforcement proceedings, commence a judicial review, or
bring an action under the Act. The difficulties of these courses of action
should not be underestimated, however.

The tighter, post-N2 regulation of the insurance industry will have
profound effects on insurance brokers and the FOS will play a major part
in this process. The number of claims to the IOB doubled over the 1990s
and this trend is likely to continue under the new regime. Brokers will
need to keep up with both the FOS' evolving dispute resolution
'philosophy' and procedures, in order to maintain good relationships with
insurers and insureds in the future.

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