Complaints: Are You Treating Your Customers Fairly?

We were pleased to be welcome by Travers Smith on Thursday 27 April to hear from Walther Merricks of the Financial Ombudsman Service, Jane Whittles Director, Governance and Control, IAM at Abbey and Margaret Chamberlain of Travers Smith.

Walter Merricks began by saying TCF impact of FOS is ‘not a lot’ but eventually maybe. FOS has to operate under the broad principles of the law, rules and industry practice. TCF is really directed towards senior management systems and controls. However FOS is part of a working group with trade Associations looking at its impact.

TCF should improve things but not the way FOS deals with a complaint. TCF is about designing systems to achieve a result. FOS is not bothered whether a complaint is caused by design or a ‘cock-up’, why it happened or whether intended or deliberate does not matter. FOS does not ask firms for the silver bullet around what happened at the product design meeting and firms would say it’s irrelevant to the complaint.

There is a big discrepancy between the numbers of complaints referred to FOS by a narrow range of firms and the rest. This will be reflected in some of the proposals outlined in the FOS funding consultation to be issued next week.

Consistency is an issue for firms to address. Is it fair to settle a complaint on the basis someone threatens to go to FOS whilst leaving several hundred other customers in the same boat without compensation simply on the basis they have not complained? FSA’s programme of TCF should influence senior management to prepare and advance high level commitments to TCF. It should infect a firm’s strategy through marketing, compliance and legal functions including their sampling and monitoring of complaints.

Firms cannot assume all customers have the same understanding and it is important not to throw a customer relationship away. The main thing is the culture of the firm. The commercial position of the firm often dictates its stance and from a TCF perspective do we expect the same from a firm that is in financial trouble? The gap between senior management and the coalface is often apparent with a lot of fine words by senior management but lower down they know this is designed for the FSA and the real objective is to save costs when paying compensation or maybe they just ignore what is being said. The complaints area is seen as a cost centre subject to cost reduction targets. I know of a firm where senior management talk glowingly of TCF but in case files they are absolutely resistant to paying up even with straight forward cases. These firms often insist on ombudsman decisions which is something FOS is reluctant to do.

Are products designed for customer needs or to make a sale? Some brands may have a different approach to TCF within the same group. Should the same regime be expected throughout the group? Marketing material should be consistent with the product. However Grant Thornton has recently suggested 76% of adverts broke the rules so is there evidence of marketing departments being out of control? What are you trying to tell staff to do? Are staff recognising and capturing complaints or are they instructed simply to treat as a query? Is there pressure to keep down the complaints numbers or a readiness to let the numbers go up as a positive sign that customers are willing to express their views? Are process-changes communicated effectively and is attention paid to what is said rather than issuing standard or badly expressed letters?

The key to effective complaints handling is fair, consistent and prompt. We know about the impact of coping with large volumes but are your staff of the right calibre? Training is a DISP requirement and it is a requirement to identify systemic problems.

FOS is very supportive of principle based regulation and it has great potential. There is large scope to thin down the rule book. The PIA tried to do it with the evolution project but was swept away before they could do it. Not everyone wants less rules and it is unfairly said compliance would say there is too much reliance on principles. There will always be complaints and mistakes around and if FOS were not there they would have to go to the courts. Courts set precedents and this would inevitably lead to more rules. FOS provides a back stop to FSA that is not possible without. The vast majority of complaints are not about FSA rules and this is not where complaints come from. ICOB rules do not give rise to complaints and FOS rarely have to interpret rules except in the case of time limits where the rules have changed more than once.

FOS encourages industry codes and worked very well with the Banking Code which is a good model where the process of consultation including consumer bodies is excellent. Nothing much has changed since the ABI statement of good practice was abolished by ICOB. The ICOB rules did not make much difference to FOS.

Firms normally only see decisions relating to them and only a few cases make it into the public domain. A selection is put in Ombudsman News but if more were published could FOS be accused of quasi regulation? However FOS is giving active consideration to being more open and more predictable. Do firms really want all 8,000 decisions published on the website? Asked about information for customers there is scope for more on the website but it would have to be aimed at a different level. The ombudsman news is readable but more as a technical exercise highlighting decision on a particular area. However FOS deal every day with about 1500 members of the public with complaints or questions about what they should do and the vast majority they are able to deal with and only a small proportion end up as complaints.

Joanne Whittles is ideally placed to give a before and after overview having been an ombudsman and not working in industry. Much of what follows are personal views. FOS spent a huge amount of time making sure its processes and procedures were well understood. However understanding was overestimated and there is huge misunderstanding about process and approach. The biggest difference in misunderstanding lies between compliance and complaints handlers and the organisation as a whole. This is particularly so in large firms and less so in medium size firms. Ombudsman is often used as a generic term but it is not fully understood when decisions become final. Specialists need to help the rest of the firm understand underlying themes like the Royal Liver case which should be reviewed against TCF.

Firms must tell FOS what they want but they would find they were pushing on an open door. Abbey contact FOS about having to contact 4600 customers. They were very helpful and in the end only 48 complaints were received but FOS was more than happy to talk and will assist firms to achieve a minimum number of complaints.

FOS decisions are a huge source of intelligence and value for firms. It is hard for firms to learn lessons from feedback with so many competing demands. Rules tend to act against the best use of these views. OFTEL used to regulate on principles alone and it is only in financial services where so many rules apply. The FOS approach works very well with principles. Some senior management see FOS decisions always as a one-off but there are themes and principles involved that could be built into the design of products. This is the basis of a principles based approach. It’s too hard for some firms and they like rules. However look at FSA enforcement notices to obtain visibility on principles. Think of principles first and then rules but it is often the reverse that happens. It is far easier to do by tick box than analyse and ask philosophical questions. Ask yourself would you be happy if this were sold to your mother or whether you would be prepared to defend yourself on Watchdog.

FSA knows it cannot get rid of all the rules unlike other regulators. However TCF will help firms focus on principles. The FOS process is increasing the role in how firms behave and spread through culture and where the learning will come from. The largest area of complaints Abbey gets at the moment is the use of grey squirrels in its advertising.

Asked about how she feels if a senior person says they complained about their endowment and when asked why simply said ‘why not?’ It is perfectly reasonable to take account of knowledge and skill of the person making the complaint. A worse case that always incensed her was when someone said it was ‘worth a try’. These types of complaints detract from dealing with the real complaints.

Margaret Chamberlain of Travers Smith then gave usher impressions of complaints handling and TCF. Many years ago she complained about an old s226 pension when she realised the commission she has agreed to be rebated to her policy had not happened. Having asked for an independent actuary to confirm the amount she had received was correct they refused to do so and as a result she never gave them another penny of her money. Complaints can have a direct business impact and senior management need to take on board the message that the way you handle complaints affects how clients do business with you.

Partly driven by MiFID FSA will be restricted in how it can make rules as they will be set at a European level to stop gold plating making it difficult to trade across borders so will be driven back to principles. City lawyers expressed concern in a letter to John Tyner about principles as firms need some certainty. If firms take a bona fide decision based on what they believe to be the principles FSA should accept this.

For complaints TCF has been more fleshed out in the FSA’s Dear CEO letter on mortgage endowments, which gives more general guidance. The most recent fines for Abbey and Guardian have gone for Principle 6 and 2. They can be assessed with hindsight and Jane confirmed she had been instrumental in reporting Abbey to the FSA in the first place. Compliance with DISP is necessary but not the only way to handle complaints. The FSA way the website operates is a real and substantive concern. Despite typing in the name of a document there were 137,000 matches. Things need to be on a part of the website you expect them to be and flagged. It is not a lot to ask the FSA.

Everyone involved with complaints should look at the John Tiner letter. There are general points around avoiding a narrow view of the firm’s duty and recognising the validity of oral evidence. Diligent investigation and avoiding literal and narrow interpretations of the customer’s complaint is required. Certainly do not rely on the customer’s signature alone or the fact they did not exercise their right to cancel.

The challenge is for senior management to work out and have cultural acceptance at the top. Fining corporates does not always achieve the right results that going for senior management of the company would despite the difficulties.

The next fine needs to be over £1 million to make people sit up and notice. But the fine takes no account of other costs. Saying you have done something when you haven’t as Abbey did will cause problems. Firms may reply in the positive but do not think about what they are saying. If firms are forced to employ an expert as Abbey did through a s.166 order this can be phenomenally expensive. Firms may feel accountants go in with something to find so it’s a good idea to avoid these things.

With Abbey 26% of complaints were mishandled meaning if you got to the right result it was by accident rather by design. The enforcement notice also gives some good examples of what not to put in your response to complainants including reference to advisers following procedures, the contents of the key features and customers failing to act on cooling off notices (see paragraph 4.25 of the enforcement notice).

Guardian minuted they had drifted too far in the complainant’s favour out of line with the market. What has the market got to do with the uphold rate? It is possible Guardian’s policies or sales practices were different to the market and this is no basis upon which to make a decision. Guardian recognised the risk of the new approach in a review stating “… it may not measure well in isolation against FSA’s broader approach as expressed in the Tiner letter”. It was as if they were prepared to continue for as long as they could get way with it. With senior management actually recording these facts FSA should have given them a very rough ride.

Apart from being a huge yawn the L&G case does raise some specific points worth noting. Firms cannot rely on customer signatures alone and the key features document is not enough in itself to demonstrate the customer understood the risks even if they are compliant and very well written. There was an enormous emphasis on procedure but the evidence was deficient. These enforcement notices provide a lot of information in particular firms should look at cases in totality not just the specific complaint.

One paragraph in MiFID is crucial and relate to “in relation to retail client”. The category is much wider and includes corporates and current intermediate customers where complaint handling must be effective and transparent procedure. MiFID will be copied out but what does transparent mean? It is loaded in favour of protecting retail clients requiring firms to review their procedures.

The panellists were asked if there were degrees of fairness. There are degrees of what you can offer. You may offer a Rolls Royce service or more limited. Legally you are either fair or unfair but you could be more than fair. One leading barrister when asked about the difference between reasonable care and all reasonable care simply said he had never heard of some reasonable care. There are not degrees of fairness just different ways of achieving a fair result.

How much greed comes into low cost endowment complaints? Walter Merricks suggested Brian ought to write a book about the history of these products. FOS just focuses on a fair result and it is not for FOS to speculate on the motives. Many complaints received sound highly convincing when they speak with certainty about being guaranteed the policy would pay off the mortgage. There were armies of sales people who were systematically acting with that kind of sales line and caused a great deal of dissatisfaction. It is a difficult line but not the basis of what most people put to FOS.

Are firms being treated fairly when they cannot apply simple time limits like 15 years stop? The industry set up the ombudsman to get disputes out of the courts which are much more expensive than FOS. The average FOS case costs about £500 which is much less than a court. There is a general desire to keep complaints out of courts and FOS deals with complaints privately with no names published. There are some differences like time limits and previous schemes had no time limits. The decisions FOS arrives at are similar to a court and the exceptions are marginal. Another aspect of court decisions is that they have wide ranging impacts leading to case law.

Sometimes clients do not remember who sold the policy but then remember everything about the sale. In FOS experience clients often have a vivid recollection of what happened as this was often the only major decision of this kind they had made unlike the many sales made by a salesperson. FOS has to be on their guard against claims handling firms.

Are mixed messages from FOS and FSA a big issue? It is not as mixed as people think. If you dig down to what is being discussed the messages are not as mixed as at first glance. There are now more tripartite meetings than in 2000. FSA will become involved if a firm will wave confidentiality. The firm has the power to bring everyone together and it is an ideal way to cut our misunderstanding. Some thought there was a mixed message on limited advice but it is accepted that where a customer asked for specific advice on a specific product this can be given but this is different to the confusion between what is an execution only sale and one that is advised where it can only be one or the other.

On outsourcers it is clear that with mortgage endowments there is no choice. However you get what you pay for and in one instance it was clear the same firm was giving a different quality based on the contract and how much they were being paid or overseen by the contracting firm. Unless you pay for training outsourcing firms can be a centre of infection rather than spreading best practice often telling firms what they think they can get away with.

It was noted this was Brian’s last conference as Compliance Institute CEO and we wish him well. Our thanks go to Travers Smith for providing an excellent venue and refreshments.

Published: April 2005
By: Anthony Smith

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