Prior to November 2004, consumer complaints about mortgages were handled by the voluntary Mortgage Code Arbitration Service. Since we entered the era of Financial Services Authority (FSA) regulation, all authorised mortgage firms come under the complaints framework of the Financial Ombudsman Service (FOS). So far, a huge amount of complaints have been handled by the FOS that relate to mortgage endowments – but these are complaints about the mortgage-related investment vehicle, not the mortgage itself – and the overall number of FOS complaints about mortgages and mortgage advice remains low. In fact, in its proposed levy budget for 2006/7, FOS is asking its industry block 16 (mortgage lenders, advisers and arrangers) to contribute only 2.3 per cent of its total contributions. Bearing this in mind should help us all to keep a sense of proportion about how far FOS cases will start to become an administrative and financial burden to the mortgage intermediary sector.
FOS has a very close relationship with the FSA, both organisations having been set up by the Financial Services and Markets Act 2000, which created a single regulator and Ombudsman for the whole of the financial services industry. The Memorandum of Understanding between the FSA and the FOS explains that, although FOS is accountable to the FSA in a number of significant respects, it is operationally independent of the FSA. Close co-operation, information sharing and consultation between the two organisations help to reduce duplication of efforts, and the FOS’s annual budgets (including the amount that firms must pay in levies and case fees) must be approved by the FSA. Although many view the FOS as fundamentally a consumer-protection agency, it views itself as ‘the champion of neither the financial services industry nor consumers. We are completely independent and deal with disputes fairly and impartially.’ (See FOS’s aims in its Annual Review, June 2005).
An informal alternative
This bring us to the role of FOS, which is to resolve individual disputes between consumers and financial services firms ‘fairly, reasonably, quickly and informally’. The service is intended as an informal alternative to the courts, with normally no formal hearings or cross examinations and fewer rigid procedures. The easiest way to understand FOS’s approach to cases is to look at the information it gives to consumers – at whom it directs the majority of its communications, especially on its website. The overall aim of FOS decisions is to put the consumer back in the position that they would be in if their particular financial deal had not gone wrong. This process can include telling the firm to make good losses, with decisions binding on firms up to £100,000, although in most cases decisions involve much smaller amounts of money.
The consumer’s first port of call if they are unhappy about their treatment by a financial services firm is to complain to the firm itself, and the FOS can only get involved if the complaint remains unresolved once the firm has sent its final response, or if eight weeks have elapsed with the firm having given no response and the complainant not prepared to wait any longer. The next step is for the complainant to submit a complaint form indicating what they want from the firm to put things right and including copies of all documentation. The next step is for the FOS to try to negotiate an informal resolution to the dispute. If this fails then a formal and final decision is made, which firms have to accept. Should the FOS not consider the complaint valid, then consumers have the right to pursue their claim through the court system.
FOS’s caseload is vast, with nearly 111,000 new cases received in the year ended 31 March 2005, of which nearly 70,000 were about mortgage endowments. Mortgage loan cases amounted to 3,000 (200 fewer than the previous year). A decreasing level of complaints about early repayment charges (including incorrect lender calculations) was reported, as was a lower than expected level in shared appreciation mortgage complaints. A rise in complaints about offset mortgages was reported, with again mistakes in calculations cited as a problem. As the 2005/6 FOS annual report is not published until June this year, these figures are now losing their relevance as current information. We should also remember that, at the time that the latest available figures were published, mortgage advisers and arrangers had only been regulated for five months so the complaints cited must have been against those mortgage lenders that were aleady FSA regulated. FOS does not publish details of individual cases, so the overall figures are open to interpretation. It has been widely communicated by the Association of Mortgage Intermediaries (AMI) that only approximately 400 complaints relating to intermediary business has been received by FOS since ‘Mortgage-Day’, with even fewer actually being investigated.
It remains to be seen whether complaints against mortgage advisers will start to be a significant part of the (admittedly tiny) proportion of FOS cases expected from the mortgage sector. At the recent AMI London Conference, Walter Merricks (chief ombudsman at the FOS) assured delegates that FOS wanted to play a minimal role in the affairs of mortgage intermediary firms, which should help to boost confidence that FOS claims are not going to become a major burden within the sector.
Financial burden
Regarding the financial burden placed on mortgage firms by their compulsory membership of FOS, the proposed annual flat fee levy per firm is modest at £50.00 for 2006/7, as outlined in the FSA’s Regulatory Fees and Levies consultation paper 06/2. This flat rate levy across the mortgage sector is calculated to raise £365,600 within a total levy of £15.8 million – which again underlines the low proportion of overall FOS caseload that the mortgage industry is expected to generate.
The main point of contention about FOS costs are the case fees charged. The FOS service is completely free at the point of service for customers – even if their case is dismissed. There is no other source of funding for FOS apart from the firms that make up the financial services industry, so they must bear all the costs. Firms pay no case fee for the first two cases per year, but after that a case fee of £360 is charged to the firm – whether or not the case is upheld against them. In its annual corporate plan and 2006/7 budget, the FOS says ‘only 5 per cent of firms (predominantly the larger ones) paid any case fees in 2004/5. Despite this, some firms resent the risk of case fees.’ Some might say that this is understating the case.
In fairness, the FOS does recognise that some cases may be ‘frivolous and vexatious’ and it will not charge a case fee where complaints are rejected on these grounds. However, the weight of sympathy is always with the customer and, in one of its Q&As, the FOS states: “A consumer’s failure to present a coherent and reasoned argument doesn’t automatically mean their case has no merit’.”
Ambulance chasing
Mortgage firms can no doubt take the odd incoherent and poorly reasoned complaint in their stride, but a real threat that may start to dominate the complaints process is claims-handling firms that operate by ‘ambulance chasing’. There has been a phenomenal rise in the prominence of such firms in the personal injury sector, and now that endowment claims have peaked, it is feared that the ambulance chasers may turn their attentions to mortgage ‘mis-selling’. In the past, the Lord Chancellor’s Department of Constitutional Affairs has warned firms encouraging people to make frivolous personal injury claims to clean up their act, or else face tough new regulations. Supporting this view, in its response to the FOS’s proposed corporate plan and budget, the Association of Independent Financial Advisers (AIFA) has pointed out the problem of increasing volumes of complaints being generated by complaint-handling firms. AIFA has declared its support for the introduction of regulation for these firms and it has also urged FOS to review the current basis on which its funding is raised.
These are big issues and won’t be resolved quickly. In the meantime, mortgage firms all have built-in protection against large amounts of FOS cases being filed against them – i.e. the complaints handling process that is part of the FSA’s regulatory framework. It should be remembered that FOS only gets involved after any consumer complaint has been through the firm’s own complaints procedure and remains unresolved. If firms do a top class compliance job, embedding the FSA’s ‘Treating Customers Fairly’ (TCF) principles in their customer treatment, and keeping good quality records (preferably for ever), then the chances of keeping customers happy and the FOS at bay are likely to be very high.
Bill Warren is compliance director at Complete (CMLS)
