A cautionary tale: Who's marking the Ombudsman?

True story : A Cautionary Tale about the Financial Ombudsman Service

Last year a customer took out a travel insurance policy through one of my clients. She wanted to travel to the USA but forgot/or did not specify US cover when she filled in her application form. She selected the wrong product. While she was in the US, the customer claimed on her policy. The claim was turned down.

The customer decided to complain to the Financial Ombudsman Service (FOS). Her case was that she always intended to select US cover when she applied for her travel insurance. Astonishingly, the FOS upheld her claims on those grounds. According to the ruling, the intention was there, and despite completing her application form improperly AND not checking her documents to make sure she had correct cover before she travelled, the customer’s claim should be honoured. 

My client is not the only insurance provider who’s got a tale to tell about the FOS. Rather like the lists of weird and wacky insurance claims that sometimes appear in the tabloid press, (“a squirrel crashed through my windscreen” is a recent motor claim favourite) there are countless similar cases where the FOS has upheld complaints that are at best inconsistent, and at worse fly in the face of reason.

Conduct risk stipulates that customer should expect the appropriate outcome for their grievance, whether the claim is upheld or declined. Faced with such inconsistency from the Ombudsman, many insurers choose to pay out on smaller claims, rather than cough up the £500 the FOS demands to process each complaint (smaller firms get 25 free cases before they pay a fee). Conduct risk is thus heightened even further.

The FOS handled 2.16m complaints in the last financial year. 223,000 were resolved and nearly 510,000 went to formal dispute. 74% of those in formal dispute were PPI related, and 60% of total complaints received were PPI. Total FOS revenue of £163m (gross revenues of £240m) came primarily from fees, split into £350 (per PPI claim) or £500 (standard case).  These numbers tell us two things: FOS is a significant revenue generator (paid for by the industry) and PPI had a massive impact on the organisation, which admitted that staff were diverted from their usual roles to handle PPI, on top of the 900 people recruited specifically for PPI in 2012/13 (a further 1000 are to be recruited this year).

FOS Chairman Sir Nick Montagu noted in the FOS annual report: “Our standards and values have not been allowed to suffer by our having to double in size to meet the huge growth in demand. Nor will they do so in the face of the further demands made of our service that we expect to see in the coming year. The customer remains firmly at the heart of all our planning for the future. Our aim remains to enable consumers and financial businesses to reach a fair and quick resolution to their disputes. That points towards our working increasingly with both sides to deploy a service tailored to the nature and complexity of each individual complaint.”

There is no sense that FOS has played fast and loose with its revenue raising and it got a clean bill of health in the most recent NAO report in January 2012. But whether the massive increase in caseload from PPI has led to a decline in quality is moot: certainly there are a number of insurance providers who would take issue with Sir Nick’s assertion that “standards have not been allowed to suffer.” And chief ombudsman Natalie Ceeney’s departure in late 2013, turning up at  HSBC of all places, was explained by the chairman as being the right time to go because the FOS had received its millionth PPI complaint. Hmm.

Anecdotal evidence suggests many FOS case decisions are flawed and inconsistent, even when disputes are formally escalated to the Ombudsman, but why haven’t insurers drawn attention to the problems? The industry doesn’t seem to have the stomach for a fight. It’s worth remembering that FOS decisions are not legally binding, but instances of insurance providers refusing to pay up are rarer than a Norwich City goal this premiership season. Years of kicking by regulators and politicians has left our industry supine and unwilling to stand up for itself.

Surely our trade associations – BIBA and the ABI in particular – can and should step in. They can obviate the need for individual firms put their head above the parapet by sponsoring collective action. Why not commission a reputable third party, with a track record of fairness and objectivity, to review the case histories and determine whether the FOS is indeed inconsistent, or not? The report’s findings can then form the basis of a call to action, if the evidence is there to support the industry’s beef.

In truth, the longer-term consequences of declining standards at the FOS are deeply worrying. If customers know that, whatever policy they choose, the Ombudsman will compensate them if things go wrong, all customer responsibility is abrogated and insurance companies have no reason to guard their reputations.  But if our industry chooses to sit on its hands, it will only have itself to blame for the complete extinction of caveat emptor.