FSA and FOS consult on improving standards of complaints handling

On 30 September 2010, the FSA proposed changes to its complaints handling rules as part of a package of measures to drive up standards of complaints handling within the industry by ensuring that firms resolve complaints promptly and fairly. Proposals include:

  • Increasing the maximum financial award which can be made by the Ombudsman from £100k to £150k (see RPC’s press release of 22 July 2010 on just this possibility here and further comment in the case notes below)  
  • Requiring firms to identify a senior individual responsible for complaints handling  
  • Abolition of the ‘two-stage’ complaints handling rule to incentivise firms to resolve complaints fairly the first time  
  • Underlining the requirement for firms to carry out root cause analysis, by identifying and remedying any recurrent or systemic problems with complaints, and to take action where appropriate  
  • Additional guidance in relation to taking account of Ombudsman decisions and previous customer complaints and learning from the outcome  

The FSA has also published firm-specific complaints data, enabling customers, for the first time, to compare and contrast the way different firms deal with their complaints.  

Comments can be made on the proposals in CP10/21 until 31 December 2010. For a copy of the consultation paper and accompanying press release click here and here.

Root Cause Analysis

The financial services sector has been digesting the implications of the FSA’s Consultation Paper 10/21 on “Consumer Complaints: the Ombudsman award limit and changes to complaints-handling rules”. Although only a consultation (with a response deadline of 31 December 2010), from the questions asked by the FSA and from experience, it is highly likely that all of the recommendations will become enshrined in regulation.  

Of greatest concern for those of us who have been monitoring this issue for some years is the FSA’s renewed emphasis on root cause analysis and the proposal for rule changes to reflect this revised approach. The existing complaints handling rules (DISP) require firms to identify and remedy any recurring or systemic problems revealed by their complaints handling. They also suggest that firms “should have regard to Principle 6 (Customers’ Interests) when they identify problems and consider whether they ought to act on their own initiative with regard to the position of customers who may have suffered detriment from, or been potentially disadvantaged by such factors, but who have not complained” (DISP 1.3.3 – 1.3.5 G).

The FSA believes that effective root cause analysis will be beneficial to firms and consumers as the costs of problems that are not identified early on, but which later turn out to be widespread, can be very high. The proposed processes the FSA would expect firms to undertake include collecting and analysing MI on root causes, assessing the priority of different root causes and deciding how to correct them, including dealing with customers who have not complained. This last category is the most interesting. The FSA appears not to give due weight to the potential costs to firms and their insurers, once a problem has been identified, of seeking out other customers who have not complained with a view to compensating them. The FSA talks about preventing widespread and costly problems occurring rather than the inevitable costs of cleaning up after problems have surfaced.

In the CP’s cost benefit analysis, the FSA notes that “In some cases, firms will make a payment to consumers who have not complained, but who have suffered a loss for the same reasons as consumers who have complained.” The FSA says it cannot estimate the value of this transfer to consumers as it will depend on too many variables which will, in turn, determine whether the root cause analysis will identify problems requiring remedial action. In a footnote, the FSA states (without any apparent awareness of the irony of including the comment in just a footnote) that the estimated total costs to the industry in respect of consumers who have been mis-sold PPI policies but who would not receive redress without rule changes relating to PPI complaints handling would be between £1bn and £3bn!

The FSA estimates in any event that improved complaint handling at firm level ought to result in an increase in the proportion of complaints upheld of between 10% and 15%. The FSA recognises that in respect of PPI alone, the root cause rules could cost the industry billions. The rules set out in the PPI Guidance (PS10/12) have been adopted in the proposed changes to the DISP root cause rules generally.

The new guidance will include that the firm should consider “Whether it ought to act with regard to the position of customers who may have suffered detriment from, or been potentially disadvantaged by such problems but who have not complained and, if so, take appropriate and proportionate measures to ensure that those customers are given appropriate redress or a proper opportunity to obtain it. In particular, the firm should: (1) ascertain the scope and severity of the consumer detriment that might have arisen; and (2) consider whether it is fair and reasonable for the firm to undertake proactively a redress or remediation exercise, which may include contacting customers who have not complained.”

Whilst firms and their insurers may take comfort from the inclusion of the words “appropriate and proportionate measures”, these will in practice offer little protection because once a root cause problem has been identified, the obligation will be on the firm to contact all similar customers and proactively undertake a redress or remediation exercise to ensure that customers who have suffered detriment are identified and compensated. The FSA’s view of “appropriate and proportionate measures” is likely to be very different from that of the firms and their insurers.

The renowned Pension Review case of Rothschild v Collyear decided that the Pensions Review amounted to a claim for the purposes of professional liability insurance. The same analysis could apply where a firm discovers that it has a systemic problem and needs to compensate customers who have not complained. The firm is obliged to remedy root cause problems. Mr Justice Rix’s comment that insurers accept the regulatory regime when they agree to insure regulated firms serves as a statement of judicial policy. Early notification to and prior consent from insurers should be considered pre-requisites for any root cause analysis and remediation exercise.

Where, in the past, firms would seek legal advice to confirm that a problem identified by a complaint was not systemic, they will now be required under more intense FSA scrutiny to establish to the FSA’s satisfaction that a proper root cause analysis has been undertaken and that genuine steps have been taken to ensure no widespread consumer detriment. Although legal advice will still be important and remain protected from disclosure to FSA, its supervisors and enforcement investigators are likely to find ways around privilege arguments to check that thorough root cause analysis has been carried out. In every circumstance where a firm issues or sponsors a product or advises a number of clients to invest in the same or similar way, the risk of a systemic, root cause problem exists and, if a problem arises, a firm will effectively be obliged “to undertake actively a redress or remediation exercise”. We recommend (at the very least) that firms obtain early and robust legal advice (which will attract legal professional privilege) whenever the mere possibility of a systemic problem is identified.