The FOS yesterday published its 2015/16 budget consultation. In short, we can expect more of the same.
Of note for financial advisers:
- FOS expects to receive 16,000 new investment and pension complaints during 2015/16. This is in line with the actual number of complaints received in 2013/14 and FOS's most recent forecast for 2014/15. In other words, no change expected.
- The case fee (£550 per file after 25 free cases) and the annual levy is likely to remain the same as for 2014/15.
- 2013/14 saw a 50% increase in the number of Ombudsmen. More Ombudsmen are likely to join during 2014/15. An additional 200 Adjudicators will also be recruited.
FOS recognises that investment complaints can be complex and therefore require more time to resolve. Taken with FOS's 2014/15 business plan, there is a sense that certain investment complaints can be harder fought than complaints in respect of other product groups. An example would be UCIS complaints. The 2015/16 budget mentions that UCIS complaints are on the rise whilst the 2014/15 FOS business plan explained that UCIS complaints can be hotly contested by firms.
One of the reasons for harder fought complaints might be the growing involvement of CMCs in respect of UCIS complaints in particular. Given the financial interest CMCs have in the outcome of complaints, it is more likely that unresolved complaints end up with an Ombudsman. Another reason UCIS complaints might be harder fought by firms is that they tend to relate to higher investment amounts and, on reflection, an era when generally speaking the documentation at the time of sale was not as good as it tends to be today. The result is that firms sometimes face an exposure because of technical breaches of the rules. Despite that, the firm strongly believes the investor would still have invested in these products and signed the necessary paperwork to evidence the relevant exemptions applied.
Interestingly, the FCA complaints data shows that between 2010 and 2012 there were circa 84,000 investment complaints per year. The number of investment complaints apparently increased in 2013 to over 88,000 and the first six months of data for 2014 showed complaints of 45,080.
The FCA complaints data is surprising. The narrative suggests that pensions saw a 37% increase in administrative and customer service complaints. There was a 13% increase in administrative and customer service complaints for other investment complaints. The increase might therefore be explained by a rise in service complaints rather than claims for financial loss.
Whilst the number of investment complaints might be up, the volume of complaints being referred to FOS is broadly the same. This supports the analysis above and/or means that firms are improving their complaints handling.
Our impression is that complaints against financial advisers are actually on a downward trend. There are a number of reasons for this. The credit crunch exposed a number of riskier investments – some of the risks might understandably not have been considered to be risks at the time (who would have predicted the counterparty risk of Lehman Brothers to be a material risk back in 2007?). The credit crunch also exposed a level of fraud by rogue advisers or fund managers that firms were criticised for failing to spot during the due diligence process. Losses flowing from these events have now largely been flushed out.
Our experience is that many firms have taken on board lessons from a difficult period and this has led to improved systems and controls around riskier investments and document retention. I'm not so sure RDR has had much impact yet (although it might do in the long term).
We have recently commented that pensions is likely to be a topical area for complaints during 2015. A rise in pension complaints is identified in FOS's budget consultation paper and there is already some data to support a broader upward trend in pension complaints.
One other interesting take away from the FOS budget - FOS calculates the unit cost of dealing with a complaint at £706 for 2015/16. Given the more complex nature of investment complaints the true cost is likely to be more than that – say £1000. Let's just assume, for current purposes, that this unit cost is accurately passed on to financial advisers via the levy and case referral fees.
That means that with 16,000 complaints, the third party costs of resolving those complaints will be circa £16 million for the industry. That may sound a lot but the big win is that complainants are often unrepresented or, if they are represented, they are not entitled to recover costs. If FOS did not exist and even a quarter of the complaints involved claimant law firms with average claimant costs of £15,000 (the true figure could be much higher) then the third party costs for the industry would be nearer £60 million. To that end, FOS has proved to be a cost-effective dispute resolution forum.
The trade off, of course, is the frustration around inconsistency, the fact decisions are based on what is fair and reasonable rather than on the standard of care expected of a reasonably competent adviser (meaning compensation paid might be higher than would otherwise be the case) and the fact that, particularly as FOS gets bigger, it will be increasingly difficult to recruit technically competent people to resolve what are inherently complex issues for investment complaints.
So whilst I usually find myself airing my frustrations with FOS, I have sufficient festive cheer remaining at this time of year to acknowledge that notwithstanding the fact its existence has taken away a good deal of revenue for law firms, FOS has some very real benefits for consumers and firms. Now only if they'd stop splitting complaints, taking jurisdiction over complaints that were never suitable for an informal dispute resolution process and supported the introduction of a long stop, I'd be out of New Year blog material!