MoU between FCA and FOS: will complaints handling become more risky?

The FOS published a draft MoU with the future FCA that has blurred an already hazy line between the ombudsman and regulator.

Unlike the voluntary MoU which has been in place between the FSA and FOS since 2007, the draft MoU between the FCA and FOS (published on 22 February) is to be required by paragraph 3A(2) of schedule 17 to the Financial Services Bill currently travelling through Parliament.

The relevant sections of both MoUs on information sharing between FOS and the regulator which set out what types of information the FOS will provide to the regulator remain much the same and include "information about: serious shortcomings in firm's complaint-handling; concerns about the fitness and propriety of a firm or approved person; or other issues that may require action by the FSA [or FCA] in accordance with its statutory objectives".

In this respect, the proposed MoU does not, at first glance, appear to represent an increase in risks associated with complaints handling.

Pressure to settle

Nonetheless, although FOS may expressly plan only to provide similar information in future, given that FOS has now said that it will publish its final decisions, it is likely that it will come under greater pressure to refer firms to the regulator; either because of apparently egregious conduct or because complainants (encouraged by CMCs) insist.  This, in turn, will increase the pressure on firms to settle.

Both MoUs stipulate that cooperation and communication between FOS and the regulator is most important where FOS is "receiving a significant number of cases concerning the same issue" as the regulator is addressing. The aim, following the PPI experience in particular, is (understandably) to encourage FOS to warn the FSA about sector-wide problems looming on the horizon.  But this also creates a clear incentive for firms to keep the number of complaints referred to FOS at a low level.

Taken together, the combined risks of publicity and referral to the regulator may become too high to defend a particular complaint.  Firms may pay less regard to the merits of a complaint - legal or otherwise - and more simply to 'how it looks'.

'Specific disclosure'

There is one subtle but significant change to the wording of the MoUs which would allow the FCA to request specific information about cases from the FOS.

Under the 2007 MoU, if requested by the FSA to provide information about "actual or contemplated regulatory action", FOS has agreed to provide "the number and types of complaints handled; and specific initial and final decisions". Thus, the information available to the FSA is limited to the decisions of adjudicators and ombudsmen - rather than the underlying documentation - and generic statistics about complaints.

Under the draft MoU, FOS "may give the FCA (for the specific firm concerned) information that is relevant to the discharge of the FCA's statutory functions." Whether deliberately or not, the language has been broadened to permit the FCA to request a very wide range of information about specific firms and also, presumably, specific complaints.

Shared objectives

Perhaps most intriguing is the wording added into the draft MoU, reflecting the new s.232A of the Bill, which seems to increase the extent to which FOS is being converted into an arm of the FCA: "The Financial Ombudsman Service Limited must disclose information to the FCA where in its opinion it considers that the information would or might be of assistance to the FCA in advancing one or more of the FCA's operational objectives."

We have recently written about the blurring of the lines between the FOS and the regulator; now FOS has agreed indirectly to further the same objectives as the FCA. But it is far from apparent that referral is a necessary part of achieving these objectives, as the objectives contained in the draft Financial Services Bill - consumer protection generally, the integrity of the financial system as a whole, and competition - do not appear to require the referral of firms or individual advisors to the FCA in respect of specific instances of misconduct revealed by, or committed during, complaints handling.

Given the serious consequences that might flow, firms who are facing FOS complaints will want clarity from FOS as to whether they will receive notification of, or the opportunity to object to, such a referral. This is even more true for those individuals responsible for complaints handling - the 'CF Complaints' function exists in all but name - because liability for poor complaints handling is now personal. It is all too easy to see how one complaint, referred by FOS, with encouragement from an angry complainant or CMC, could snowball into an investigation by the regulator.

Conclusion

For a document that shares so much of its substance with its predecessor, the draft MoU actually provides the scope for a significant change in the role of FOS, from a mandatory ADR scheme for regulated firms, to a referral agent for new work for the FCA's supervision and enforcement departments.