Financial Ombudsman Service and general insurance
31 December 2014
28 October 2018
Chartered Insurance Institute
The Financial Ombudsman Service (FOS) provides a cost-effective and informal means of resolving financial services disputes, including those relating to general insurance. It can consider disputes between the insurer and the policyholder or between an intermediary and client, investigating complaints against regulated firms from consumers and small businesses and awarding compensation of up to £150,000 in any case.
For a complainant, the FOS offers advantages over the courts; for example, the service is free at the point of use and it follows an inquisitorial rather than an adversarial process. Perhaps most importantly, the FOS has an obligation to reach decisions that are 'fair and reasonable in all the circumstances', which enables it to diverge where appropriate from a strict interpretation of the law.
Membership of the FOS is compulsory for all authorised insurers and other authorised firms including intermediaries, with every company required to contribute funds to its operation.
It is vital for those who deal with consumer or small business policies to stay abreast of the principles and standards developed by the FOS. Guidance from the FOS may involve general business practices, such as the desirability of recording crucial telephone conversations. More dramatically, it can involve amendments to fundamental points of insurance law, for example in consumer cases the FOS no longer allows insurers to rely on non-disclosure rather than misrepresentation (from April 2013 this has had a statutory basis following the Consumer Insurance (Disclosure and Representations) Act 2012 coming into force); or it can be a specific issue limited to a particular type of business, such as whether a consumer can demand to choose a lawyer under a legal expenses policy.
This factfile was last updated in December 2014.
Formation of the FOS
Financial Services and Markets Act 2000
Review of award limits
Publishing complaints data
Stages in case handling
Status of ombudsman decisions
'Wider implications' cases
An appraisal of the FOS
The complainant's perspective
The firm's perspective
What is fraud?
What evidence is required?
What action should an insurer take?
Financial Ombudsman Service
The Financial Ombudsman Service (FOS) deals with complaints relating to four key sectors: banking, investment, personal pensions and insurance. It can investigate complaints about most financial problems involving:
- PPI (payment protection insurance);
- credit cards and store cards;
- loans and credit;
- payday lending and debt collecting;
- savings and investments;
- hire purchase and pawnbroking;
- money transfer;
- financial advice;
- stocks, shares, unit trusts and bonds.
It was established in December 2001 under the Financial Services and Markets Act 2000 to help settle disputes between consumers and UK-based businesses providing financial services. It is the largest ombudsman scheme in the world. In the year ended 31 March 2014 it resolved 518,778 cases, of which 17% related to insurance. To deal with this substantial workload it employs around 3,500 staff.
This fact file focuses on the work of the FOS on general insurance cases.
What is an ombudsman? The word is of Scandinavian origin, and its meaning has been variously translated as 'representative' or 'grievance person'. In its original form in 18th-century Sweden, the role was that of a public official who would personally take up difficulties that a citizen was experiencing with government departments. The word is not gender specific, and many of the current ombudsmen at the FOS are women. In the UK, ombudsmen are now commonplace in both the public and private sectors.
The FOS replaced eight existing complaints-handling mechanisms:
- the Insurance Ombudsman Bureau;
- the Personal Insurance Arbitration Scheme;
- the Personal Investment Authority Ombudsman Bureau;
- the Financial Services Authority Complaints Unit and Independent Investigator;
- the Office of the Banking Ombudsman;
- the Office of the Building Societies Ombudsman;
- the Office of the Investment Ombudsman;
- the Securities and Futures Authority Complaints Bureau and Arbitration Service.
A broad framework for the FOS was set out in the Financial Services and Markets Act 2000 (FSMA), with more detail being provided in the Financial Services Authority (FSA) (now the Financial Conduct Authority (FCA)) complaints sourcebook (DISP).
The FOS can deal with complaints from:
- a consumer;
- a micro-enterprise that employs fewer than ten people and has a turnover or annual balance sheet that does not exceed €2 million;
- a charity with an annual income of less than £1 million;
- a trust with a net asset value of less than £1 million.
However, before a complainant can apply to the FOS, it must first exhaust the internal complaints procedure offered by the business with which it is in dispute. The business has eight weeks in which to resolve the complaint. The complainant has to apply to the FOS within six months of the final response from the business.
The FOS was established under part 16 (sections 225 to 234) and schedule 17 of the FSMA. Here a small selection of the more important provisions will be considered:
- Section 225 provides for an ombudsman scheme under which 'certain disputes may be resolved quickly and with minimum formality by an independent person'. The first two elements of speed and informality are vital to the success of the FOS; the scheme is not intended to operate like a court or tribunal.
- Sections 226, 226A and 227 provide respectively for the FOS to have a compulsory jurisdiction, a consumer credit jurisdiction and a voluntary jurisdiction. The voluntary jurisdiction enables the FOS, where it wishes, to agree with firms that it will accept complaints even where matters fall outside statutory regulation. For example, insurance brokers were not subject to statutory conduct of business regulation ‒ and therefore the compulsory jurisdiction ‒ until 14 January 2005. However, from 1 April 2003, the FOS was prepared to accept those that so wished into the voluntary jurisdiction.
- Section 228 provides that compulsory jurisdiction and consumer credit jurisdiction complaints are 'to be determined by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case'. This is a key power, particularly for insurance complaints. Insurance contract law has the potential to produce unfairness, as noted above, but it is clear that the FOS has in such situations not just a power but a duty to disregard the law.
- Section 228 further provides that the ombudsman must give written reasons for its decision. These reasons are essential if the parties are to understand the ombudsman's views, and will assist in a challenge if either disagrees.
- Finally, section 228 contains the rule which makes an application to the FOS a 'no lose' situation for complainants. If a complainant accepts the ombudsman's decision it becomes binding on both insurer and complainant. However, the complainant is free to reject the decision and pursue the matter through the courts.
- Section 229 provides that for compulsory jurisdiction and consumer credit jurisdiction complaints the ombudsman may make a money award up to a set limit ‒ currently £150,000 ‒ or instruct the insurer to take specified steps, the cost of which should not exceed that limit. However, the ombudsman can recommend a higher figure if appropriate.
- Section 231 provides that the ombudsman has the power to call for a party to a complaint to produce specified information or documentation.
- Schedule 17 paragraphs 16 and 16D respectively provide that a money award made under the compulsory jurisdiction or the consumer credit jurisdiction can be enforced through the courts as if it were an order of a court.
Detailed rules for the FOS are to be found in a section of the FCA Handbook called Dispute resolution: complaints (DISP). As with the remainder of the Handbook the actual rules are marked with an R. Those passages marked G are merely guidance, but invaluable in indicating the manner in which rules are likely to be interpreted and applied. Note that on 1 April 2013 the former regulator, the Financial Services Authority (FSA), was replaced by the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and the Bank of England's Financial Policy Committee (FPC). The FCA Handbook replaced the FSA Handbook in respect of, among other things, the handling of complaints.
The following rules are of particular interest:
- Rule 2.6 sets the territorial scope of the FOS's jurisdiction. Complaints under the compulsory jurisdiction can be brought against firms carrying out business from an establishment in the UK. If a firm participates in the voluntary jurisdiction then the scope is widened to include establishments in the EEA where (a) the firm has notified its home regulator, (b) the activity is directed at least in part at the UK, and (c) the relevant contracts are (or, in the case of a potential customer, would be) governed by UK law.
- Rule 2.7 determines who is eligible to make a complaint. Most importantly, the FOS is open not just to private individuals but also to sole traders and small businesses that employ fewer than ten people and have a turnover that does not exceed €2 million. Interestingly, a complainant can be a person for whom a contract of insurance was taken out or intended to be taken out. This opens the door for third-party complaints.
- Rule 2.8 imposes time restrictions for the making of complaints. A complainant cannot refer a case to the FOS unless they have first obtained a final response from the firm or eight weeks have elapsed since the matter was raised with the firm. Once a final response has been received from the firm, the complainant has six months to go to the FOS. In some cases, of course, a complaint will not be made to the firm. There is then a long-stop restriction that the matter cannot be referred to the FOS more than six years after the relevant events, or, if longer, three years after the complainant became aware or ought reasonably to have become aware that there was cause for complaint. In exceptional circumstances the FOS may allow complainants to bring complaints after these time limits have expired.
- Rule 3.3.4 lists no fewer than seventeen grounds on which a complaint may be dismissed without consideration of its merits ‒ for example, that it is frivolous or vexatious, or that it is a complaint about the legitimate exercise of a firm's commercial judgement. There is a further possibility ‒ under Rules 3.3.5 and 3.3.6. If the FOS considers that a complaint raises an important point of law, and would be more suitably dealt with through the courts as atest case, it may dismiss the complaint on receipt of a written undertaking from the firm. The undertaking must commit the firm to paying the complainant's reasonable costs if the matter is subsequently litigated.
- Rule 3.5 deals with matters of evidence. In particular, the FOS is not bound by the rules that would apply in court proceedings. It may exclude evidence that would be admitted in court, and admit evidence that would be excluded. The FOS may also take oral evidence, though hearings are in practice rare.
- Rule 3.7 imposes a limit of £150,000 on money awards. It also gives the ombudsman specific powers to make awards for pain and suffering, damage to reputation, and distress and inconvenience. The ombudsman is also empowered to award costs 'reasonably incurred' by a complainant. This power is exercised sparingly. In general, the ombudsman takes the view that a complainant does not need to be represented when bringing a complaint to the FOS.
- Rule 3.9 allows the ombudsman to delegate all powers in connection with the investigation of a claim other than the final determination.
The FOS reviews the limit of awards every three years. The next review is planned for 2015.
The non-executive board of the FOS commissions three-yearly external reviews of its service. The next review is due in 2016.
Since 2009 the FOS has published on its website (www.financial-ombudsman.org.uk/publications/complaints-data.html) the number of complaints received each six months and the proportion upheld, with a breakdown of the products these relate to in each sector. It also publishes on its website the quarterly complaints numbers from its publication Ombudsman News and every six months publishes the names of the 200 financial businesses that together account for around 95% of its workload. The website also includes a database of decisions taken in individual cases (www.financial-ombudsman-decisions.org.uk/Default.aspx). The FCA website (www.fca.org.uk/firms/systems-reporting/complaints-data) publishes information on how firms handle complaints reported to the FCA.
Before the FOS can consider a case, the consumer must first give the business an opportunity to investigate the complaint itself. The business has a maximum of eight weeks to resolve the complaint. Thereafter, if the consumer is not satisfied with the response, they can refer the complaint to the FOS but must do so within six months of the final response from the business.
The ombudsman makes decisions on the basis of what it considers to be fair and reasonable. In handling complaints, the ombudsman is required to take into account relevant legislation, the regulator's rules, guidance and standards, codes of practice and (where appropriate) good industry practice at the time.
Both the FSMA and DISP give powers to the ombudsman rather than to the FOS. However, it would require a very large number of new ombudsmen to be appointed if every case were to be dealt with by an ombudsman. In practice, investigatory powers are delegated, and the ombudsmen consider only that small minority of cases where a final decision is requested.
There are therefore up to three successive stages in the standard FOS procedure:
- The Customer Contact Division deals with initial enquiries. Although it does not investigate complaints, the advice and guidance it offers may lead to cases being resolved. If not, cases are referred to an adjudicator.
- An adjudicator investigates each case and explores whether it will be possible to bring the two parties to agreement through mediation or conciliation. If not, they will issue a 'view letter', setting out an opinion of the matter. Only around 10% of cases proceed beyond this point, but it is possible for either party, if dissatisfied, to ask for a review by an ombudsman.
- An ombudsman reviews the case and, if there are no prospects of successful mediation or conciliation, issues a 'final decision'. Less frequently, an ombudsman may issue a 'provisional decision'. This may be appropriate where, for example, an ombudsman intends to reverse the decision of an adjudicator, and wishes to give the parties an opportunity to make final representations.
The final decision of the ombudsman is binding on the business but not on the consumer. If the consumer decides to accept the ombudsman's decision, it becomes binding on both parties and can be enforced through the courts.
If the consumer decides not to accept the ombudsman's final decision, they can seek redress in the courts.
Decisions of the FOS can be directly challenged through judicial review. A full explanation is outside the scope of this fact file. However, it should be noted that the grounds of challenge are limited, and the challenge must be brought swiftly. In January 2011 the British Bankers Association, on behalf of a number of high street banks, brought a judicial review against the ombudsman's and the FSA's approach to PPI complaints handling. The High Court rejected the challenge and endorsed the approach taken by the FOS and FSA. In another judicial review, brought by an independent financial adviser, the judge clarified that the ombudsman is 'free to make an award different from that which a court applying the law would make'. This means that a business applying for judicial review in effect has to prove that the ombudsman's decision was so unfair that no reasonable person would have made that decision. This is known as theWednesbury unreasonableness principle.
If either party is unhappy with the practical details of how the FOS handled the case, they can bring a complaint to the FOS. In the year ending 31 March 2014, 2,847 such complaints were brought, 82% of which were resolved through the FOS's internal complaints procedure.
There is also an independent assessor who can investigate when either a complainant or a firm is dissatisfied with the service provided by the FOS. This cannot amount to a reconsideration of the original case, but the independent assessor can recommend redress when they think it appropriate. In the year ended 31 March 2014, 416 complaints were referred to the independent assessor, who in 23% of cases recommended that the FOS itself should pay compensation ranging from £25 to £1,000.
Decisions of the FOS may also be subject to indirect challenge on limited grounds. As noted above, a complainant who has accepted an ombudsman's decision has the right to enforce it through the courts. From two cases decided by the High Court in May 2007, it is clear that a regulated firm may defend such enforcement proceedings by arguing that the decision was one which the FOS was not entitled to take. The cases involved directions made by an ombudsman which would, in each instance, have cost the regulated firm more than £100,000 ‒ the maximum monetary award the FOS could then make under DISP. The court specifically declined to indicate whether such defences could also be raised on other grounds such as alleged bias or irrationality (Bunney v Burns Anderson plc and another; Cahill v Timothy James & Partners Ltd (2007)).
The FOS is not a regulator. Its role is to resolve the individual cases which have been referred to it. Nor do its decisions form binding precedents. Strictly speaking, therefore, neither the FOS nor regulated firms are obliged to follow earlier decisions when dealing with similar cases. However, many firms take the view that they should align their practice with that of the FOS. Doing so is likely to protect a firm's reputation, build customer confidence and lead to easier relationships with the FOS and the FCA.
One point of tension has been cases referred to the FOS which involve issues with wider implications, for example where it is known that a case being considered is just one of many involving similar circumstances. In such cases the FCA will wish to consider whether regulatory action is appropriate, and the firms concerned may wish to be satisfied that the FOS fully understands the wider implications involved. The FSO works closely with the FCA and other regulatory bodies to consider whether regulatory action is needed (see www.financial-ombudsman.org.uk/about/other_bodies.html).
Where a disagreement arises between a complainant and a firm, it will frequently be possible to reach a settlement through negotiation. In cases where negotiation fails, the complainant has the choice of referring the matter to the FOS or pursuing a case through the courts. The FOS offers a number of key advantages:
- Cost: The service offered by the FOS is free to the complainant at the point of use. With the courts, an unsuccessful claimant faces a risk of having to meet the costs of both parties.
- Inquisitorial process. Once a case is accepted for investigation, the FOS will carry out its own investigations to establish where the truth lies. This is in contrast to the courts, which decide on the basis of the arguments presented by the insurer and the complainant.
- Accessibility. The FOS has introduced a number of initiatives to make its service more accessible to complainants. For example, it provides publications in Braille, large print and on audiotape, and can make and receive calls using Text Relay. Informality. The processes operated by the FOS are informal and friendly. There is no need for a complainant to be represented, and in fact in most cases representation is discouraged. Nearly all complaints are decided on papers only ‒ in contrast to the courts where a hearing is the norm.
- Expertise. The FOS undoubtedly has more experience than the courts in dealing with the types of insurance dispute within its jurisdiction. Importantly, it may also be more aware of current issues within the industry. And it may have a better understanding of the problems faced by the consumer.
- 'Fair and reasonable'criterion. Perhaps most importantly, the FOS makes decisions on the basis of what is 'fair and reasonable in all the circumstances'. This is vital in insurance cases, since there is widespread agreement that in some respects insurance law is weighted heavily in favour of the insurer.
- Range of remedies. The FOS can provide remedies not available through the courts. For example, it may instruct a firm to reinstate a policy, or to rewrite it on different terms.
- No loss of rights. If a complainant is not happy with the decision of an ombudsman, they may reject it and pursue the case against the insurer through the courts. However, if the complainant accepts the decision, it is binding on the insurer up to £150,000.
Regulated firms are, of course, obliged to accept the jurisdiction of the FOS. However, there are advantages to the firms in doing so. There are the issues of expertise and cost already mentioned in connection with complainants. Arguably, however, the greatest benefit to firms is one of reputation. Consumers feel more confident about buying insurance, knowing that there is a robust and independent complaints system in place should anything go wrong.
Fraud during the claims process is a serious concern for insurers. However, the FOS has not always been happy with the way that they approach the issue. Its comments may usefully be considered in three stages:
- What is fraud?
- What evidence is required?
- What action should an insurer take?
The FOS believes that there are two essential components of insurance fraud:
- an intention to deceive;
- a desire to induce the insurer to pay more than the true entitlement.
Both components must be present for fraud to occur (Ombudsman News 21).
Like the courts, the FOS has had to address the problem of cases where a valid claim is made but where 'fraudulent devices', such as forged documents, are used to support it. So, for example, a policyholder may produce forged receipts to support a claim. This is not in itself conclusive evidence of fraud. Although the use of forged documentation is to be deprecated, the claim itself may be entirely genuine. In such circumstances there is no desire to induce the firm to pay more than the true value of a genuine claim. There is, therefore, no fraud. More rarely, it may be that the policyholder is unaware that the receipts are forged. Again, in such circumstances, there is no fraud.
An exaggeration is not always fraud. Nor is a genuine mistake regarding either the original purchase price or the replacement cost of a lost item. The FOS gives as an example the fact that many people believe their cars to be worth more than they are in reality.
The FOS states that the fact that members of the insurer's staff are personally convinced of the claimant's bad faith is not sufficient proof of dishonesty. This is no doubt a reference to the syndrome of 'the claims manager's nose'. Those who deal with claims on a day-to-day basis frequently believe that they have a feel for when a claim is fraudulent. Whether they are right or not, it is clear that they will not be supported by the FOS unless they are able to produce more objective evidence.
In particular, the FOS will expect to see two things:
- concrete evidence of lies, inconsistent statements or acts of deception;
- evidence of a desire to induce the firm to pay more than the true entitlement.
The latter requirement may be difficult to meet as it can require an analysis of the claimant's motives. It is advisable for a firm to carry out the necessary investigations at an early stage. By the time the matter is referred to the FOS, it may well be too late to uncover any new evidence and the claimant will have had ample opportunity to concoct an explanation.
The fact that the claimant may have lied in another context is not sufficient proof of fraud in a current claim. For example, a loss adjuster investigating the claim may draw the insurer's attention to the policyholder's conduct in connection with an earlier claim under a different policy. Such evidence may raise doubts about the policyholder's honesty, but it is not conclusive proof of fraud in the current case.
If an insurer suspects fraud it should make its views known to the policyholder, who may then respond to the allegations.
The FOS will not support an insurer which, suspecting fraud, uses a spurious technical reason to reject a claim.
If a firm can put together sufficient evidence to give a strong indication of fraud, the FOS may decline to deal with the complaint on the basis that it is more appropriate for the matter to be determined by the courts. This is particularly so where evidence from third parties is involved, since in a court evidence may be taken under oath, and witnesses may be cross-examined.
Fraud at the time of application or renewal may entitle an insurer to avoid the policy from outset.
Fraud at the time of claim will not entitle an insurer to avoid the policy from outset. There are instead two possibilities:
- If the fraud is perpetrated only in order to recover a genuine loss and does not affect the insurer's ultimate liability, then the policyholder will still be able to recover his losses and the policy will remain in force.
- If the fraud would affect the insurer's ultimate liability, or amount to a fundamental breach of contract, the insurer may forfeit the policy from the date of claim. This means that cover will cease and the claim will not be paid. It will not be able to recover payments made in connection with earlier claims in the absence of evidence of earlier fraud.
Financial Ombudsman Service
Telephone: 020 7964 1000
Consumer help line: 0800 023 4 567
The FOS maintains an impressive website, holding a large amount of information of interest to both complainants and firms. Some key publications are available in Braille and in some languages other than English. The following small selection will give some idea of the breadth of material:
- Each year, the FOS publishes an Annual review. This contains useful statistics, management reports and coverage of current themes in complaints.
- Since April 2001, the FOS has also regularly published Ombudsman News. Important issues are discussed and illustrated with anonymised case reports.
- Technical briefing notes are made available on specific issues ‒ for example, whether compensation is taxable.
- General guides are available for complainants and complaints handlers employed by firms.
Additionally, the FOS offers various information services:
- The Customer Contact Division provides information and initial guidance to complainants.
- The Technical Advice Desk assists firms and consumer advisers with technical matters and provides general guidance on how an ombudsman might view specific issues.
- The Outreach Team undertakes a range of activities ‒ including organising and speaking at seminars, workshops and conferences.
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.