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Taking a long look at complaints

The Treasury recently published a consultation paper on the transitioning of complaints. This affects complaints that arise after the onset of FSA regulation of the mortgage and insurance markets on October 31 2004 and January 14 2005 respectively, but relate to transactions that took place before these dates.

The Treasury expects the Mortgage Code Compliance Board and the General Insurance Standards Council to wind down when FSA regulation commences, leaving a void in the handling of complaints. During the year ended April 2003, 102 complaints were heard by the Mortgage Code Arbitration Scheme with half of those cases being upheld. This compares with 9,710 complaints heard by the GISC Dispute Resolution Facility over the same period with 500 progressing to become formal complaints. Quite a contrast, but then the insurance market is far larger and more diversified, covering areas such as car, travel and extended warranty insurance.

The paper covers a number of situations where it is considered to be beyond the scope of the Treasury&#39s powers to impose a retrospective complaints handling regime and bring such complaints with the scope of the Financial Ombudsman Service. Interestingly, among the examples given is the case of complaints relating to MCCB or GISC firms that do not become authorised by the FSA. This might happen where the firm ceases regulated activities but concentrates on non-regulated sales such as secured loans and buy-to-let mortgages.

It also applies to firms that become appointed representatives and hence fall outside direct regulation by the FSA. It is the parent company, the principal firm, that is regulated and any sins committed in a prior existence by its ARs are not inherited by the principal.

This is understandable from a legal perspective but it means ARs can walk away from any complaints on cases arranged before they became ARs. As an AR, any future complaints will be handled by the principal firm. In short, by becoming an AR you wash your hands of complaints, both past and future. The Treasury also says that complaints about mortgages arranged before a firm become a member of the MCCB cannot be transitioned to the FOS.

Looking at the possible solutions for transitional arrangements the options are a) to do nothing, b) an industry-led solution and c) pass legislation to give the FOS automatic and compulsory jurisdiction over such complaints.

The paper says that an industry-led solution would raise issues of funding, organisation and enforcement and this is not pursued further in the consultation document. From that, we can safely conclude that the Treasury regards handing over jurisdiction to the FOS as the only viable option.

In the box on this page are summarised the arguments for and against transitioning complaints about mortgages. The benefit to consumers arise as mortgages are long-term products and therefore customers may realise they have been mis-sold a product only after several years.

The Mortgage Code is accepted as being good practice across the vast majority of the mortgage market. The level playing field argument is that when a broker comes within the jurisdiction of the FOS it will be subject to the same complaints regime as applies to mortgage lenders. Seamless transition means there would be no gap in the availability of complaints handling procedures and the reputation of the industry might be at risk if there were no credible independent mechanism for resolving allegations of mis-selling before October 31 2004 but which are made after that date. Finally, &#39continuity with N2&#39 refers to the position at November 30 2001 when FSA regulation commenced for a range of financial services and complaints made after that date relating to conduct before that date were transitioned to the FOS.

The Treasury then asks for suggestions as to whether there are any other arguments in favour of transitioning complaints from MCCB-registered firms.

Turning to the arguments against (see box), the first concerns the potential liabilities of firms who joined the MCCB being transitioned to the FOS, whereas firms that did not join the MCCB are off the hook. Not a particularly strong argument as only a small minority of mortgage firms operate outside the MCCB and those that did join knew the liabilities. The cost to business is assessed at £155,000 in the first year. This is a relatively modest sum and is one that is expected to decline in the future.

It is also said that the higher profile of the FOS might encourage more complaints from consumers. Well, that would rather depend on whether you believe that the FOS has any sort of profile among consumers. A snippet in last week&#39s Mortgage Strategy said that “more than eight in 10 respondents to an opinion poll had either never heard of, had heard of but knew nothing about, or knew just a little about the FSA”. So what are the figures for the FOS?

The possible wider impact of rulings is causing some concern within the industry, which is looking at precedents laid down by the arbitration services.

On the final argument about different processes, what do you expect from different organisations?

The Treasury then poses the question – what are your views on the arguments against transitioning complaints from MCCB-registered firms? A subtly different question from the one above. Makes you wonder if the Treasury has already made up its mind.

The paper also looks at the arguments for and against transitioning complaints for general insurance products. Pure protection, i.e. term assurance, falls into its usual black hole as it was not covered by the GISC in the first place. Consequently, as there never has been an independent mechanism for resolving such complaints, this is one of those situations where the Treasury feels it is beyond its powers to transition the complaints to the FOS.

The consultation paper, which can be downloaded from, has 16 questions and the response deadline is November 21.

To transition or not to transition

Arguments for transitioning mortgage complaints

• Benefits to consumers

• Good practice across the market

• Level playing field

• Seamless transition

• Continuity with N2

Arguments against transitioning mortgage complaints

• Incomplete market coverage

• Costs for business

• Profile of the Financial Ombudsman Service

• Possible wider impact of FOS rulings

• FOS and MCAS processes may differ


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