Watfchdog Bares Its Teeth

From December 1^st we should all sleep easier in our beds. That is the date when the Financial Services Authority – which began life as long ago as October 1997 – takes on its full powers and finally regulates just about all the financial deals that we might do. Investment, insurance, loans and banking will all be supervised by one body and, if things go wrong, there will be one system for complaining and seeking compensation.

Creating the FSA was one of the first promises made by the new Labour Government after it came to power in May 1997. Chancellor Gordon Brown explained that the existing system was "not delivering the standard of supervision and investor protection that the industry and the public have a right to expect." And he said he was "committed to reform…to reduce the chance of events such as the mis-selling of personal pensions happening again."

That scandal, which involved more than a million people being wrongly advised to move from a company pension to a personal pension between 1988 and 1994, was firmly blamed on the previous Conservative Government and its lack of tough controls over the financial services industry. Ultimately it is expected cost the insurance industry £13.5 billion in compensation and administration.

The following spring Treasury Minister Alistair Darling promised "a regulator which commands the respect of the industry and enhances public confidence. The Financial Services Authority will become the role model for the future." Over the next four years the FSA took on more and more duties as it absorbed other organisations or began to act for them on licence. Now, finally, on December 1^st it takes on its full powers. So what difference should we expect?

In the past if you wanted to complain about a financial service there were eight separate ombudsman and conciliation schemes, all with different rules. Now they have all been unified into one – the Financial Ombudsman Service. It is not part of the Financial Services Authority, but it comes into being on the same day and is created by the same legislation.

The Ombudsman can deal with complaints about any financial services company, such as a bank or investment company, which is registered with the FSA. For example, you may have been sold the wrong product, or sold something without the risks being explained. Or you may just feel that your bank has mishandled your instructions over a direct debit or standing order. The Ombudsman can only deal with complaints about companies and products which are regulated by the FSA.

If you feel you have a complaint the first thing you have to do is put it writing direct to the company concerned. It then has two months to resolve the dispute. Sometimes your complaint will be dealt with to your satisfaction. But if you and the company cannot agree, or it takes more than two months, then you can take it to the Ombudsman. At this stage the company should make it clear that the matter has reached what is called ‘deadlock’. You then have six months from the date of that letter to take the complaint to the Ombudsman.

In many cases the Ombudsman will resolve the problem quickly by finding a compromise acceptable to both sides. If that is not possible then the case proceeds to a formal investigation and ultimately the Ombudsman will give a ruling which can include compensation to the customer. Once the ruling has been made the company has to follow it – or try to challenge it in court. The Financial Ombudsman Service is free. You do not need a lawyer to argue your case – though if you want professional help you will have to pay for it. If you disagree with the ruling or the compensation ordered then you can still go to court, though that is likely to be expensive and time-consuming.

There is also a new system for complaints about the way the Financial Services Authority has done its job. If you believe you have suffered financial loss because of maladministration by the FSA itself after December 1 2001, then you can put your case to the Complaints Commissioner, Rosemary Radcliffe. Individuals and regulated companies can complain to her. The first stage is an internal investigation into the complaint by the FSA. If that is not satisfactory then the Commissioner will carry out a full investigation. She can tell the FSA to pay compensation. It is not bound by her rulings, but it is very unlikely to refuse to follow them.

Sometimes a financial company goes out of business leavings investors out of pocket or insurance claims unmet. Before December 1^st there were eight separate compensation schemes which paid compensation if a bank, building society, insurance company, or investment house was unable to meet its liabilities. Now there is one scheme, the Financial Services Compensation Scheme, with a common set of rules. The maximum amount of compensation for the loss of money which is on deposits in a bank and building society – in the unlikely event of it going bust – has been raised from a £18,000 to £31,700 – on a joint account each party can get this amount. The maximum for a claim on an insurance policy that is not met by the insurer has been raised from 90% of the total to 100% of the first £2000 and 90% of the rest. If an investment company goes bust then the maximum compensation remains at £48,000. You normally have to ask for compensation within six years of the company going out of business.

The FSCS publishes lists of companies that have gone out of business and whose customers can claim compensation. Only companies that were registered with the FSA are covered by the compensation scheme. So if you have any doubts about a firm or a person offering you financial products, the first thing to do is to check if it is registered by ringing the FSA helpline 0845 606 1234. If they are not registered they are committing a criminal offence and you should not, of course, have anything to do with them.

The Financial Services Authority has four legal obligations

· Maintaining confidence in the financial system

· Increasing public understanding

· Protecting consumers

· Preventing crime

The bulk of its work is in registering and licensing 22,000 companies who can carry on financial business. From December 1 any company selling financial products or services will normally have to be registered with the FSA and tell you so on its letterhead and any printed material. If it does not, then ask why. Some products, such as car or home insurance and mortgages – as well as the brokers who sell those things – are excluded. Credit unions become regulated next July. And mortgage providers – but not brokers – will be included sometime after September 2002.

The FSA also produces some very useful information which explains financial products and how they work with advice about how to protect yourself when you invest or buy them. Its website can help you decide if a particular kind of product is right for you or not – you enter your details in what it calls a ‘decision tree’ and it will tell you, for example, if a stakeholder pension is right for you. It will not recommend a particular product but it is beginning to produce a series of comparative tables showing the costs and basic information about similar financial products from a whole range of providers – for example unit trusts or pensions. That can help you make comparisons and choose the best product. The tables do not contain information on the past performance of investments as FSA research shows that is virtually useless as a way to choose a good performer in the future. However, this information is available from other sources such as the monthly magazine MoneyFacts.

Whether the FSA has done a good job protecting consumers is a matter of debate. During the last four years there have been three more major financial scandals have emerged – endowment mortgages and free-standing additional voluntary contributions (FSAVCs) have been mis-sold to millions of people. And of course Equitable Life has foundered, slashing the value of the pension funds of more than a million savers (see Saga Magazine September 2001). In 2001 alone three insurance companies went bust and the FSA has been criticised for failing to act over the difficulties at Marconi and Railtrack which left hundreds of thousands of individual shareholders out of pocket, and harmed the savings of millions more through their pension funds or unit trusts. The FSA has always said it does not operate a ‘zero-failure’ regime. But there is some concern that its job of protecting consumers is in conflict with the need to maintain confidence in the financial system.

The FSA costs nearly £200 million a year and employs more than 2000 people. Now it has its full powers, we can only wait and see if it becomes the tough and effective financial regulator that the Government promised in 1997.

FURTHER INFORMATION

Financial Ombudsman Service 0845 080 1800 

Financial Services Compensation Scheme 020 7892 7300

Financial Services Authority 0845 606 1234

Complaints Commissioner 020 7712 1576 

MoneyFacts 01603 476 476

EQUITABLE LIFE UPDATE – FSA BOSSES FINED

Three directors of the Financial Services Authority – including its chairman Sir Howard Davies – had their pay docked by the FSA Board because of failings in their handling of the crisis at the life assurance company Equitable Life. Sir Howard made the revelation in an interview with Money Box on Radio 4 in the week that the Government published a highly critical report about the way the FSA dealt with the Equitable crisis. It said the watchdog had failed to be alert, misunderstood the risks to new customers, and was ill-prepared for the outcome of the court case which led to Equitable closing for new business in December 2000. Sir Howard Davies said his performance related pay had been cut by £13,900 in 2000/01. Two other directors, Michael Foot and Philip Thorpe, each lost £8850. Despite these fines their overall pay rose – Sir Howard got £341,014 and the others £277,504 and £279,245 respectively.

December 2001

e-mail Paul Lewis on paul@paullewis.co.uk