IFAs could see a rising compensation culture if more consumers believe they can only expect justice from financial firms with a lawyer by their side, warns the Financial Ombudsman Service.
Speaking at a conference for IFAs last week Walter Merricks, chief ombudsman, expressed concern the existence of FOS could encourage an "unhealthy propensity" among consumers to demand redress for every perceived loss. He told the IFA audience: “I don’t see that an unhealthy situation has developed – yet. But there are some warning clouds on the horizon.”
Merricks said while most people have a genuine reason for complaining, there is a “growing public notion that you cannot expect justice from a financial firm without a lawyer or a claims specialist on your side”.
Emma Parker at FOS says this notion could arise if firms do not deal with consumers’ complaints appropriately and their confidence is undermined.
“We are not seeing a compensation culture now but ultimately if consumer confidence is undermined consumers might go to third parties,” Parker explains.
Merricks said the industry and its customers would pay a high price for such a development because “a legitimate and profitable business sector, making money out of ensuring that consumers are not wrongly fobbed off, will be here to stay”.
He pointed to the growing number of advertisements on TV and airlines which offer consumers compensation for a mis-sold endowment.
Merricks believes the development might also affect the relationship between financial advisers and their customers – instead of being built on mutual trust and fairness, the relationship may become adversarial.
Moreover, Parker points out many IFAs can prevent complaints by speaking to their customers and resolving issues, whereas complaints handlers could act as a screen between IFAs and consumers resulting in more complaints to FOS.
The development could also affect the nature of FOS’s service as Merricks said it “affects the level of informality that we aim to offer in the service we provide – and this makes handling disputes more legalistic and hard-fought".
“Already we are seeing an increase in the judicial review challenges made by firms, perhaps under pressure from the claims being made against them,” he added.
Parker believes it is important for FOS to hear complaints from the consumers themselves so they can work out the whole story and decide whether the consumer understood the advice given.
Merricks said the treating customers fairly (TCF) initiative should improve the way financial firms intend to treat their customers and help avoid an adversarial relationship between advisers and their clients.
However, he added TCF will not affect the way FOS decides individual complaints because its role is “to decide, in the particular circumstances of a particular complaint, whether an individual customer has been treated fairly or not – taking into account the law, the FSA’s rules and good industry practice”.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7968 4554 or email [email protected].IFAonline
Despite improved risk appetite
FOS award limit increase
Relates to 136 million transaction reports
Ceremony will take place 13 November