CML news & views

The newly published Annual Review of the Financial Ombudsman Service (FOS) focused on a number of important issues for lenders. While the number of general complaints about banking and payment protection insurance (PPI) rose, there was a sharp drop in the caseload of complaints about mortgage endowments, which once accounted for more than half of the FOS’ workload. Meanwhile, the recently published report into the FOS following Lord Hunt’s review contained a number of recommendations to improve the scheme, reflecting arguments we put forward in our submission to the review.

Complaints about mortgage endowments fell by 70% in the last year. At 13,778 – down from more than 46,000 in the preceding year – the number of endowment complaints was less than half the number originally predicted by the FOS, and is now comparable with levels last seen five years ago. 

The huge drop in endowment complaints in 2007/08 is even more remarkable as it comes against a backdrop in which there was a 30% increase in the number of cases about all financial products referred to adjudicators and ombudsmen, according to the Review, published at the end of last month. 

Last year saw large increases in cases about bank charges (up to 31,618 from 3,285 in the preceding year) and credit cards (up to 14,123 from 3,285 the year before).  And while there was a sharp fall in complaints about mortgage endowments, the number of insurance disputes doubled and banking complaints trebled.

Mortgage endowments

Endowment complaints accounted for 11% of the workload for adjudicators and ombudsmen, compared with 49% (46,134 cases out of 94,392) in the preceding year. By the final quarter of the year, mortgage endowment complaints represented only 8% of the total. 

The FOS said the fall in mortgage endowment complaints was “significant.”  Its Review said: “It indicated that we were at last in a position to take stock and plan a future course in a world no longer dominated by mortgage endowment complaints.”  The reduction in the mortgage endowment workload meant that, for the first time in its short history, the number of staff employed by the FOS actually declined over the last 12 months.

Complaints about mortgage endowments peaked in 2005 and 2006 with annual totals in those years of almost 70,000. In 2005 and 2006, complaints about mortgage endowments accounted for more than 60% of the FOS’ workload. At one stage, the FOS was receiving over 250 mortgage endowment complaints every working day.

It attributed the sharp fall in the number of complaints primarily to the impact of ‘time-barring,’ a process by which policyholders are prevented from complaining because they had failed to do so within three years of receiving their first warning letter. In the end, a potential rush to complain before the deadline failed to materialise.

The Review said that working out how customers should be compensated for mis-sold endowment policies was becoming more complicated in cases where they had taken a range of actions – such as redeeming their mortgage or switching to a repayment loan – before bringing their complaint to the FOS. But the ombudsman re-iterated that, where it upheld a complaint, its over-riding principle was to put the consumer back where they would have been if the policy had not been mis-sold.

Partly as a result of the growing complexity of cases, the number of mortgage endowment disputes that could only be settled by formal decisions by ombudsmen more than doubled in the year – totalling 3,705, compared with 1,802 in 2006/07.

Claims-management firms

Claims-management companies are continuing to target mortgage endowment customers, the Review said. Cases involving mortgage endowments comprised one-third (33%) of all claims submitted by these firms, the largest category overall. 

The FOS believes customers should not need the help of these firms, which usually take a significant proportion of any compensation due to the complainant. It decides cases on facts, it stressed, not the way they are presented. It also prefers to hear from customers in their own words. In his review of the FOS, published in April, Lord Hunt argued strongly against the introduction of fees for complainants, which would “damage accessibility comprehensively.” But he did favour the introduction of fees for vexatious claims submitted by claims-management companies.

Mortgage complaints

Complaints about mortgages other than those related to endowments totalled 6,824, or 5.5% of the total. Mortgages were the subject of 10% of all complaints about banking and credit. Meanwhile, the number of complaints about unsecured loans rose for the fifth year in a row. There were 2,940 in the most recent year, compared with 1,755 in the preceding 12 months.

The number of complaints about mortgage exit administrations fees (MEAFs) fell, as predicted by the FOS in its Review last year. Although it continued to receive some complaints about MEAFs, the FOS said the number had fallen since the publication of a statement of good practice for mortgage lenders, agreed between the FSA and the CML. We continue to believe, as does the FOS, that fees and charges – and the basis on which they may change – should be clear up front. 

Mortgage arrears

In its Review, the FOS said there had been an increase over the last year, from a low base, in the number of disputes about administration fees related to mortgage arrears. But given that, over the same period, there has been rise in the number of cases of mortgage arrears, an increase in the number of complaints could be expected. 

The FOS questioned whether, in some cases, any arrears administration was actually necessary, particularly where the customer is keeping to an agreed repayment schedule. It also said there had been a rise in complaints about the way lenders were handling arrears problems, with an increase in disputes about the way lenders communicated with customers and their willingness to be flexible. All the points made by the FOS will need to be considered carefully by lenders operating their arrears management processes.

However, the FSA’s mortgage conduct of business (MCOB) rules impose a requirement on firms to make and keep an “adequate record” of their dealings with a customer in arrears. The reality is that, unless a borrower pays the administrative costs arising from their arrears, those costs could end up being borne by other customers, who are keeping up with their mortgage payments. 

We believe it is important that borrowers facing arrears should be clearly informed about their lender’s particular processes. We are encouraging firms to make sure they have clear information on arrears management and their commitment to treat customers fairly. 

Our view is that the essence of fair treatment for customers in arrears is for firms to ensure that their processes are tailored to the borrower’s circumstances, within the scope available commercially to the lender.

Payment protection insurance

Complaints about PPI increased significantly towards the end of the year, following a gradual build-up earlier. In fact, there were more complaints in the first three months of 2008 than in the whole of the preceding year. There was also a significant rise in complaints using standard letters and templates from newspapers and “reclaim” websites. 

An increasing proportion of complaints focused on how PPI policies were sold, rather than instances in which claims were turned down by insurers. There were complaints from customers who claimed they had not asked for a PPI policy, or were not aware that they had been sold one. Other customers had been told they had to take out insurance, even though they did not want it. And some said that the exclusions that would make them ineligible for cover had not been properly explained to them.  Single-premium policies were also a source of complaint.

The upsurge in complaints coincided with growing scrutiny of PPI by consumer groups, culminating in a Competition Commission inquiry into the sector. We argued against the inclusion of mortgage PPI in the inquiry because there are some significant differences between this product and other types of PPI. At a time of rising mortgage arrears and possessions, mortgage PPI can make an important contribution to protecting vulnerable borrowers.

Our arguments were partly vindicated by the FSA when it published its review of PPI sales standards last autumn. It concluded that sales of regular premium PPI with prime mortgages were more likely than other types of protection insurance to have met sales standards and to have been based on a proper assessment of the customer’s needs. The Competition Commission is expected to publish the provisional findings of its inquiry on 5 June.

The Hunt review

Our submission to the review of the FOS overseen by Lord Hunt made a series of recommendations for improving the service, including:

• consideration to the possibility of sifting out in the early stages those cases which were unlikely to be upheld and where it would therefore be unnecessary to charge a full case fee;
• exploring the scope of the FOS to commit to service levels and timescales in handling cases;
• stronger advice to customers to direct their initial complaint to the relevant firm, and only go to the FOS if they were not satisfied with the firm’s response;
• the need for the FOS to address the perception that it is the consumer’s champion;
• the need to re-assure firms that the FOS was even-handed in its approach, and that its decisions were consistent; and
• the need to strike a delicate balance between giving firms further information about how cases had been decided and setting precedents that could be misunderstood by consumers and firms.

Review findings

In April, Lord Hunt published a comprehensive report as a result of his review.  Among the 73 recommendations were a number reflecting points we had made in our submission, including the need for:

• the FOS to work harder to achieve demonstrable consistency;
• greater transparency to avoid accusations that the FOS was “making it up as it goes along;”
• regular, independently edited selections of anonymous case reports;
• improved interaction between the FOS and regulators (given that some of the ombudsman’s workload is created by regulatory action or inaction);
• prompt regulatory action to find generic (or, if necessary, statutory) solutions to cases with wider implications; and
• moving as quickly as possible to a general policy of not charging a case fee in all cases found to be outside its jurisdiction, even if investigation was needed to establish this fact.