The number of new cases referred to the FOS in the last financial year outstripped its own estimates by 40%, according to its annual review for 2008/9. And nearly 60% of the complaints it handled were found to have been justified.
The FOS deals with complaints from consumers against companies that provide financial services, such as banks, building societies, financial advisers and insurers. It also handles complaints brought by small businesses, charities and trusts, although the vast majority of its cases are from private individuals.
Many of those claims are the result of single-issue consumer campaigns on topics such as payment protection insurance (PPI).
Of the 127,471 new cases received by the FOS between April 2008 and March 2009, 30,000 were PPI-related, a three-fold increase on the previous year.
Most complaints related to PPI mis-selling, rather than claims made under PPI policies. And most of those related to single premium PPI, where the premium is added to the loan and interest is charged on the premium and the loan together. But the ombudsman has also seen a significant number of cases relating to PPI sold alongside credit cards.
Overall, the FOS upheld consumer complaints in a record 89% of PPI-related disputes.
In June 2008, faced with the fast-growing number of PPI complaints, the FOS asked the Financial Services Authority (FSA) to consider whether it should take regulatory action to address the problem at a higher level.
Earlier this year, the FSA asked firms to stop selling single premium PPI alongside personal loans by the end of May 2009. And radical changes to the way PPI is sold are due to come into effect in 2010, following a Competition Commission investigation into the market.
FOS chairman Sir Christopher Kelly said that the high volume of complaints about payment protection insurance was especially disappointing. "We had hoped that action by the regulator might result in the collective resolution of large numbers of complaints without the continuing need for consumers to refer individual cases to us," he said.
Complaints about other types of insurance also increased. Buildings and contents insurance disputes, for instance, were up by 29% and 23% respectively. The report suggests the economic climate means that policyholders are putting in more insurance claims and insurers resisting them more vigorously.
Complaints about health and medical insurance, however, remained at similar levels to the previous year. The FOS attributes this to improvements in the way insurers deal with income protection and critical illness disputes and, in particular, to the Association of British Insurers' new code of practice relating to non-disclosure and long-term protection policies.
The report says the code has resulted in fewer cases about non-disclosure of a consumer's medical history being referred to the FOS and that, in those cases it does see, it is agreeing more often than before that the insurer acted fairly.
Outside the realm of insurance, complaints about credit cards rose by 32% and investment disputes were up 30%, triggered largely by falls in the stock market. There were also large numbers of cases relating to mortgages (up 11%) and unsecured loans (up 44%).
Given the current economic climate, Chief Ombudsman Walter Merricks said the increase in the number of cases reaching the FOS was perhaps no great surprise.
"But what is new and very disappointing is that, of the complaints we have handled, we have found a record proportion – almost six out of ten – to be justified," he said.
Under FOS rules, the consumer must first make a complaint to the business concerned, giving it the opportunity to resolve the dispute before the matter is referred to the FOS. If a business finds it is receiving a series of complaints about the same issue, the FOS expects it to identify the root cause of the problem and take pro-active steps to address the situation.
At a regulatory level, the FSA and the Office of Fair Trading have powers to address "systemic issues" that have resulted in widespread detriment to consumers.
As a result of this system, the FOS would normally expect to decide between 30% and 40% of cases in the consumer's favour. But Merricks believes the very large number of complaints now being upheld shows the complaints-handling framework is not working as well as it should.
Legislators in both the UK and Europe are currently considering ways of enabling more consumers to obtain compensation via class actions where there has been widespread consumer detriment. These include adopting a system that would enable collective actions to be brought on behalf of all consumers adversely affected, not just those who had opted to take part in the litigation.
Commenting on this proposal, Merricks says in the report: "While this may not be a universal – or even an appropriate – remedy for all instances of widespread detriment, it does focus on the core of the bigger problem rather than on the detail of individual cases.
"There are other possible redress mechanisms that could be considered. But what is clear is that the present system for dealing with large areas of unremedied consumer detriment is in need of reform.
"A solution to the problem would reduce the volatility of the ombudsman service's workload, adjust unrealistic expectations of what we can be expected to deliver, and ease tensions between the financial services industry, its regulator and its ombudsman.
"Above all, it would be a real step towards re-establishing the confident of consumers in financial services," said Merricks.