Out-Law News 4 min. read

FSA in drive to improve complaints handling

The maximum compensation the Financial Services Ombudsman (FOS) can award consumers would increase from £100,000 to £150,000 under proposals put forward by the Financial Services Authority (FSA) last week.

The regulator and the ombudsman also want to streamline the process by which firms handle customer complaints before they are referred to the FOS.

The move is the latest step in the FSA's strategy for delivering credible deterrence for financial services firms and prompt and effective redress for their customers.

Launching a joint FSA/FOS consultation paper on 30th September, Sheila Nicoll, the FSA’s director of conduct policy, said:

“Good complaints handling standards should be the rule not the exception and complaints handling forms a key part of our intensive and intrusive approach to supervise how firms deal with their customers.

“While the FSA’s review into complaints handling by banks in April found some good practice, this is far from universal and it is clear that not enough is being done by senior management to prioritise complaints handling.

“We will continue to work closely with firms to help push up standards in this area and to deliver improvements in the way firms treat their customers and we have already referred two firms to enforcement as a result of poor complaints practices."

FOS limit

The current FOS award limit of £100,000 has remained unchanged since December 2001. The ombudsman can recommend firms make a payment above this amount but firms are not obliged to comply – although many do.

The FSA and FOS have decided it is time to bring the figure up to date. The new £150,000 limit would apply to complaints referred to the FOS on or after 1st January 2012, irrespective of when the act or omission complained of occurred.

Since the vast majority of FOS awards fall below the current limit, however, the FSA expects the change will affect only a few hundred cases a year.


The paper also proposes abolishing the "two-stage" complaints procedure in the FSA's Dispute Resolution Sourcebook (DISP).

Under current DISP rules, a firm receiving a customer complaint must send a written response within eight weeks (stage 1). If within a further eight weeks, the customer indicates he is not satisfied, the firm must send a final written response (stage 2). The customer has six months from the final response to refer the matter to the FOS.

The FOS is able to consider a complaint if a final response has been sent, or if eight weeks have elapsed since the firm received the complaint.

But, the consultation paper notes, the FSA's review of banks' complaints handling found three out of five banks had used the two stage process "in ways that could result in the unfair treatment of complainants". A separate review of complaints files at 31 insurers showed 13 of them using the process "poorly".

"We have therefore concluded that, while some firms use the two stage process appropriately, it is inherently prone to misuse, in particular because it effectively gives the firms an incentive to deal with complaints to a lower than satisfactory standard at the first stage on the basis that only a relatively small number of consumers will take their complaint further and the firm then has a second chance to rectify any shortcomings in the original complaint handling," the consultation paper states.

Under the new rule, which would some into force on 1st July 2011, the firm's first response would be its final response.


The paper also proposes new DISP guidelines to ensure firms have effective internal procedures for disseminating regulatory guidance and ombudsman decisions to their claims handling teams.

There will also be some additional guidance on firms' existing obligations to carry out root clause analysis of recurring of systemic problems. This builds on the FSA's recently finalised guidance for complaints about payment protection insurance (PPI) but will apply to all types of complaint.

The FSA acknowledges that these measures will need to be implemented in a way that is proportionate to the size of the firm. Firms of all sizes, however, will be expected to appoint a senior manager (a director or similar) with overall responsibility for complaints handling.

It is proposed that the new guidance would come into effect on 1st August 2011. 

Identity theft

The FSA has also asked for evidence about the number of consumers who suffer detriment because they are the victims of identity theft or mistaken identity but cannot bring a complaint to the FOS.

At the moment, if a debt-owning company continues to pursue an individual after it has become clear that the loan was obtained using a stolen identity (or because the individual has been wrongly identified as the debtor), the victim may not always be able to bring a complaint. 

If, for instance, the debt-owing firm employs a debt collector and the debt is a regulated under the Consumer Credit Act, the victim can complain to the FOS about the debt collector. But if the firm takes action to recover its own debt, no complaint can be made about the firm because the Act excludes debt collection by the debt owner.

Under DISP, the FOS can hear a complaint brought by a potential customer of a firm, but most people being wrongly pursued in this way would not have had any intention of becoming a customer.

There is also no available course of action if the debt owning firm has passed adverse information about the victim to a credit reference agency. In most cases, the agency will have acted in good faith on the basis of information received so cannot be held liable. Under current rules, however, the individual would not be able to bring an FOS complaint about the firm who passed on the information.

Once they have more evidence about the scale of the problem, the FSA and FOS will consider whether new rules are required. In the meantime, the current consultation closes on 31st December 2010. The final rules and guidance will be published in April 2011.

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