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| Financial Law Update | Back to article summary. |
| Financial Services Ombudsman publishes first set of decisions | ||
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| The Financial Services Ombudsman has been steadily extending his authority across the financial services sector this year. Starting on 1 April 2005 with Credit Institutions and the Insurance Sector he has since added Credit Unions (1 August 2005), Mortgage and Insurance Brokers (1 October 2005), Moneylenders (1 November 2005) and all others (including non-regulated financial services providers) will be added on 1 December next. | ||
| The Financial Services Ombudsman has been steadily extending his authority across the financial services sector this year. Starting on 1 April 2005 with Credit Institutions and the Insurance Sector he has since added Credit Unions (1 August 2005), Mortgage and Insurance Brokers (1 October 2005), Moneylenders (1 November 2005) and all others (including non-regulated financial services providers) will be added on 1 December next.
The Ombudsman, Mr Meade, has been in the news recently as on 25 October he published an interim report covering his decisions from April to September. The report is short (nine pages) and concise in format. It covers a number of interesting cases all of which provide some useful generic lessons for anyone in the financial services industry irrespective of the particular sector they are in. More detail on these cases is set out below. What is the Financial Services Ombudsman?
The Ombudsman is appointed by the Financial Services Ombudsman Council. The Council comprises ten people appointed by the Minister for Finance and drawn from the various industry and consumer interests with an independent Chairperson. Its function is inter alia to prescribe guidelines and regulations under which the Ombudsman is to operate, keep under review the efficiency and effectiveness of the Bureau as well as to advise the Ombudsman on any matter on which he seeks advice. What Powers does the Ombudsman have? A decision of the Ombudsman is binding on the parties involved subject only to an appeal to the High Court. The Ombudsman may direct the provider to do one or more of the following: The Ombudsman has extensive legal powers to require product providers to supply information including the power to require employees to provide information under oath. If necessary, the Ombudsman can enter premises of providers and demand the production of documents etc. He can also examine the witnesses. Anyone who obstructs the Ombudsman commits an offence and is liable to a fine of up to €2,000, imprisonment for three months or both. If a provider fails to comply with a direction, the Ombudsman or the customer may apply to the Circuit Court for an enforcement order in respect of the direction. The customer or product provider concerned may appeal to the High Court against the finding. Who can use the Ombudsman Service and what for? All natural persons, limited companies with a turnover of €3 million or less (SMEs) and all unincorporated bodies, including clubs, charities, trusts, partnerships etc. can avail of the Ombudsman Service. The matters that can be complained of include: In order to make a complaint the customer must have previously communicated it to the provider concerned and must have given the provider a reasonable opportunity to deal with it. A customer is not entitled to make a complaint to the Ombudsman when the conduct complained of is or has been the subject of legal proceedings before a court or tribunal, it occurred more than six years ago or relates to a matter that is within the jurisdiction of the Pensions Ombudsman. The case studies An elderly couple awarded €56,000 compensation because of an unsuitable high risk investment. In this case an elderly couple invested €127,000 which, after four years, was worth just €34,000. They complained that the Financial Service Provider had failed to discharge its duty of care by recommending an investment which was completely unsuitable to their circumstances. The couple were approaching 70 years of age and the husband was suffering from a severe disability. In these circumstances, the Ombudsman felt that a high risk investment was unsuitable and should not have been recommended by the provider. The Ombudsman considered too that there was a failure on the part of the provider to explain properly the extent of the investment risk and awarded them €56,000. The couple did not receive their entire losses back as the Ombudsman felt that the couple, when they made the investment, must be taken to have accepted a degree of risk to their capital sum. Fall in investment value of an 80 year old person’s joint investment not upheld. In the first case the elderly couple did not receive all of their losses back. In this second case the Ombudsman clearly demonstrates that individuals must take responsibility for their actions and the Ombudsman scheme is not a mechanism for unwinding bad investment decisions. In this case a customer who invested €120,000 in an Investment Bond found that after two years it had fallen in value by 26%. It was alleged that the Bank was negligent in selling investment policies which were not appropriate to her circumstances and the Bank should be made responsible for the loss which occurred. The main customer in this case was a lady aged over eighty years. However, the account was jointly held with her son, who was closely involved in the discussions and the decision making process concerning the investments. He also had had previous experience in investing in medium high risk investments at the same Bank. Following investigation, the Ombudsman observed that although the investment had been made in a medium-high risk bond, he found that the information that the investment could go down as well as up was clear from the information brochure which the customers had seen and read and the customers had been fully advised as to the nature of these investments in discussions with the Advisor. On the basis of the evidence he had seen, the Ombudsman did not consider that the Bank was in any way negligent in selling this investment product to these customers. The evidence showed that the customers themselves had elected to take up this particular investment from a number which had been offered to them. The Ombudsman came to the conclusion that the investment policy sold was not inappropriate to the customer’s circumstances and that the customers had been fully aware that there was a considerable element of risk in the product and he found no negligence or failure of duty on the part of the Bank. Lessons These cases demonstrate the importance of following the correct sales procedure, and using documentation with the appropriate warnings and caveats. They also demonstrate that, assuming there is no actual negligence or mis-selling on the part of the provider, the fact that an investment does not perform as hoped is not itself a reason for compensation. Though this interim report does not give names of the providers concerned the Ombudsman may do so in his annual report. However Mr Meade has indicated that he would only do so in respect of organisations that were not co-operative, where the situation was very grave and where the customer suffered at the hands of a poor complaint handling procedures in the institution. Summary The Financial Services Ombudsman is an important new statutory dispute resolution service. The Ombudsman has significant powers and can make awards for quite substantial sums. The fact that such an interim report has been made is to be welcomed as it affords compliance officers, legal counsel as well as management in all sectors of the financial services industry an opportunity to review the cases considered and apply any lessons to their own organisations. ญญญญญญญญญญญญญญ Further information on the firm is available at www.mop.ie. |
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Joe Beashel is a partner in the Banking and Financial Services Department at Matheson Ormsby Prentice and is Head of the firm’s Regulatory Risk Management and Compliance Group. He can be contacted by phone: +353 1 619 9000 or by email: joe.beashel@mop.ie |
