Cost of complaint

Although consumer associations welcomed the creation two months ago of the Financial Ombudsman Service (FOS), which has combined the ombudsman services of six financial services sectors including insurance, there are fears the new system will prove to be much more expensive for the insurance industry.

From 1 December last year, the FOS became the only ombudsman for complaints about financial products. Its aim is to establish a "single port of call" for complaints handling, making life easier for customers who have a financial grievance.

The FOS will step in to help resolve disputes, provided the customer has already complained to the company concerned and is still dissatisfied.

For insurers, a big difference is that, unlike the insurance ombudsman, membership of the FOS is compulsory.

Previously, insurers could choose whether to be part of a complaints-handling scheme, though most were. Some large companies, such as Co-operative Insurance Services and Bupa, were under the Personal Insurance Arbitration Service.

Another key point is that insurance companies, like other financial businesses, will have a statutory requirement to notify the number and type of complaints on a regular basis to the regulator. For insurers, this is currently the General Insurance Standards Council, although by 2004, they will probably be under the watchful eye of the Financial Services Authority. There will also be a legal definition of what is a complaint, not necessarily what the company concerned says is one.

Colin Darrell, quality service manager at Groupama Insurances, believes the new system will have a greater cost impact on insurers, largely because of society's increasing ability to complain. He says: "Costs are likely to rise proportionately."

Although the level of awards is still capped at £100,000 as under the former ombudsman, the new body's more proactive stance is likely to encourage more grievances.

As an example, the FOS requires that anyone writing to an insurance company is notified of the existence of its service. Leaflets from the ombudsman on how to escalate a complaint are sent with any insurance company's reply to a customer. "In fact we are rolling out the carpet for them to complain," says Darrell.

Not that Groupama wants to take a stand against the new body. Darrell says: "We see the changes as evolutionary, not revolutionary. We have taken on board that these are opportunities rather than threats to look to identify the problem and satisfy the customer."

More draconian
He adds: "The FOS is a different regime with a more detailed rule book. It is likely to be more draconian, but we don't take issue with that."

Jonathan Clark, business solutions director at Crawford & Co, agrees that costs may rise. "Responding to the changes will take some time and some investment."

But he adds: "While regulation has a bearing on cost, if you want to be assured of protection, it doesn't come free.

"Complaint handling is not an easy task. You have to train people and keep them up to date. What are you prepared to pay for? It's a market issue. One of the key things is to encourage a good attitude and avoid a blame culture."

But, according to the FOS, having a one-stop shop has brought down the average unit cost of a complaint from £730 in 1992 to £688 this year. "It is proving to be a lot cheaper," says an FOS spokesman. "Rather than having six separate systems, separate staffs, separate premises, it's all under one roof."

Efficiencies
The levy paid by companies to the ombudsman will be much the same as what they were paying to former complaint handlers. For insurers, the general levy is 0.1593p for every £1,000 of gross premium income. There is a complaint case fee levy of £360.

Insurers are generally in favour of the new set-up. Not that they had any reason to be unhappy with the old insurance ombudsman because figures show that, of the number of complaints resolved, two-thirds have been in favour of the insurer and one-third in favour of the policyholder.

The new regime will certainly be tougher. Under the insurance ombudsman, with its voluntary membership, non-compliance would lead to expulsion from the watchdog scheme.

"Failure to comply is a regulatory offence," says the FOS spokesman.

"For the first time a consumer will be able enforce an award in the courts automatically. Under the old system, if a firm had not paid, he or she had to begin all over again at a hearing."

However, insurers hope that complaints can be kept to a minimum and what grievances there are can be resolved in-house without recourse to the FOS.

Groupama's Darrell believes it is a question of making all employees aware of the complaints-handling process. "There must be staff training to reach competence in this area and identifying business improvements. I think all major insurers are already doing that."

Wrong ombudsman
Consumer bodies do not believe that insurers had a bad record in complaints handling, though they welcome the new regime. The National Consumers' Council believes the FOS should make for greater efficiency. "Under the old system, if you made a complaint to the wrong ombudsman, it wouldn't necessarily be passed on," said a council spokeswoman.

"The new FOS should mean less hassle for the consumer, and that bodes well."

Melanie Green of the Consumers' Association agrees. "Generally having one body is a good thing. There's a good referral system. It will be interesting to see what happens and how long it has to turn things round.

"The main thing is that a complaint is being dealt with speedily," she says. N

Who's who in the Financial Ombudsman Service
The Financial Ombudsman Service (FOS) was set up almost two years ago, but it was only on 1 December, 2001 that it officially became the single body for financial complaints.

The chief ombudsman is Walter Merricks and there is a 12-strong board, half of whom will change with effect from 23 February.

The chairman is Andreas Whittam Smith, founder and former editor of the Independent newspaper, and current president of the British Board of Film Classification.

His deputy is Brian Landers, chief operating officer at Pearson Education.

From February, managing director of Unum, Lawrence Churchill will be appointed to the board.

There were concerns about the fact there was no general insurer sitting on the board. The FOS said this is not important and would not be a disadvantage to the industry.

A spokesman says: "The board is responsible solely to appoint, and ensure the impartiality of, the ombudsman."

He adds that they act as a "buffer zone" between the financial services industry and the outside world.

The FOS has the power to make binding awards on firms, but it does not fine or in any other way punish them. That is the job of the regulator, be it the Financial Services Authority (FSA) or the General Insurance Standards Council (GISC).

Its remit covers most areas of finance, but there are some complaints it cannot deal with, including those concerning general insurance brokers.

It also does not get involved with what it considers to be firms' proper use of their "commercial judgment", for instance the amount of insurance premiums that a company charges.