As every TV and film buff knows, policing always involves a soft guy and a tough guy. When it comes to policing general insurance, it is no different. The soft guy is Chris Woodburn with his easy-to-comply-with General Insurance Standards Council. The tough guy is Walter Merricks, the Financial Services Ombudsman, with his punitive consumer complaints scheme.

Merricks, who was the insurance ombudsman until his appointment to the new super ombudsman, is adamant that customer complaints be dealt with by a firm hand. And he is very happy that intermediaries will come under his regime, even if on a voluntary basis under GISC and with a weaker initial scheme currently being negotiated.

"The big challenge to come is to make this a comprehensive scheme across the insurance industry. That was something I was keen on when I was insurance ombudsman. All we were able to do was open up the IOB to a very small number of intermediaries," he says. But the small number did include the giant Aon.

Merricks says consumers should be protected no matter how they buy their insurance. "A large number of consumers are unable to distinguish between an intermediary and an underwriter – and frankly, the way insurance is presented by many intermediaries is designed to obscure that distinction.

"Consumers don't want to understand the difference and it's all designed so that they don't have to. Given that there is a potential for error to rest with an intermediary rather than an underwriter, it's an opportunity that must be grasped now."

Who's to blame?

All of which could open up some interesting judgments. "If there is a complaint against both parties – underwriter and intermediary – the question will be how we attribute the blame, if we think that either is to blame," Merricks says.

But intermediaries need not be unduly worried. Research shows that only 15% of complaints are levied against intermediaries, while the bulk are directed at insurers. "Intermediaries are less used to dealing with complaints, but can better sort things out on a personal level."

And those insurers will have to implement a much more rigorous consumer complaints system under the Financial Services and Markets Act. The new regime will involve more than just the old DTI checks on solvency levels.

"Underwriters will have to have a much more structured sys-tem for handling complaints. The FSA rules will apply, and that will be new for general insurers. They will actually have FSA inspectors or monitoring officers coming around to see their complaint handling operations," says Merricks.

He and his crew have been working with the GISC to help establish an interim coding system until the ombudsman is ready to take intermediaries on board. It wants to establish its statutory role, which will commence in the spring, before taking on the voluntary role of regulating intermediaries.

But he has already identified that many insurance sellers coming under GISC could face problems – especially those selling a single-commodity product without going through a question-and-answer session with the customer to identify whether or not the policy is suitable.

"There are some policies, such as loan protection and travel policies, that are not sold by question-and-answers. They are sold as mass-market products, the danger being that they may be sold to unsuitable people or may be designed with so many exclusions and those exclusions are not pointed out," Merricks says.

As insurance ombudsman, Merricks regularly damned insurers for taking premiums and then relying on unexplained exclusions to avoid paying claims. He made clear that relying on the small print to get out of paying was unacceptable. "That is something that we have often commented on in the IOB report."

The real worry for intermediaries is cost. While some have demanded a complainant fee to prevent vexatious complaints, the big concern has been cost. But Merricks says the scare stories of £500 per complaint are nonsense. The funding regime will be a complex mix of general levy funding and individual complaint charges.

"Those who are part of the compulsory jurisdiction – insurers, banks and investment companies – will pay 50% of the cost of running the whole organisation by way of a general levy, which will be related to their size," says Merricks. "We found it impossible to do that, as we will have to have a different unit of measure for each area. So for banking, we will probably use numbers of accounts; for insurance, we will continue to use turnover; and for investment, we may have to use funds under management. The ABI has been very closely involved."

It is the other 50% that will result in case fees. "These will be related to cases against the firm. We will discover how many cases there have been during the course of the year. We will do it on a retrospective adjustment – we will take some money on account as it were, and then we will adjust at the end of the year, and say, 'OK, there have been 20,000 cases.' We will see who produced those cases, allocating 50% of the cost to those firms on a case-by-case basis. It's got to be paid for somehow, and it should remain a free service for people, so it's either that or tax payers' money."

In fact, Merricks gets more annoyed by claims that he can't be independent if he is paid for by the industry, than he does moaning from insurers: "Journalists often used to say this, and of course, we shall continue to be paid for by the industry. We are an approved statutory organisation – approved by parliament, which is the same way that judges are paid."

Merricks says the industry must face up to the reality that, like it or not, the ombudsman will hear complaints from small business. "The industry generally, and the IOB, were against the idea of small business claims coming in relation to insurance. But the FSA decided that they should – largely because they want to have a consistent definition across the board, so that we can have a single definition of who is eligible to complain."

"Some people say that a consumer-focused organisation shouldn't be taking sides between one business and another. On the other hand, you can also make the point that small businesses are now very often one man being encouraged to run from home, and every large business starts as a small business somewhere."

Merricks says there are plenty of examples on the life side. "Where an individual is complaining about the service from an IFA, or a small partnership is complaining about the service from an IFA, they are two evenly matched organisations. That is a different field, different from the original model where we are on the whole dealing with individuals complaining against large organisations."

What's in store?

Those facing numerous complaints will have more to worry about than who the complainants are or how much each complaint costs. The damage to their reputation and brand could be the biggest factor. The FSA is likely to end up publishing league tables – although it refuses to name them as such – of the companies with the most complaints.

"You measure by money. You measure by the number of complaints upheld. You are not wrong to assume that one day consumers will be given a lot more information about the standard of service from different financial service providers – and the service providers are anticipating that. It would not take a genius to imagine that the FSA may one day be tempted to publish that information," says Merricks.

And he expects there to be a fair few complaints. The new ombudsman scheme will be launched with a much higher profile and more publicity than anything that has gone before. Merricks expects to be inundated. "The problems for us will be problems of success," he says. It will be up to the industry to prove him wrong.