Are we once again facing the spectre of retrospective application of standards?
On 21 November, the Treasury's consultation period will close on the issue of what to do about complaints during the hand over from GISC to the FSA. There are strong rumours that it will propose an immediate transition for all business into the Financial Ombudsman Service (FOS) after GISC closes.
So, what exactly does that mean? Well, GISC will close its doors on 13 January 2005, and with it its disputes resolution service. The Treasury is concerned for those customers with complaints that arise after 13 January, but relate to the period during which GISC was its members' regulator.
Insisting that the FOS automatically takes over seems a little heavy handed. After all, GISC remains a voluntary regulator, and therefore there are large customer groups who have not had the benefit of its service because their insurance supplier chose not to sign up. Yet the Treasury is only proposing such a move for ex-GISC members. What about members of other voluntary regulators, such as IIBRC? Surely expiring GISC members should be given an option? The Treasury didn't seem too worried about orphaned complainants when it closed down IBRC - there were no transition arrangements made then.
Don't get me wrong, I've nothing against the principle of a complaints procedure, and I'm sure it's very laudable to suggest this apparently simple step - until, that is, you start to dig a little deeper. The GISC service is free to both the complainant and the firm being complained about. As we all know, the FOS makes no charge to the complainant but charges a non-refundable case fee to the firm which is the subject of the complaint.
The FOS is also going to have to try to take into account the regulations under which the policyholder purchased his policy, and ensure its judgment is based on that and not the new FSA rules. But if you talk to IFAs who have had dealings with the FOS for endowment mortgage sales, you'll begin to understand why this might seem a little naive. The FOS's track record of applying new standards to old sales is well documented in this area, and many IFAs feel understandably aggrieved. In 1990 the regulations simply required IFAs to furnish the customer with a quotation which contained the appropriate warning that the endowment's performance was not guaranteed. Today, however, the requirement is more stringent, and the customer has to be specifically and separately given this "health" warning.
Unfortunately, the FOS invariably applies today's standards to old sales, justifying it by suggesting to IFAs that, once the rules changed they should have revisited all their old files to check they were still compliant.
There are other practical difficulties too. The FSA's professional indemnity (PI) requirements require cover for the ombudsman's awards, but only from January 2005. How will PI underwriters view providing cover retrospectively for past demeanours, I wonder?
Of course, if brokers volunteer for the FOS early, as some pundits predict (suggestions that as many as 500 brokers might subscribe before 2005), then this will be helpful, but will not solve the problem. And I do wonder how many brokers will actually volunteer? Far fewer than 500 in my view.
I can't pretend that there is an easy solution to this one, but I am certain that imposing an inherently unfair "catch all" on only a segment of the market is not the answer.