A growing and efficient market in financial services depends, amongst other things, on consumer confidence. Developing consumer confidence requires effective:
- prudential regulation, to ensure that financial businesses are financially sound and run by fit-and proper people;
- conduct of business regulation, or effective self-regulation through industry codes, to ensure financial businesses treat consumers well;
- arrangements to provide appropriate protection to consumers if a bank or other significant financial business becomes insolvent;
- accessible and user-friendly arrangements to resolve disputes between consumers and solvent financial businesses; and
- measures to create confident consumers, by increasing their financial capability through public information on financial issues and on their rights and liabilities.
The G20 High Level Principles on Financial Consumer Protection, adopted by the Organisation for Economic Cooperation and Development (OECD) in October 2011, include :
“Jurisdictions should ensure that consumers have access to adequate complaints handling and redress mechanisms that are accessible, affordable, independent, fair, accountable, timely and efficient. Such mechanisms should not impose unreasonable cost, delays or burdens on consumers. In accordance with the above, financial services providers and authorised agents should have in place mechanisms for complaint handling and redress. Recourse to an independent redress process should be available to address complaints that are not efficiently resolved via the financial services providers’ and authorised agents’ internal dispute resolution mechanisms. At a minimum, aggregate information with respect to complaints and their resolutions should be made public.”
In focusing on resolving disputes between consumers and financial businesses, a 2012 World Bank report draws on experience in the developed market of western Europe in order to identify considerations that are likely to be relevant elsewhere.
Information on conditions across all consumer sectors in the European Union – in the European Consumer Conditions Scoreboard (fifth edition, published March 2011) – shows that consumers and businesses throughout the EU find it easier to resolve disputes through ombudsmen and other ADRs rather than through the courts.
The need for effective ADR through a financial ombudsman is supported by nine previous World Bank reports on improving consumer confidence in financial services in individual countries. Common themes included :
- Special attention should be paid to consumer complaints. Many are enquiries rather than disputes. If they are not satisfactorily addressed, they undermine public confidence.
- Businesses should tell customers in writing how they can complain, and have a designated department/person to handle complaints. Regulators should review complaint files.
- Consumers should have access to a fast, inexpensive and effective redress mechanism. Ideally there should be one, clearly identified, central location for complaints or enquiries.
- Consumers should be able to submit complaints by phone, email, post or personal visit. The central complaints office should have a free phone line.
- Going to court is not a viable alternative for most consumers. Policy-makers should consider establishing a financial ombudsman.
- Statistics on consumer complaints should be analysed and published. They should be used to identify future improvements in the protection framework.
Experience shows that an effective financial ombudsman benefits financial businesses and the state, as well as benefiting consumers :
- Consumers have greater confidence in financial services when they know that, if anything goes wrong, they will be able to take their dispute to an independent body that will resolve the issue quickly and informally, without the consumer needing a lawyer.
- Financial businesses benefit because: consumers are more likely to buy financial products; the cost of resolving disputes with consumers is kept to a minimum; and unscrupulous competitors who act unfairly are held to account.
- The state benefits because: redress can be provided at minimum cost; feedback from an ombudsman can help improve future regulation; and confident consumers are more likely to play their part in helping to develop a sound financial market.
Ombudsmen can fulfil a wider role than the courts. Like the courts they resolve individual cases. Unlike the courts, they can also deal with consumer enquiries, and proactively feed back the lessons from their work to help governments, regulators, financial businesses and consumers improve things for the future.
So an ombudsman’s role in underpinning consumer confidence in financial services includes:
- helping to support improvements, and reduce disputes, in financial services; and
- helping financial businesses themselves to resolve disputes with consumers; as well as
- resolving consumer disputes that financial businesses fail to resolve themselves; and hence
- reducing the burden on the courts; as well as
- increasing financial inclusion.
Referring to Switzerland’s Ombudsman Offices and the World Bank’s 2012 report, it is however also important to note that a few countries have the unusual idea of ‘competitive’ ombudsmen, where – subject to specified minimum standards – the financial industry is able to choose between two or more competing financial ombudsmen. Such a choice presents severe risks to independence and impartiality – because financial businesses may favour the ombudsman they consider likely to give businesses the best deal. It overlooks the role of financial ombudsmen as an alternative to the courts and creates one-sided competition – because, unlike the financial businesses, the consumers are not given any choice of ombudsman.
The above is mainly an excerpt from the World Bank’s 2012 report : Resolving disputes between consumers and financial businesses: Fundamentals for a financial ombudsman