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Financial Services Sector Expert Insight
- Aug 14, 2018
- Latest News
by Paul Grainger, Complyport Limited
The Financial Services Sector is one of the most important areas of the economy of the United Kingdom (UK). It is not surprising therefore that the financial services sector gives rise to a significant number of disputes and litigation cases.
The financial services sector contributes 7.51% of UK economic activity (as measured by Gross Domestic Product - GDP). It contributes £66 billion (11%) of UK taxation, contributes £58.5 billion to UK exports, employs 1.1 million people directly and a further 1.1 million in ancillary service jobs. Nearly every one of the 27.2 million UK households will use and be a customer for at least one financial service. In many cases, each household may use multiple financial services per person and many households will contain more than one person who is a customer. At the time of writing, there are 27.4 million people in work in the UK.
Most householders will have a bank account, possibly a mortgage, car purchase loan or other hire purchase loan, have credit card, debit card, store card, Oyster card or other form of payment card, use payment applications on their mobile phone. As a householder they will normally have household contents insurance, may need motor insurance, may have insured their mobile phone and may buy travel insurance for their holidays. Many may have other forms of insurance too. They may have savings products (eg, Individual Savings Accounts – ISAs), be a member of a pension scheme and have life assurance or investment products. It is not surprising that the Financial Conduct Authority (FCA) reported in 2017 that there were 3.76 million complaints made by customers about financial services firms. That accounts for roughly 13.8% of households or 13.7% of the UK work force who have raised a complaint against a financial services firm in the 2017 year.
Of course many of these 3.76 million complaints are resolved between the financial services firm and their customers through the mandatory complaints handling process and procedures introduced by the regulators. Many of these that are not resolved through the complaints handling process may be resolved by reference to the Financial Ombudsman Service (FOS). However, a relatively small number of the total may remain unresolved and there may be substantial sums at stake. It is these cases that may result in litigation.
In this article I will draw upon my experience as an expert in financial services and financial services regulation and discuss the role of the financial services expert witness in different types of case.
Complaints handling process
The Financial Services Act 1986 came into force in April 1988 and introduced mandatory complaints handling rules for complaints against regulated financial services firms. This meant that financial services firms had to deal with complaints in accordance with rules and guidance set out by their regulator.
As regulation developed and regulators merged, the complaints handling rules can now be found win the DISP (Dispute Resolution) section of the Financial Conduct Authority (FCA) Handbook.
The complaints handling rules set out minimum standards that must be adhered to by financial services firms in recognising and responding to complaints raised by their customers. This includes minimum disclosures of information including notifying the customer of their rights regarding the ability (if they are an eligible complainant) to refer to FOS any complaint that is not resolved to the customer’s satisfaction.
It is estimated that of the 3.76 million complaints made against financial services firms in 2017, circa 3.4 million were resolved between the financial services firm and the customer. This suggests that around 90% of complaints logged by financial services firms are fairly rapidly dealt with by financial services firms to the satisfaction of the customer (or that the customer accepts there is no merit to their complaint and settles or withdraws it). It also suggests that around 10% of complaints are not satisfactorily resolved and go on to become complaint cases investigated by and adjudicated on by FOS.
It is also interesting to note that approximately 41% of all complaints related to Payment Protection Insurance (PPI). The FCA has imposed a deadline of 29 August 2019 for PPI complaints to be received. This deadline should result in a very significant drop in the number of complaints cases reported to the FCA and in those referred to FOS. However, if there is a very significant reduction in complaints (circa 40%) due to the end of PPI complaints and claims, based on current estimates that will still leave around 2.2 million complaint cases each year against financial services firms.
FINANCIAL OMBUDSMAN SERVICE (FOS)
Many disputes relating to financial services may be dealt with by the Complaints Teams within financial services firms. Generally, such complaints will be from private clients and will often involve relatively small sums of money. Many complaints will be resolved amicably with consumer accepting the findings of the complaints team and any compensation offered. In other cases, the consumer may not be happy with the findings and/ or the amount of compensation that may have been offered. In such cases where the complainant does not agree with the findings or response from the financial services firm, he or she often has the right to refer the dispute to FOS.
FOS is a body originally set up under the Financial Services Act 1986 to act as an independent form of dispute resolution with the express intent of providing a relatively simple and speed means of providing consumers with an independent route to resolve financial services complaints and disputes. It is free for the consumer. Its decisions are binding upon the financial services firm and referring a case to FOS normally avoids costly and time consuming litigation.
FOS handled 1,456,396 enquiries in the 2017-2018. Of these enquiries, 339,967 became new complaints. The complaints accepted by FOS for investigation and resolution involved 4,014 firms, of which 1,956 firms had only 1 complaint, 1,304 firms had between 2 and 10 complaints but 193 firms had over 100 complaints.
In the year 2017-2018, FOS resolved 400,658 cases (including cases from the previous year). Of this number, 32,780 were by way of an Ombudsman’s Final Decision which is binding on the financial services firm.
An extract of the data provided by FOS in its Annual Review is provided at Table 1 and Table 2 and Table 3 below.
It is worth noting that not all enquiries received by FOS are complaints. It is also worth noting that not all potential complaints about which enquiries may be made can be investigated by FOS. FOS is able to investigate complaints relating to individual consumers with regard to a range of mainstream financial services in the UK. However there are some types of claimant and some types of services which FOS does not have the authority to investigate and adjudicate on.
Financial Ombudsman Service - Complaints Summary 2017-2018
Enquiries handled 1,456,396
New Complaints accepted for investigation 339,967
Complaints resolved 400,658*
Complaints resolved by Ombudsman’s Final Decision 32,780
*Includes complaints resolved by Ombudsman’s Final Decision
*Includes complaints accepted for investigation in a previous year but resolved during the 2017-2018 year.
Financial Ombudsman service -
Number of complaints and firms 2017-2018
Number of complaints against firms Number of firms
It is interesting to note that there are some firms who appear to be serial offenders and have multiple (and in some cases hundreds) of complaints against them. This implies either multiple failings in the way they deal with customers or that there was a significant issue that that had an impact on many customers.
Financial Ombudsman Service
What complaints were about 2017-2018
Financial service sector Percentage of
firm complained about total complaints
Banking and credit 31%
Investments and pensions 4%
Insurance (excluding PPI) 11%
Payment Protection Insurance (PPI) 55%
Perhaps there is no surprise that PPI and banking complaints account for 86% of all complaints. It may also be expected that given the large numbers of the population who buy insurance out of necessity (whether home, motor or travel insurance), that it will generate a significant number of complaints (11%). However, it may be surprising for some to find that only 4% of all complaints related to investment and pensions.
What the evidence from FOS demonstrates is that whilst there are a large number of complaints that arise from the financial services sector, the vast majority of these are resolved either direct with the firm concerned or by FOS. The implication is therefore that only the relatively small number of complainants where cases that are not resolved by FOS to their satisfaction or that are not eligible to be accepted by FOS are likely to consider litigation.
Clearly where such cases are resolved by FOS, there is no need for a consumer to consider litigation and thus no need to instruct an expert. However, what happens then to the other cases?
There are broadly two classes of consumer complaints that are most likely to result in litigation. They are
1. those cases where the customer is dissatisfied with the FOS decision regarding the outcome of his/her complaint; or
2. those cases where the compensation claimed is above the threshold for the maximum compensation that can be awarded by FOS.
Due to the cost of litigation, it is normally the latter types of case that are most likely to result in litigation. (However, it may be that where a customer has very strong feelings about a case, they may pursue a civil claim based on a point of principle. This may also be the case where a claimant has financial support from a third party.)
It should be noted that when FOS investigates an unresolved complaint and finds in favour of the customer, FOS can instruct the firm to pay compensation for financial loss and/or for non-financial reasons (eg, distress). This can be expressed as a monetary amount or as a formula, but is limited in either case to a maximum award of £150,000 plus any costs and the addition of simple interest on both the award and the costs.
It is also worth noting that FOS can only deal with eligible complainants which broadly means individual retail consumers and micro enterprises. Similarly, FOS only has jurisdiction over retail financial services firms that carry out services in or from the UK.
In addition to the two types described above, there are also financial services disputes that are perhaps best described as “Business to Business” disputes. Such cases can include smaller and medium sized enterprises that, as they are not micro enterprises, currently fall outside of the definition of an eligible complainant and so who in the event of an unresolved complaint, cannot seek redress via FOS. It can also include disputes arising from non-retail financial transactions, eg, capital markets transactions or regulatory due diligence on merger or acquisition.
Complainants are normally inclined to consider litigation where the complaint is unresolved or where an offer of compensation has been made by the financial services firm or a counterparty to a transaction, but the offer is not considered to be acceptable. It is at this stage that a complainant is likely to seek legal advice and contemplate litigation.
The Civil Procedure Rules set out the correct process to be followed where litigation s contemplated (including consideration of alternative dispute resolution methods). I do not propose to go into the Civil Procedure Rules in this article.
It is normally at the initial consultation between a complainant and their legal adviser that the use of an expert may be considered first. Matters relating to financial advice, financial transactions and financial services regulation are quite technical and often complex. In considering and ascertaining the merits of any litigation under consideration, it may be that an expert is consulted at an early stage to help clarify the issues and to provide a preliminary opinion as to the merits of the complainant’s case.
If an expert is not instructed at this early stage, it may be that key issues are identified which will have a significant bearing upon the case it may well be that an expert is instructed with quite specific instructions in terms of the questions or matters to be considered and upon which an expert opinion is required.
Of course it is also the case that if an expert is instructed by a complainant’s legal adviser, then the defendant’s legal adviser may also instruct an expert (and vice versa). In some cases, the parties may seek clearance to instruct a Single Joint Expert (or may be instructed to do so by the Court).
Nature of case
Where an expert is instructed (whether by one party or as a Single Joint Expert) the expert and the legal adviser(s) will agree terms of instruction and payment. However the most important part of the instruction is the precise nature and scope of the opinion that is required from the expert. This in turn will be determined by the nature of the issue or issues involved in the complaint or dispute.
The term “financial services” covers the following market segments:
• Banking advice and transactions;
• Mortgage lending and mortgage advice;
• Consumer credit lending and advice;
• Savings and investments advice and transactions;
• Stock broking;
• Investment portfolio management;
• Life assurance advice and transactions;
• Pension plan and pension schemes advice and transactions;
• Insurance advice and transactions;
• Insurance broking;
• Independent Financial Adviser (IFA) firms;
• Financial Planning firms;
• Investment companies;
• Investment fund management companies;
• Life assurance companies;
• Insurance companies.
The type of financial services product or service will determine the subject matter expertise required by the expert. It is self-evident that the expert should have relevant expertise (technical knowledge and experience) of the product or service concerned.
The matters generally involved in the majority of financial services complaints or disputes can then be sub-divided into the following categories:
a) Whether any advice or transaction was suitable for the customer;
b) Whether the execution of and completion of a transaction was appropriate;
c) Whether the correct or appropriate regulatory processes and procedures were followed;
d) Whether the actions or behaviours of the financial services firm were negligent or in some other way deficient;
e) Whether loss has occurred;
f) Calculation of the quantum of any loss;
g) Whether any loss arose from deficient behaviour by the financial services firm that is defending the claim.
The expert will be expected to form an opinion based upon the evidence provided as to whether the outcome of the advice or service was appropriate and compliant with the requirements of the relevant regulator or regulators.
The range of financial services and the matters or considerations involved in the two lists above, are provided to illustrate the potential complexity involved. The lists are not exhaustive.
The instruction given to the expert by the instructing legal adviser is critical in shaping and framing the opinion that the expert will provide. It is becoming more common for the instructing legal adviser to provide a draft instruction but to ask the expert to indicate any other information or questions that may be relevant to the aspects of the case upon which the expert’s opinion is required. This is often very helpful to the expert and the instructing legal adviser in ensuring that the final instruction provided to the expert is precise and focused on the issues for which expert opinion is required, but not so focused or precise as to inadvertently exclude issues or matters that may be pertinent to the opinion required.
I would observe that in my experience the better framed the instruction, the easier and more cost effective it is for the expert to produce the required opinion.
The evidence bundle provided can also have a significant influence upon the ease cost effectiveness with which the opinion can be provided. In some cases, the evidence bundle may contain too much information. In these cases, there is information that is not relevant to the matters and precise questions upon which the expert must prepare an opinion. As a result, time is wasted reading information that at best may not be relevant or pertinent and at worst, may serve to confuse matters. In other cases, it may be that too little is provided meaning that the expert may need to ask supplementary questions or request additional information.
There are of course scenarios where the nature of the opinion required may evolve. If and when supplementary questions are posed to the expert, this may require additional evidence to be provided.
In my experience, instructions can be broadly grouped into two categories - focused or broad brush. In focused instructions, the instructing legal adviser generally has a very specific range of questions on which they would like the expert to offer provide an opinion. They often consist of quite specific and in some cases limited scope questions enabling the expert to offer equally focused opinion in response.
The broad brush instruction is more wide ranging in its scope. It will often seek opinion from the expert to identify regulatory or compliance failings in the processes and procedures that the financial services firm has undertaken in advising a customer or carrying out a financial transaction. This is useful where the client is believed to have suffered loss as the regulatory and compliance failings will often be the cause or partial cause of the loss.
Loss and causation
A key part of any complaint or litigation relating to financial services is that the complainant (the claimant in litigation) will have suffered one or more of financial loss, expense/cost and/or distress or upset. The amount (quantum) of any loss, expense or cost can be calculated using well established methods. In my experience, it is more difficult to assess what (if any) payment should be made to compensate a customer for distress.
In assessing the quantum of loss, account may need to be taken not just of losses already incurred, but also of future losses or future costs and expenses. It may be the case that future losses, expenses and costs can be calculated and commuted to provide a present value. It may also be the case that interest may be due on the quantum of past losses, expenses and costs.
Whether an expert will be instructed to provide an opinion on loss assessment and calculate the quantum will depend significantly on the complexity of the mathematics involved and the competence of the expert. In some cases, one expert may be instructed to provide an opinion on matters relating to the advice process and/or execution of a transaction, whilst another expert is instructed to calculate quantum.
Having established whether a loss has occurred and if so the quantum of loss, it is then important to establish what is known as causation, ie, the cause of the loss. In intermediation cases where a financial service is transacted following some form or advice, an expert will normally be instructed to assess whether the advice and/or transaction process and procedures followed were compliant with regulatory requirements and/or company standards.
Where the advice or transaction processes or procedures were not complaint with regulatory requirements (and/or company’s own additional standards where applicable) then it is highly likely that an expert will conclude that the non-compliance is the root cause or a contributory cause of the loss.
Another scenario may also occur. It may be the case that an intermediary or adviser such as a financial adviser, an insurance intermediary, a mortgage broker or a stock broker or similar has followed company procedures to the letter. However, if those company procedures were not compliant with regulatory standards then that is still likely to be a cause of loss.
Types of cases
Most financial services expert witness cases can be classified as either “Business to Business” (B2B) cases or as retail client cases. As discussed above, currently only micro businesses qualify as eligible complainants and can escalate unresolved complaints to FOS.
B2B cases typically mean that the complainant /claimant is not an eligible complainant and this has no recourse to FOS in the event their complaint is not dealt with satisfactorily by the financial services firm. If the sums at stake are sufficiently large, the business concerned may wish to seek a remedy by litigation.
Complaints by most individual customers and most micro businesses generally fall into two types. They tend to arise from issues relating to One-Off Intermediation; or Service Fulfilment.
One-off intermediation typically involves the provision of some form of advice or information based upon which the customer enters into a transaction. The transaction could be with the same firm that provided the advice or information or it could be with a completely separate firm.
In many cases intermediation would involve the customer dealing face to face with another human being. Examples of this would in the past have been financial advice, insurance broking and mortgage or loan advice.
However, increasingly technology has been and is being used in the intermediation process. Whilst face to face advice and contact may be preferred for more complex financial transactions, increasingly customers are seeking information and advice from say a call centre and may then carry out a transaction via the same call centre. Much of the home and motor insurance market now operates in this way.
Increasingly, internet (web) based information, advice and transaction services are being delivered in markets such as consumer credit, motor insurance, home insurance, term life assurance and savings products. Not only have direct sales websites arisen (eg, Direct Line insurance), but price comparison websites have become increasingly important. Not only do they provide comparisons of product features, they also allow the customer to obtain a personalised price comparison and the ability to click through and transact the product required. Indeed, it is useful to reflect that the Russian meerkats that appear to have become so ubiquitous on television, are actually promoting a very successful financial services comparison site (Comparethemarket.com) for insurance and savings amongst other products.
It is relatively easier for a firm to control a website based service than one delivered by humans. Assuming the correct process, procedures, information and disclosures are hard wired into the website and they are compliant, it is much easier to ensure a consistently compliant transaction will result.
The other main type of case involves service delivery or fulfilment. This can include the servicing and claims issues arising especially in relation to banking and insurance business. To a lesser degree is also applies to loans administration, mortgage administration and savings products.
Service delivery issues can also arise from service agreements relating to private client portfolio management, financial planning or high end insurance broking, where a client may have specific service delivery requirements for which they pay a fee.
Where a dispute or complaint relates to service provision, it is normally because the customer believes the financial services product has not worked or behaved as expected or because it is believed that some other key aspect of service delivery has not been fulfilled.
Business to business issues
I have commented above on aspects that relate mostly to cases arising from retail advice and transactions. However, some of the cases in which I have provided expert reports involved issues where the claimant was unable to seek any remedy other than by litigation. Where the claimant is a smaller or medium sized enterprise or a large firm, they cannot seek to resolve a complaint or dispute by reference to FOS. Similarly, certain types of financial service or transaction fall outside of the remit of FOS.
I have been involved in one case where one financial services firm acquired another financial services firm, based upon warranties and undertakings that there were no identified regulatory or compliance problems identified by the firm being acquired at the time of sale. Subsequently, quite some time after the sale had completed, regulatory and compliance problems were identified relating to advice and transactions provided to clients of the firm that had been acquired.
I was instructed as a single joint expert to review the client files concerned and determine the extent of any non-compliance or regulatory breach. I was then instructed to assess whether the breach was capable of being rectified and if so estimate the time and cost required to remedy any breach and avoid or limit loss to the client. This was a commercial dispute between two financial services firms relating to the value paid by one firm to buy another. However, expertise was required to assess compliance with regulations and rules relating to financial advice and transactions.
Other cases in recent years have arisen from business banking activity and capital markets. These cases involved complex financial products (swaps, options, futures and similar derivatives products) being sold by banks to corporate customers for whom they were not appropriate. In these cases too an understanding of the products concerned and of the regulations and rules applicable was required in order to provide and expert opinion on the appropriateness of such transactions to instructing legal advisers.
Competence, negligence and rogue behaviour
The root cause of many financial services disputes is actually human behaviour. I do not have the time or space in this article to explore this in any depth. However, there are some high level observations I would like to make.
It is often said that in financial services things go wrong because of one or more of three reasons:
2. Rogue behaviour;
Competence can be defined as having the relevant knowledge, skills, experience and application required to carry out a role or job to the required standard. By implication incompetence is the failure to attain one or more of the four requirements or characteristics of competence. This may arise because a person was recruited into a role for which they were not sufficiently qualified and/or experienced, because they had insufficient skills, were over-promoted or were insufficiently trained.
Rogue behaviour in the delivery of a financial service may be characterised as acting in a way that is contrary to the behaviour that is prescribed or that is expected in the circumstances. Rogue behaviour may arise out of intent, incompetence or lack of care. Rogue behaviour may be as a result of criminal intent.
Negligence can arise because of a lack of appropriate care and attention, leading to error or omission. This will often be due to failure to follow correct process, procedure or standards in carrying out a tasks. Negligence can be caused by incompetence but it can also be caused by rogue behaviour.
Corporate behaviour is sometimes blamed when things go wrong in the financial services sector. However, regulators and other commentators have consistently made the point that corporate behaviour arises from the morals, ethics, principles, policies, processes, procedures, controls and culture set by the senior management and middle management within the firm. If the tone from the top is poor, it is no surprise that poor products and service may arise resulting in complaints and disputes with customers.
Given my comments above, it will come as no surprise that I do not expect there to be any significant decline in the demand for expert reports relating to financial services litigation. Even when PPI claims end in August 2019 the expected drop in complaints (41%) will still leave an expected 2.2 million financial services complaints each year, of which a significant minority are likely to result in litigation.
However, with the intended extension of the Senior Management and Certification Regime (SMCR) by FCA to the whole of the financial services sector in 2019, it is likely that if senior managers are found to have been negligent or non-compliant by regulators, then customers (especially those unable to seek recourse to FOS) may be encouraged to take their case to litigation. After all, if the firm’s senior management have been found to have been non-compliant, it is likely to support any complaint against the firm.
BA (Hons), FCISI, FIFP, CFP, APFS
Chief Executive Officer
Paul is the Chief Executive Officer of Complyport Ltd, a major regulatory and compliance consultancy firm advising in the financial services sector. He joined Complyport Ltd in April 2014.
• 35 years’ experience of dealing with financial planning, investment, pensions, social security and long term care issues;
• 35 years’ experience as a financial services practitioner;
• 32 years’ experience of financial regulation and compliance;
• 30 years’ experience as a regulatory and compliance consultant;
• 26 years’ experience span as a compliance officer & money laundering reporting officer;
• 30 years’ experience as a director/partner and of senior management and risk control in financial services.