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The Chairman of Committees: Because Amendments Nos. 161A, 161B and 161C are being spoken to along with Amendment No. 161YA, I should point out to the Committee that if Amendment No. 161A is agreed to, I

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shall not be able to call Amendment No. 161B. If Amendment No. 161C is agreed to, I shall not be able to call Amendment No. 162.

10 p.m.

Lord Hunt of Wirral: I welcome the opportunity to explain the thinking that lies behind Amendment No. 161A. In doing so, I should like to mention my personal feelings about the ombudsman scheme. Noble Lords will know that for 35 years I have been a solicitor involved in advising insurance companies and their trade association, the Association of British Insurers, and the predecessor bodies.

Just under 20 years ago, as solicitor to two insurance companies in particular, I was one of the authors of the original industry scheme for the insurance ombudsman. After discussions with the National Consumer Council, we set up the scheme. Its themes could be described as informality, flexibility and speed. I believe that the scheme has been a tremendous success, as indeed have been the other schemes. I am moving this amendment in the hope that we shall retain that flexibility and speed in the new scheme, and I know that the chief ombudsman and his colleagues share that view.

What I and a number of other noble Lords seek to do in this amendment is to draw attention to what I believe to be a fairly obvious defect in the drafting of what is now Clause 225(3). Perhaps I may say how pleased I am to see sitting in their places the noble Lord, Lord Borrie, and the noble and learned Lord, Lord Donaldson of Lymington. I know that the noble Lord, Lord Phillips of Sudbury, would have been here had it been possible for him to be present. That is because we are all concerned about the defect which I shall explain and which I understand was brought to the attention of the Treasury as long ago as August last year. The Government have been on notice for several months as regards anxiety about the defect which is shared not only by the chief ombudsman, but also by the Financial Services Agency and the scheme operator whom we now know as the financial ombudsman service.

If ever there was a provision in the Bill that needs to be clear for ordinary consumers, surely this is it. Among all the provisions of the Bill, those concerning the powers of the ombudsman are most likely to be of interest to ordinary consumers. Furthermore, it is crucial for responsible members of the industry. It is of the utmost importance that everyone should be clear about the powers of the ombudsman in relation to the size and the make-up of money awards.

Of course, the whole purport behind the scheme is a reflection of the fact that the industry is rightly placing more emphasis on curing the problem as soon as possible. The FSA will be making rules to govern firms' complaints-handling activity. And most large financial service firms--banks and insurance companies--have in-house complaints-handling units. The current schemes, and indeed the new scheme, are intended to be a last resort after a complaint has been considered at senior level within a

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firm. On average, firms probably deal with between six and 10 times the number of complaints that the ombudsman ever receives.

Against that background, it is critical for complainants and their advisers to be clear about the powers of the ombudsman to make money awards. It would be most unfortunate if the ambiguity had to be the subject of regular argument before the ombudsman by sets of advisers, or, even worse, before the courts, before a clear interpretation could be established. That would do little for confidence in the industry and, indeed, for confidence in the scheme itself. Speaking as a solicitor, I feel strongly that the last thing the ombudsman scheme wants is intense learned argument over a considerable period of time.

The figures to which I have been referring as to the number of complaints handled by in-house complaints departments are not untypical throughout the industry. The cases that reach the ombudsman are, in effect, disputes that cannot be resolved even by the application of expertise and goodwill by experienced staff in complaints-handling units in industry. The complexity or novelty of the matters in issue, or perhaps the bitterness and lack of trust that may have developed, mean that the matter must be referred for independent adjudication. At that stage, therefore, when a matter is referred to the ombudsman, he must expect the parties to an unresolved dispute to be at loggerheads. It would be unfortunate, therefore, if there were further room for dispute over the ombudsman's powers because this House had failed to enact a clear provision.

I have envisaged situations where a financial firm complained of had the benefit of professional advice. But many will not seek advice. The whole ombudsman scheme is designed to be used without professional assistance. Let us consider a dispute with an investor over what is alleged to have been negligent advice. Both might stare long and hard at the words of this subsection before trying to guess its meaning, and that is the topic I want to address.

Let me for a moment reflect on the process that the Bill provides for a determination to be made. Clause 224 empowers the ombudsman to determine a complaint on the basis of what is "fair and reasonable". That is clearly wider than the definition used within a court. For example, the ombudsman might conclude, "I find that, while this company has not broken any rule or legal duty, it behaved unfairly towards the complainant and that behaviour caused the complainant financial loss of X amount and much anxiety and distress". On that basis the complaint is upheld. But what redress can follow? That is where the problem arises.

Under Clause 225, the ombudsman can either make a direction or a money award. By virtue of Clause 225(2)(b) the ombudsman may make a direction the financial consequences of which are unlimited and such a direction can encompass requirements that courts are unable to make. So in the case we are considering, the ombudsman could, for instance, direct that the institution should

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apologise; that it should write to other organisations reassuring them about the complainant's creditworthiness if that had been put in doubt; that it should reconstitute the complainant's account, as directed, and should treat as valid certain transactions it had purported to invalidate. All these matters are within the ombudsman's power even though the cost might exceed the monetary limit. They are certainly powers which are not exercisable by a court--that is my key point--nor rightly does the subsection try to constrain the ombudsman's powers by reference to the powers of a court. Such is the wide variety of possible remedies that might be appropriate in a scheme where disputes need to be settled with the minimum of authority that the power of the ombudsman needs to be generously defined.

But when considering a money award, the Bill adopts a very different approach. The ombudsman must then look to Clause 225(3) and try to understand what it means. In a money award he is required only to compensate for the kinds of loss or damage for which a court could order,

"if it were deciding an action for breach of contract".

What on earth does that mean?

There are two very different possible interpretations of that provision. The first could follow these lines: the ombudsman is permitted to construct a hypothetical contract which contemplates any form of loss or damage as potentially resulting in an award of damages for a breach of that hypothetical contract. If it is possible to envisage any contract resulting in the kind of loss for which a court could award, then the ombudsman can make an award. I shall not go into any further detail on that matter.

The second possible construction is that the ombudsman must look to the actual contract entered into by the complainant and the respondent and then consider the kind of damages that a court would have power to award for breach of that particular contract. But the problem with that interpretation is that often there will be no contract at all. What the complainant complains about is, for instance, that he has been wrongly discriminated against and has been unable to take out a contract so there is not one. Alternatively, he is a third-party beneficiary under a trust or an insurance policy and under those circumstances he is not party to a contract at all. Even if he is party to a contract, that approach might turn out to be too narrow, depending on that, if anything, which is finally specified under subsection (3)(b).

I hope that I am taking the Minister with me so far because this is such a crucial and critical point. Surely it would be absurd for the ombudsman to declare, "I find that this complaint should be upheld on the basis that in my opinion it would be fair to do so, even though a court would not. However, I am unable to award compensation for the complainant because a court would not do so".

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There appears to be a clash here between the requirement that the ombudsman should determine the outcome of complaints on a basis different from and wider than that used by the courts on the one hand, and the attempt to constrain the money awards that the ombudsman may make by reference to the powers of the court.

We have to remember that these provisions may have to be interpreted in the courts. It is that which I am seeking to avoid. In a similar context the courts have been found to be very cautious about interpreting generously provisions such as these. Unless clear words are used on the face of the legislation the courts normally say that the powers of decision-makers are to be construed no wider than the powers of the courts themselves. That is the approach that the courts have taken to quite similar provisions in the legislation relating to the powers, for example, of the pensions ombudsman. That ombudsman will be very different from the one proposed here. The courts will have their minds lead to such precedents.

My amendment and that of my noble friend, seek to clarify matters. It would make a more natural and commonly recognised distinction between financial loss under paragraph (a) and other forms of loss or damage under paragraph(b). The policy aim in separating all this is that the authority should be enabled to impose a separate limit on these forms of loss or damage under paragraph (b). I believe that the amendment would permit that to be done.

In proposing this amendment I am seeking to assist the Government to get this rather important clause right and to make sure that it is clear on the face of the Bill. There is a clear and recognised ambiguity here. I hope that it will be accepted that this ambiguity can be eradicated by enacting my amendment. The Minister may say that it is not a perfect amendment--I do not know yet. It can be argued that the expression "financial loss" should be expanded so that it could refer to future uncrystalised losses. Some people may prefer that, as a matter of policy, the authority should specify the heads of loss or damage if these are to be the subject of a separate limitation. However, these issues are of less importance than the ambiguity contained in the main provision.

I am aware that disquiet has been expressed by the FSA and by the ombudsman about the drafting of the clause. The concern was also shared by the current ombudsman schemes. I could quote from the letter from the chairman of the Council of the Banking Ombudsman dated 26th January of this year, but the Minister will be aware of that communication. Therefore, I shall just make a passing reference to it. When the Economic Secretary replied on 14th March, he said:


    "It is, of course, the Government's intention that the meaning of these provisions should be clear, and I have therefore asked my officials to consider whether the clause needs amending".

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I hope that my noble friends and I have given the Government that opportunity.


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