Update on complaints handling
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Speech by Vernon Everitt, Director, Retail Themes Division, FSA
British Bankers' Association Complaints Oversight Seminar
15 September 2006
Good morning. Thank you for inviting me to speak to you.
Today I want to focus on three key areas:
- why complaints matter in the context of delivering our regulatory objectives;
- how well are firms handling complaints and where we see scope for improvement; and
- our future regulatory agenda in this area in a world where we are moving towards a more principles-based approach to regulation.
I will draw to a large extent on the findings of our Treating Customers Fairly work, and our experience of endowment complaint handling during 2005/06.
Why complaints matter
Even in the best run businesses, mistakes or misunderstandings happen, leading to complaints. For us, the way a firm manages complaints says a huge amount about its senior management and the sort of culture, values and overall approach to treating customers fairly they are seeking to embed.
The importance of complaints is, of course, about much more than regulatory compliance. As I know many of you advocate in your own firms, there is a compelling business case for the senior management of firms to take a proactive interest in the substance underlying complaints as part of ensuring that customers are being treated fairly.
Effective complaint handling is a crucial part of customer recruitment and retention. Research suggests that a consumer with an unresolved complaint will tell 10 or more other people. Many dissatisfied consumers will not afford you the courtesy of complaining; research also suggests that for every complaint received, around 25 other consumers will stay silent and simply take their business elsewhere. Therefore, firms which learn from complaints are well placed to ensure their products and services remain effective, relevant and competitive. Those which fail to do so are missing a big opportunity.
But we do, of course, have a deep interest from a regulatory perspective. In terms of where this fits in to the bigger picture, we aim to deliver an efficient and effective retail market in financial services, and thus help consumers achieve a fair deal. To achieve this we focus on:
- helping consumers become more capable and confident in the decisions they make;
- ensuring consumers receive, and use, clear, simple and understandable information;
- ensuring that firms are soundly managed, well-capitalised and treat their customers fairly; and
- delivering regulation that is proportionate and risk based.
Effective complaints handling is a core element across all of these outcomes.
The complaints regime is also a vital factor in allowing us to operate in a risk-based way. This demands that we run a so-called “non-zero failure regime” in that we must focus our finite resources on the big risks that matter most, accepting that there will be times when things go wrong. One of the factors which allows us to take such an approach is the existence of a robust complaints regime which gives consumers the confidence that their complaints will be dealt with promptly and fairly in such times.
How are firms doing?
So much for the theory. How are firms actually doing?
Let’s drill down into two recent pieces of thematic work - our latest progress report on Treating Customers Fairly (TCF) and our work on mortgage endowments.
TCF is our initiative to achieve a material change in the behaviour of firms towards their customers. In ''Towards fair outcomes for consumers'' published in July, we articulate that one of the customer outcomes we aim to achieve is that consumers do not face unreasonable post sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint. Today I want to build on this further to set out three indicators we look to firms to deliver which, in our view, capture the basics of good complaint handling in the context of TCF:
- first, firms have in place effective procedures for handling complaints promptly and fairly;
- second, communications with complainants are clear and understandable; and
- third, firms undertake a root-cause analysis to identify and remedy recurring causes of complaints.
Firms often tell us that they are confident that their approaches are consistent with, or exceed, these indicators. But it is striking that relatively little is put into the public domain by firms – eg in annual reports – explaining the approach taken to complaints and providing measures to demonstrate effectiveness. Clearly this needs to be surrounded by the right context – this is not all about volumes of complaints, which can often be a function of the size of firm or market share. But with the right explanation, wouldn’t it be refreshing for firms to go public and demonstrate in a highly visible way how they are delivering fair outcomes for consumers in this area? Which one of you volunteers to go first?
I’d like to say a brief word about each of these indicators.
Firms have effective procedures to handle complaints promptly and fairly
Mortgage endowments represent 49% of complaints about banks referred to the Financial Ombudsman Service (FOS), so our experience here is a useful case study through which to assess progress here.
The headline is this – all types of firms, not just banks, are dealing with record numbers of endowment complaints. The 52 largest firms, accounting for 90% of all policies sold, resolved 767,000 complaints and paid more than £945 million in redress in the last year. This represents an increase in complaints handled of over 130% on the previous year, and takes the number of complaints resolved since 2002 to 1.5 million. This shows that, in general, firms are really getting to grips with endowment complaints, and putting in place effective systems to handle these record volumes.
Furthermore, firms are making progress, though more needs to be done, on handling complaints promptly and fairly.
Over the last year, our key indicator of decision quality – that is, the extent to which the FOS overturns a firm's decision – has improved from 38% of cases to 32%. Indeed, if we exclude the small number of worst performers (in whom we are taking a particularly close interest), the overturn rate is significantly lower. Add this to the work being done by some firms which doesn’t feed into these statistics, such as reviews of past decisions, and it is clear to us that, although more needs to be done, the bulk of firms are getting on with the job of delivering fairer outcomes for consumers.
We have also seen an improvement in the speed of decisions. The number of complaints not resolved within eight weeks of receipt has improved from 49% of complaints to 34% over the period. This is particularly encouraging, as it shows firms have managed to improve the speed of decision-making, without compromising the primary goal of reaching fair decisions.
So there have been gains for consumers as a result of firms focusing on getting complaint handling right. But, as mentioned, there remain a minority who are still failing to resolve complaints in reasonable manner, and we are focusing our regulatory efforts on this small number. We have demonstrated that we will take enforcement action where firms fail to handle complaints effectively. Since 2002 we have fined four firms over £3 million for not having effective complaint handling procedures. Similar enforcement action remains a possibility if the small number of firms who are still not handling complaints effectively fail to demonstrate that they too are delivering.
So we have seen improvement and will, using our risk-based approach, ensure that this continues. But firms must not take their eye off the ball. Complaint volumes are expected to remain high, and there are over 3 million policies not yet time-barred. So while we have not yet experienced a time-bar related ‘complaint surge’, firms must be alert to the possibility that such a peak might occur in 2007. The senior management of firms must ensure that they dedicate sufficient attention and resources to maintain the momentum of improvement.
The basic lesson to be learned from the endowments experience, I suggest, is that it is now clear that firms failed to dedicate sufficient resources and attention to endowment complaint handling early enough. The huge administrative cost and reputational damage which resulted from the game of catch up that ensued could have been minimised had effective systems been in place from the outset.
Clear and understandable communications with complainants
As I explained earlier, it is vital that consumers are provided with clear and understandable information. This helps consumers make more informed financial decisions, including in the post sale environment if the consumer needs to make a complaint. However, successive pieces of our thematic work suggest that there is still plenty of room for improvement before we can say that firms are communicating in a manner which is clear and understandable to most of us.
There are two separate issues here surrounding effective communication. First, process. Consumers need to be made aware of their right to complain; initially to the firm, and then, if not satisfied, to the FOS. Awareness hinges to a large extent on firms providing consumers with clear and understandable information about the complaints process. Second, substance. Firms need to communicate in a way which demonstrates that they understand the consumer’s perspective and set out clearly and in plain language the outcome of the complaint.
To test one aspect of the quality of communications, we recently reviewed 300 documents relating to mortgage endowment complaints. The detailed findings of this work are available on our mortgage endowment website, and I strongly recommend you take a look at the findings of this work to see if it gives you any ideas for improving the quality of your communications with complainants. Here is a summary of what we found.
We saw many examples of communications which were broadly in line with our requirements. However, we also identified areas for improvement:
- letters could do more to articulate in plain terms the factors taken into account to justify the outcome of the complaint. For example, too often we saw examples of complaints which were rejected with blunt statements that the endowment was consistent with the consumers attitude to risk, without any more detailed explanation;
- the basis of redress calculations could be better explained. For example, fully explaining the impact of any assumptions used;
- efforts should be made to avoid terminology or unnecessary legalese; and
- letters could follow a more accessible structure and style. Too many letters did not make the decision clear until page five or six.
But we also saw some examples of letters which were particularly clear and informative. Particular examples of good practice included:
- setting out a clear summary at the start of the response about the complaint decision and redress;
- providing a clear overview of the basis of the complaint, and the supporting evidence;
- setting out clearly, and in plain language, the rationale and figures involved in the redress calculation. This can be re-enforced by sending separate cheques for the policy surrender value and the redress; and
- offering a description of the client's policy (in case they have misunderstood its terms) and details of the original mortgage.
These lessons apply to all communications with complainants and not just final responses to endowment complaints. Effective communication involves considering the information complainants need and how these key messages can be communicated in a way which is accessible and understandable given that many consumers find these topics daunting and incredibly complex.
Firms undertake root cause analysis and implement lessons learned
Our recent TCF work demonstrated that firms need to drive a cultural shift to embed TCF as a core part of their corporate culture. This will require senior management developing and using management information (MI) to assess the extent to which TCF has been embedded in their organisation, and identifying areas where they could improve the outcomes they deliver for consumers.
This is highly relevant to complaints. As mentioned earlier, complaints represent a rich source of information about how fairly a firm treats its consumers. However, our TCF work indicated that too few firms gather effective MI, let alone use it to proactively identify where they might be able to deliver fairer outcomes for consumers.
So we believe firms must undertake root-cause analysis of complaints to identify common causes and, if necessary, to take remedial action. This requirement has always existed in our approach to dispute resolution, but we will be placing increasing emphasis in this area as we seek clear and measurable evidence of TCF being embedded.
The need to get 'beneath the bonnet' to establish what is driving complaints is demonstrated by the experience of banking complaints in 2005/2006. Assessment of the causes of complaints about banking services shows there was no dominant cause of consumer dissatisfaction. However, peer group analysis of the root-cause of banking complaints showed that firms with similar product mixes have uneven distributions of complaint causes. As an example, one firm received double the number of complaints than might have been expected about arrears handling given their business volumes – clearly an issue worthy of further investigation.
But what is required to put this into practice?
Delivering this change will first of all involve firms gathering effective MI. Second, firms need to have a mechanism to share these lessons learnt. It is essential that complaints data is disseminated to the relevant business areas and is not just considered to be a matter for the compliance department.
We have set firms a deadline of having moved towards implementing TCF in a substantive part of their business by March 2007. Firms will not be able to persuade us that they have begun to embed TCF unless they can demonstrate they are gathering this MI and using it proactively to undertake root cause analysis.
Our future regulatory strategy
Just as we have asked firms to concentrate on outcomes, it is entirely appropriate that we, as regulator, are also expected to be outcome focused. Therefore, we are striving towards the following in our approach:
- we continue to place an emphasis on risk-based regulation of complaints;
- we move towards a more principles-based complaints regime, which gives firms the flexibility to reach the best outcomes for their consumers.
So, what steps are we taking to deliver these outcomes?
Risk-based regulation
Turning first to risk-based regulation. As mentioned earlier, being risk-based means identifying the big risks that matter most and dedicating the right amount of resource to reduce the risk to an acceptable level.
We strive to display a high degree of risk focus through the ARROW process and our programmes of thematic work. Undertaking thematic work allows us to focus on a material risk across a sector and work in a concentrated fashion to address any material issues that arise. In the second half of 2006, thematic work is playing a major part in looking at some of the issues I have identified in this speech - the ongoing work on TCF, for example.
Collecting routine complaint data from firms and our data on specific issues such as mortgage endowments is a cornerstone of our risk-based approach. Such data is a valuable indicator of trends in the marketplace allowing us to spot areas where risks may be emerging. So our complaints data help us focus our efforts in an effective and efficient way. Complaints data also help us gauge the effectiveness of our rules. Our general insurance effectiveness review is looking to establish the extent of market failure and how effectively our rules address this. One aspect of market failure is consumer detriment, and complaints data is one of a number of measures we are using to assess how well our rules tackle such market failure. We have also used complaints data to ensure that we focus regulatory work in areas with the greatest potential for consumer detriment. For example, in our work on SCARPs this resulted in work reviewing 150 firms and in firms paying £125 million in redress.
We are also committed to using complaint data to feedback aggregate level information to firms that will help them ensure they are handling complaints effectively. For example, in our mortgage endowment work we have provided firms with anonomised peer group analysis and a league table ranking based on speed and quality of resolution.
More principles-based regulation
No discussion of retail financial services is complete without reference to the Markets in Financial Instruments Directive (MiFID).
In keeping with the huge scope of this directive, it contains provisions which relate to complaint handling. While these provisions are quite high-level, this represents an excellent opportunity to adapt the complaints regime to fit with a more principles-based approach.
So, what might more principles-based complaint regulation look like?:
- greater focus on delivering fair outcomes for consumers, and less emphasis on regulatory process and rules;
- an emphasis on the responsibility of the senior management of firms to use complaints data proactively as part of embedding TCF in their organisations; and
- an opportunity for firms to have the flexibility to decide how to deliver fair outcomes for their complainants, and align their commercial interests with consumer outcomes.
This will be supported by our review of some of our dispute resolution rules (which are outside the scope of MiFID) to place an increased emphasis on what really matters in delivering real consumer benefit. For example, we might have less prescriptive requirements around time limits, but a greater emphasis that firms must resolve complaints at the earliest opportunity.
Making a successful transition to a more principles-based regime will prove a big win for everyone. Concentrating on the principles acknowledges that firms are best placed to judge the detail of how to deliver a fair deal for their consumers. This approach will increase the probability that our statutory objective of appropriate levels of consumer protection will be met.
However, we acknowledge concerns about a more principles-based approach – particularly that there might be greater regulatory uncertainty and subjectivity. I would like to address a couple of these concerns as far as regulation of complaints goes.
First, the principles are nothing radical or new. The eleven high-level principles for businesses, including the requirement to treat customers fairly, have been in place since 2001, and forms the foundation of our regulatory approach. Moving towards a more principles-based regime will not mean an abandonment of all rules, but a re-alignment of the Handbook to support a clearer focus on the outcomes we, and I think the industry, want.
Second, the basis of the more principles-based approach is that firms work out how to deliver fair outcomes for consumers themselves, rather than being forced to follow a one size fits all system based on regulatory prescription. However, we are not going to cut firms adrift in a sea of regulatory uncertainty. In addition to a set of dispute resolution rules which support a more principles-based approach, we will continue to provide a range of non-handbook materials such as case studies, frequently asked questions and feedback from thematic work.
Third, industry codes such as the Banking Code have played a crucial role in helping to secure fair outcomes for consumers and we will be looking for that to continue.
Working with the Financial Ombudsman Service (FOS)
Finally, a few words about why it is essential we continue to work in close collaboration with the FOS, especially in a more principles-based world.
There is an overlap between the role of the FSA and that of the FOS since both of us become involved with firms' behaviour towards consumers. But there are important differences:
- FSA sets standards mainly through rules and, increasingly, principles, but FOS must apply the 'fair and reasonable' criterion; taking into account the law, regulatory rules, codes and good industry standards at the time.
- FOS is obliged to consider all the cases it receives, and cannot lay some cases aside as not a priority, or wait to see how an issue evolves; and
- as with a court, individual FOS decisions can have a wider effect.
Clearly it is imperative that we work together effectively. I would particularly like to highlight the ''wider implications'' process, established so that stakeholders can ask the FSA and FOS to consider an issue that is likely to effect large numbers of firms or consumers.
The factors we are likely to take into account in considering if the wider implications approach is warranted include whether it affects:
- a large number of consumers;
- a large number of firms;
- the financial integrity of a firm;
- interpretation of FSA rules or guidance; or
- a common industry practice.
If it is agreed that the wider-implications procedure should be applied, the FSA will consider whether a regulatory or industry solution would be more appropriate than the FOS deciding on individual cases. Actions open to the FSA include taking supervisory or enforcement action, securing redress or publishing rules/guidance.
In some cases, the FSA and the FOS may agree that, though an issue has wider implications, it is not suitable for consideration under the wider-implications procedure because the issue is not new, is a matter for some other body or an industry code or is a matter concerning a firm’s commercial judgement.
So the wider implications process is an example of us working closely with FOS. But this needs the input of firms, trade bodies and consumer groups to help us identify where this process might kick-in, so please let us know about any relevant issues.
Conclusion
I have cantered through a wide range of topics relating to complaints and TCF this morning. I have tried to talk in terms of outcomes for consumers rather than regulatory process. This is because there is a danger that we lose sight of what really matters. Consumers do not see complaints in terms of 'rules' or industry best practice. What matters to them is whether their complaint was handled fairly.
Finally, I’d like to leave you with a reminder of the key indicators we will be looking for in complaints arrangements in the context of TCF:
- firms have in place effective procedures for handling complaints promptly and fairly;
- communications with complainants are clear and understandable; and
- firms undertake a root-cause analysis to identify and remedy recurring causes of complaints.
Thank you again for the opportunity to contribute today.
Related links:
Mortgage endowment section of our website.