Thursday, 16 February 2012
Topical Issue Debate
Financial Services Regulation
Yesterday the Financial Services Ombudsman's report for 2011 was published. It highlighted the continuing problems we have by shining a light on the way the financial industry often treats its customers. Some 7,300 complaints were made to the Financial Services Ombudsman against financial institutions in 2011 relating to three broad sectors: banking, insurance and investments. Almost €2.25 million was repaid or awarded in compensation to customers of financial institutions last year on the direction of the Financial Services Ombudsman.
In 2009, the former holder of the office, Mr. Joe Meade, signalled his intention to write to the Minister for Finance to request that the Financial Services Ombudsman be given legislative authority to name particular institutions when it is in the public interest. I pay tribute to the work of Mr. Joe Meade as the Financial Services Ombudsman. He was a champion of consumer rights and his relaxed style did much to demystify his office and show people there was a redress mechanism. His successor, Bill Prasifka, has continued that trend and repeated the call, during an interview on "Morning Ireland" this morning, for the power to name these institutions.
We need to ensure the public has access to accurate information about how financial service providers are treating customers and how they behave when their shortcomings are pointed out. It is accepted that there is little, if any, public confidence in the Irish financial system at the moment. Deputies and Senators get daily complaints about the manner in which financial institutions are treating their customers, particularly as they pursue loans and debts. While I recognise that a code of conduct exists, this is more often breached than adhered to. Many people feel intimidated and unsure about how to report a breach of that code or how to engage with their bank or financial institution. The way to resolve this is through greater transparency about the performance of individual institutions.
The common themes in respect of the complaints are the sale of commission-driven financial products without regard to their suitability and the treatment of elderly customers, many of whom were sold long-term or high-risk bonds that were completely unsuited to their needs. I wish to highlight the case of a couple in their 70s who had deposited their life savings of €345,000 in one of our banks. In 2005 they were encouraged to put their money in a managed fund to get a better return. In 2008 they were again approached by the bank which advised them of a significant drop in the value of the fund. It was only at this point that they were fully informed about how the investment was managed, in particular that 70% of the initial €345,000 was based on the performance of the stock market. To make matters worse, if they withdrew their money at that stage, they would be hit with a €9,000 penalty. Thankfully the Financial Services Ombudsman found in their favour. However, we cannot name the bank involved under the present regulations.
In July 2011, Mr. Prasifka initiated a round of public consultation on the publication of information on the complaints record of financial service providers. He pointed out that the publication of such information would require an amendment to the legislation. My colleague, Deputy Michael McGrath, published a straightforward Bill in December that would extend the necessary powers to the Financial Services Ombudsman to bring this information into the public domain. For confidence to return to the system, we need to get such information into the public domain. We have submitted the Bill for consideration in the lottery for the Dáil sitting on 2 March. I hope it will be selected for debate and that the Minister will consider supporting it.
I thank the Deputy for raising this important issue. The issue the House is debating is whether a financial service provider which has been found by the Financial Services Ombudsman to have acted in an unfair manner should be named. This issue is the subject of discussions between the Financial Services Ombudsman and the Department of Finance.
Before I talk about these discussions I would like to talk about the important role played by the Financial Services Ombudsman. The Irish Financial Services Ombudsman's Bureau came into being in April 2005 and a measure of its great success has been its growing profile among consumers and industry. The role of the Financial Services Ombudsman is central in underpinning consumer confidence in the effectiveness of the regulatory regime, complementing the role of the Central Bank in safeguarding consumer interests. The Financial Services Ombudsman exercises an independent statutory function, operating in a strictly balanced and transparent fashion to investigate cases where individuals may have suffered as a result of, for example, misconduct by a financial institution or a failure to play fair with customers. The Financial Services Ombudsman is responsible for ensuring that unresolved complaints from customers of financial service providers are investigated, mediated and adjudicated upon. The importance of having an out-of-court adjudication complaints system for consumers who are not satisfied with the decisions of financial service providers cannot be overemphasised. Deputies should consider how difficult and expensive it would have been for the large number of consumers who have used the services of the Financial Services Ombudsman's Bureau not to have had an effective out-of-court dispute resolution mechanism to deal with their complaints. The cost of litigation might have served to dissuade many from pursuing their grievances. The costs for financial services bodies in defending complaints through the court system would also add significantly to operation costs.
I now turn to the discussions that are taking place between the Financial Services Ombudsman and my Department about the issue that is before the House. In July 2009, the then Financial Services Ombudsman wrote to the then Minister for Finance. In his letter he referred to comments made by various media personnel and other commentators at that time about the extent to which published decisions of the Financial Services Ombudsman should name the financial services provider. He went on to request he be given the option, if he considered it to be in the public interest, to name an institution that had been subject to one of his decisions. He outlined two reservations he had about naming institutions against which he had made findings. His first was that complainants may be less inclined to bring a complaint if they felt they might be named. His second was that institutions might take a more defensive line and might appeal findings more to the courts if they felt they were to be named anyway. However, despite these reservations, he said that he was requesting the option to name publicly an institution that had acted wrongly. The reason he gave for this was that it could be a preventative measure and that the threat of being named could act to ensure that malfeasance, when discovered, would be easily rectified and be less likely to recur.
The former Financial Services Ombudsman also suggested certain safeguards that should be included in any legislation that would give him this power. The first was that he be given sole discretion as to whether an institution should be named and that he would not be required to provide names in every case. The second was that the complainants would not be named. The third was that he would have statutory privilege covering the naming of institutions. He also said that criteria would have to be established to ensure the naming was done in a fair manner.
Following receipt of the letter from the Financial Services Ombudsman, my Department sought legal advice to help inform the deliberations to formulate a clear policy position. As Members will appreciate, this is a complex issue that requires detailed examination prior to bringing forward legislation. For example the criteria for publishing would have to be identified in the legislation. Any amendment to the current legislation must be validated, justified and applied in an objective and reasonable manner to all financial service providers.
My Department requested that the Financial Services Ombudsman consult with industry to better inform the debate. In 2011 the Financial Services Ombudsman invited submissions from all interested parties on the issue of publication of information on the complaints record of financial service providers. While inviting submissions, the Financial Services Ombudsman also set out its preliminary views on the form that such a disclosure could take. The Financial Services Ombudsman received a total of nine submissions, including one from an individual and eight from individual financial service providers and industry stakeholder representative groups. All submissions have been published on the Financial Services Ombudsman website.
On 5 January 2012 the Financial Services Ombudsman wrote to my Department. He referred to several of the submissions in which concern was expressed about how information on the complaints record of financial service providers might be presented. Assurances were sought that the information would be presented in a manner that was verifiable, robust, properly contextualised and not misleading. In addition, some submissions expressed a reservation about identifying individual financial service providers in case summaries.
In the Financial Services Ombudsman's biannual reviews, information on findings is given in two forms. First, information is aggregated into three general categories: investment, banking and insurance. Second, within each general category the information is broken down by product type. All information is aggregated across all providers so that no individual provider is identified. The information provided under each category is similar, that is, total number of complaints, complaints upheld, complaints upheld in part, complaints not upheld and total amount of compensation awarded. The annual report provides case summaries on an anonymous basis and details from the findings are redacted so that neither the complainant nor the provider can be identified.
The Financial Services Ombudsman is now proposing that the biannual review could provide a further breakdown of the information provided by the financial service provider. Accordingly, for each financial service provider information would be provided on the total number of complaints, the number of complaints upheld, the number of complaints upheld in part, the number of complaints not upheld and the total amount of compensation awarded. To give an accurate picture of the complaints record of each financial service provider, information about the relative market share of the provider would also be provided. Wherever possible, this would be done using information already in the public domain especially as referenced in other frequent regulatory reporting. For example, for insurance products the relevant metric would be the number of policies in force or the number of people covered by those policies. For banking products the relevant metric might be number of accounts or number of particular products in force. The Financial Services Ombudsman also stated that he would fully engage with the industry to develop the most appropriate manner of presenting market share information for each relevant product and that case summaries identifying the financial service provider should only be presented where there was a compelling public interest to do so and this would be specifically provided for in legislation. He went on to state that such a compelling public interest would include the need to inform potential customers that certain financial products may carry risks that customers would otherwise be unaware of in the absence of such a disclosure.
The Financial Services Ombudsman also suggested that any legislative regime would incorporate several elements. It should set out a requirement to publish information on the complaints record of financial service providers on a regular basis, that is, every six months. It should provide the Financial Services Ombudsman with the flexibility with regard to the format of the presentation of the information. I wish to inform the Deputy that I am currently considering the Financial Services Ombudsman's proposals on the naming issue. Once I have clarified the legal issues involved I will bring the appropriate proposals to Government.