Marriage counselors often advise the quality of a relationship is not determined by the number of fights that a couple has. Rather the best test is the way in which problems are resolved.
The same is true of the relationships between consumers and their financial institutions. Consumers recognize that they need financial firms. Consumers have checks to cash. They want to send money to relatives. They need to save for a rainy day—or a season of rainy days. They want to borrow to finance their big purchases such as houses and automobiles. However consumers also want to be treated fairly. When they have a problem with a financial firm, they want the problem to be fixed--or at a minimum they want to be informed as to how to avoid the same problem in the future.
So how should consumers’ problems with financial firms be addressed? For most people, finance makes them feel less than brilliant. (See blogpost on “Why Isn’t Finance Understandable?”) However this twin sense of inferiority and vulnerability is not limited to individuals who work with their hands. The truth is that if you were to give enough wine to a senior banker or insurance executive--and he or she was prepared to admit the truth--the answers would be startling. Sitting in well-tailored business suits, they would tell you that even they feel that they do not fully comprehend finance or the risks that they wager.
“Honestly I don’t even understand what you guys do,” admitted Will Emerson (played by Paul Bettany) as the head of a Wall Street trading desk in the 2011 movie, Margin Call. Just tell me what it means was his plea. We can hardly expect Working Joe or Jane will understand finance better than the experts. This means that consumers’ questions will often be based on misunderstandings. In countries ranging from Azerbaijan to Canada to Zambia, most consumer complaints over financial services are based on a vague sense of unfairness. This puts financial institutions—and their government regulators and supervisors in a difficult position. Consumer confidence is essential to public confidence in financial institutions but how should such confidence be built?
More and more countries have set up financial ombuds services. The UK led the way with a financial ombudsman that covers all retail financial services, including debt collection. In Eastern Europe, financial ombudsmen are popping up in many places, from Armenia to Russia.
But how should such financial ombuds services be structured? There are lots of solutions but how should one choose the best approach?
Fortunately two financial ombudsmen—one from the UK and another from France—collaborated to develop a set of fundamentals for any financial ombudsman. The project was conducted for your correspondent when she was at the World Bank in Washington, DC. Last week she had the opportunity to catch up with one of co-authors, Francis Frizon, the head of the Insurance Mediator’s Office in France. (She had previously spoken with the first co-author, David Thomas, former Head of the UK’s Financial Ombudsman, who had talked about problems in the UK, especially with payment protection insurance.)
Here are the 11 key principles that David and Francis developed.
Governance and funding
1. The ombudsman should be (and also be seen to be) as independent and impartial as a judge – as well as having the necessary legal and technical expertise to resolve financial disputes authoritatively. This needs to be reflected in the appointment and governance arrangements.
2. Government funding may be constrained. Industry funding can comprise a levy on all financial businesses, case fees payable by financial businesses that have cases decided by the ombudsman or a combination of the two. Even a modest fee for consumers would be a barrier for the vulnerable.
3. The title “ombudsman” should not be used for a body that does not comply with ombudsman principles – including independence and effectiveness – or which is unable in practice to secure redress for consumers. Otherwise, consumer confidence will be undermined.
Coverage and procedure
4. Ombudsman coverage of financial businesses within the relevant sector(s) should be comprehensive. It should include all financial businesses that are based in the country – including any that are foreign-owned.
5. Where financial businesses based in the country do business cross-border with consumers in other countries, the financial ombudsman should accept complaints against those financial businesses from those consumers.
6. Financial businesses should be required to have a published complaints procedure for consumers to use as a first step. If financial businesses handle complaints well, this will reduce the number of disputes referred to the financial ombudsman.
7. The financial ombudsman’s procedure should include enquiry-handling, so that some problems can be resolved before they turn into full-blown cases. Resolution of cases should include informal mediation, where this is possible, as well as formal decision.
Accessibility, transparency and accountability
8. Consumers can only access the financial ombudsman if they know about it, and where to find it. In addition to the ombudsman making information widely available, financial businesses should be required to tell dissatisfied consumers about the ombudsman.
9. The financial ombudsman should publish clear details about its powers and procedures and about the type and effect of its decisions. It is useful to publish case studies and/or guidance notes to illustrate the financial ombudsman’s approach to typical cases.
10. Financial ombudsmen should publish a report at least yearly, explaining the work that they have done. They should provide appropriate statistics about the disputes they have handled and the way in which they have handled them (including the arrangements for quality-control).
11. Where financial ombudsmen identify systemic issues that financial regulators (or even government) would be better placed to tackle, the financial ombudsman should draw those issues to the attention of the financial regulators.
The view of the Safe and Fair Finance Blog is that if all countries could create financial ombuds services following these 11 principles, then relationships between consumers and financial institutions would be solid and sustained.
Such relationships would be similar to those of the couples who have been together over many decades. Not everything is perfect. But when there’s a problem, the weaker party (in this case, the consumer) can be comforted that he or she will be treated fairly. That would be enough for most of us.
Help to establish a financial ombudsman—or strengthen an existing service---can be found through the International Network ofFinancial Ombudsmen. David and Francis are members of the Network. Tell them that the Safe and Fair Finance Blog sent you.