The Financial Ombudsman will fix it

Do many solicitors refer their clients to the Financial Ombudsman Service (FOS)? There are ways of handling financial complaints these days, and it can pay to know something of the FOS mindset before advising a client to commence litigation. One drawback is the FOS very rarely pays anything towards the cost of a complainant being represented. But a client is not going to be too impressed if efforts to take advantage of the free FOS service are not made at the right time.

The FOS can be used to mediate on complaints against banks, building societies, insurance companies, insurance brokers, mortgage brokers, credit card companies, and other lenders. If your client shows an interest in letting the FOS investigate their complaint, consider keeping a stock of FOS complaint forms '“ downloaded from the FOS website.

Banking system

Nobody fully understands the clearing system for cheques. The customer certainly does not and, even if the bank does, it is rarely capable of explaining it. So here is my best attempt. For example, you put a cheque in your current account from your daughter on a Monday. The cheque spends Tuesday in the banks' clearing system and arrives at your daughter's bank for payment on the Wednesday. Your bank will not know for sure it has cleared until the following day, Thursday.

Two things complicate the process. Some banks will give you the benefit of the doubt and allow you to draw money out of your account even though money you have paid in has not yet cleared. But the other problem is that some banks are not real banks at all, and have to have their cheques processed by one of the larger clearing banks. This can easily add a day or two to the clearing cycle.

The fact that some banks will allow a customer to draw funds even when the cheque they have paid in has not been fully cleared can cause problems. Some tricksters play this to their advantage. They see something offered for sale and offer to buy using a stolen cheque which is for an amount greater than the asking price. They then ask the seller to pay the difference back using their own cheque. Sometimes they are asked to pay some third party for shipping costs or some other expense. The prudent seller checks with his bank to make sure the purchaser's cheque has cleared before he writes out his own cheque. If he simply asks if the cheque has cleared, the bank will often say it has '“ in which case the customer will go ahead and issue his own cheque as requested. But what did the bank mean? Quite often the bank and the customer mean two entirely different things. The customer simply wants to know if there is any danger the cheque will bounce; but the bank is not addressing this danger at all.

There are cases where the FOS has ruled in favour of the bank. However, it it can be shown the bank should have know the reason why their customer was asking about clearance '“ in other words, would the cheque bounce? '“ then the FOS would expect the bank to have provided a more detailed answer. Especially if the bank knew its customer was about to issue his own cheque, they should warn there is still a possibility of the original cheque bouncing. If they have not done this it is likely the FOS would rule in the customer's favour.

Investment advice

Prior to 1 December 2001 (before the Financial Services and Markets Act took effect) an investor placed £90,000 into what became known as a precipice bond '“ a highly speculative form of investment. He had consulted an independent financial adviser (IFA)

When he realised his investment had fallen by £50,000 the investor complained to the IFA. But the IFA rejected the claim on the basis it had not provided advice, and that the transaction was execution only and it had also rebated fifty per cent of its commission.

The FOS established that the firm had sent the investor a brochure about the bond two weeks before he invested and there had been a subsequent meeting during which other options were discussed. The FOS rejected the suggestion this had been an execution only transaction, and agreed the investment was not suitable for the investor's needs and circumstances. It also ruled that the rebate of commission was immaterial in establishing whether or not investment advice had been provided. The IFA had to make good the loss.

Credit cards

A bank's customer was on holiday in France and he bought a box of cigarettes for 291.80 euros and used his credit card. He later realised the transaction had been incorrectly processed at 2,918 euros. When he contacted the bank it maintained there had been no error and that there was nothing it could do.

The FOS established that the error was not the bank's, but the retailer's. However, it disagreed that there was nothing the bank could do about the problem. It could have initiated a charge back routine that would have highlighted the problem and should have generated a refund. However, there is a time limit for this process and the deadline had now passed. The FOS ruled the bank would have to make up the loss and pay £250 for inconvenience.

Insurance companies

Insurance companies do not like burst pipe claims, a topical issue for this time of year. With so many homes being well-heated these days, burst pipe claims are rare unless the property is unoccupied. Herein lies the problem. How does a particular insurer define unoccupied; does the policyholder understand; and what precautions should be taken?

Should a claim be declined on the basis that the property had been classed as unoccupied, do check the policy definition. A typical policy wording would class a property as unoccupied once there has been no one in residence for more than 30 days. Sometimes this is 60 days.

However just because someone has left a property for a period exceeding this time, it does not necessarily mean that the claim will fail.

The FOS considered a claim for a couple who had gone away on a three month cruise. When they returned home they realised there had been a burst pipe '“ although the damage was not as great as it could have been as they had turned off the water at the mains. The insurance company had turned down the claim on the grounds that there was no cover for the escape of water if the property had been left unoccupied for 60 days or more.

However, when the FOS investigated the facts it was established that, by reference to weather records, in all probability the damage had been caused in the early stages of the couple's absence and was, therefore, covered by the policy. The only concession made by the couple was that the damage had been made slightly worse by their prolonged absence, and so they paid a proportion of the cost to repair a wooden floor.

The technical reason the above complaint was upheld is a useful talking point. There had, indeed, been a breach of policy conditions because the absence exceeded the stated 60 days. However, it was established that the actual circumstances of the claim were not connected with the breach.

The FOS has long established the following principle: 'We do not consider it good practice for insurers to decline to pay out where the policyholder's breach of a policy condition has been only a technical breach that has not prejudiced the firm's position in any way.'

The FOS also pointed out that the Insurance: Conduct of Business Rules (which came into force on 14 January 2005) state: 'An insurer must not. . . except where there is evidence of fraud, refuse to meet a claim by a retail customer on the grounds . . . of breach of warranty or condition, unless the circumstances of the claim are connected with the breach.'

On 17 July 2007 the Law Commission published jointly with the Scottish Law Commission a consultation paper on insurance contract law. The consultation period has now ended, but it is widely expected that there will be changes to the law relating to misrepresentation, non-disclosure and breach of warranty by the insured. Good insurance practice has adapted in-line with many Ombudsman decisions with the result there is a gulf between law and practice.

Payment Protection Insurance

You can not beat Payment Protection Insurance (PPI) for generating complaints. Many PPI policies, and the associated selling methods, have largely been discredited in recent months.

In June 1998 this author (and another) commented: 'Loan protection policies rarely seem to match up to the insured's expectations'((1998) 142, SJ 569 19.06.08). Even earlier than this we stated: 'It is difficult to escape the conclusion that the way these automatic schemes are marketed involves the insurer building a trap for the uninitiated and unsophisticated client.' ((1995)139, SJ 722, 21.07.95). Only now are these reservations being taken seriously.

Applicants for PPI are rarely asked any questions about their state of health or employment status which leaves all the problems to be dealt with at the claims stage. The FOS will expect an insurer to explain clearly how the cover operates and how the exclusions work. It must be made absolutely clear that the cover will not operate in relation to pre-existing conditions; and any limits in cover for the self-employed must also be explained '“ otherwise, the insurer will have to pay the claim. In relation to a complaint of a missale, if it is shown the PPI was unsuitable in the circumstances, the insurer will often be made to return the premium.