New code promises safer navigation in financial sector

IT IS something most consumers would like to see, but despite being announced last year, the Financial Services Ombudsman’s intention to “name and shame” financial institutions has yet to be realised.

While consumers may have to wait some time for such an initiative, will the new Consumer Protection Code help restore the trust of consumers in the financial services sector?

With complaints from consumers in connection with financial institutions now at historically high levels – 7,000 in 2010 – last year the Ombudsman, William Prasifka, decided to carry out a consultation process.

He did this ahead of making amendments to its biannual reviews, which would include a breakdown of the record of individual providers.

This tracking of individual providers is common practice in countries such as the UK, New Zealand and Australia. According to Prasifka, introducing just such a regime could be achieved without any exchequer funding and could offer significant benefit to consumers.

“Our view is that it would encourage providers to engage more fully with their customers in trying to resolve issues,” he says, noting that financial institutions are very concerned with upholding their reputation.

“They would be very much concerned if it were seen that they weren’t performing as well as their competitors.”

While Prasifka is keen to point out that such information will need to be “contextualised”, ie put in context of the size of the firm’s overall business, the consultation process did throw up some objections from industry.

In its response, for example, the Irish Insurance Federation said the Ombudsman’s proposals represented a “radical” step.

It argued that if not managed correctly, the proposals could generate misunderstanding in the market by subverting the statutory/supervisory role of the Central Bank through “periodic trial by media”.

If the proposals were adopted, then for financial institution A, for example, the Ombudsman’s report would reveal the total number of complaints made against the company, the number of complaints upheld, those upheld in part and the total amount of compensation awarded.

Given the amount of mis-selling complaints the Ombudsman regularly receives, particularly in the case of older people, such information could provide a valuable insight into where best to seek out financial products.

Indeed, misselling accounted for more than 37 per cent of investment complaints for the period 2007-2010.

While Ireland may not be the only country with problems in this area – in Britain, for example, the Financial Services Authority (FSA) recently slapped a £10.5 million (€12.6 million) fine on the HSBC for mis-selling products to elderly people – the expectation is that complaints will likely continue to rise.

“I will have been in this job for two years in March and I don’t see any sign at the moment that complaints are going down,” notes Prasifka. “All indications are that complaints will remain at historically high levels.”

Most worrying is that while complaints may be on the rise – and some of these may be unfounded – the number of complaints being upheld by the Ombudsman is also increasing.

After all, as Prasifka concedes, part of the reason complaints are rising is because people in financial difficulties are looking for help, even if they don’t have a valid complaint.

“A lot of complaints are being driven by people in financial distress,” Prasifka says, adding that complaints about mortgages and mortgage protection insurance have been increasing.

He describes the increase in the number of complaints being upheld (up to 29 per cent from 24 per cent previously in the first six months of the year) as “a very worrying trend”.

“It’s not a good trend and we want to see it come down.”

While the ability of the Ombudsman to “name and shame” financial institutions may help in this regard, it will require legislative change.

Before Christmas, Fianna Fáil’s spokesman on finance Michael McGrath published a Bill empowering the ombudsman to do just that, but his party is now in opposition – and it did not pursue it when it had the opportunity.

Nonetheless, Prafiska is hopeful that the proposals submitted to the Department of Finance will be acted on.

“We’ve never heard any substantive argument against it from anywhere,” he says, adding, “even the providers [financial institutions] are generally in favour.”

While consumers may have to wait some time for this amendment, however, since the start of this year there is additional protection for consumers in the form of the new Consumer Protection Code.

It covers banks, insurance companies, credit unions and financial intermediaries and its purpose is to strengthen and enhance protection for consumers.

The code aims to facilitate a better complaints resolution process, by imposing new requirements on financial services providers.

For example, institutions must now acknowledge a complaint within five days, provide an update every 20 days, and if not resolved within 40 days provide a time-frame on when it will be.

It also brings about a number of changes to how financial services providers and intermediaries must conduct themselves, most notably when it comes to the conflicts of interest that can arise with regards to commission-based financial advice.

Under the new code, when advisers earn commission in selling financial products, it should be done in a way that does not “impair” their duty to act in the consumer’s best interests. This is also the case for salespeople in financial institutions.

Moreover, if an adviser or intermediary is “tied” to a particular financial institution, in that it can only sell products sold by that firm – and likely earn commission from doing so – then it must disclose this to the consumer.

However, it could be argued that the code does not go far enough.

In Britain, for example, the Financial Services Authority is set to ban commission-based financial advice associated with the sale of products such as annuities and mutual funds from the end of this year.

Consumers should also welcome a new “reasons why” requirement, which means that lending institutions must disclose why they have refused to offer credit, such as a mortgage, to consumers. Given the lessons learned as a result of the housing bust, more stringent affordability criteria will be checked when it comes to giving out mortgages.

Enforcement powers have also been strengthened.

While a fine of the order of that imposed by the FSA on HSBC has not yet been seen in Ireland, under new legislation the Central Bank will be able to double the fines it imposes on financial institutions, bringing them up from €5 million to €10 million, or 10 per cent of turnover.

“Certainly we have become a lot more active and we will get even more active in 2012,” notes Peter Oakes, director of enforcement at the Central Bank,

Indeed last year, more than €5 million in fines were imposed across nine companies – more than double the total for 2010 – although the case of the Combined Insurance Company of Europe accounted for the majority of this.

Just before Christmas, the Central Bank imposed its largest single fine to date, €3.35 million, on the company because of a wide range of issues, including a failure to follow standard claims procedures and over-insuring customers.

However, 80 per cent of fines imposed were related to cases with a consumer angle, while 30 per cent of the Central Bank’s enforcement activities have been in the area of mis-selling.

As such, it is hoped that stricter enforcement might lead financial institutions to get their act together when it comes to treating consumers appropriately – thus reducing the number of complaints that have to go to the ombudsman.

The new code: key points for consumers

* Unsolicited “doorstep” visits are banned

* “Vulnerable” customers must be identified

* Remuneration agreements should not lead to pressurised selling

* Consumers should receive an explanation when credit is refused

* Consumers’ ability to repay credit should be assessed

* Interest-only mortgages – consumers must demonstrate ability to repay both interest and principal

* Stricter advertising principals – small print can only be used to supplement key information