Lessons from Ombudsmania
Steve Brooker of the National Consumer Council looks at the private sector Ombudsmen landscape, asking whether it is delivering for customers and identifying areas for improvement.
Most observers would agree that ombudsmen rank as one of Britain’s most successful consumer imports. It is easy to take for granted the existence of a free, relatively speedy and informal out-of-court process to receive a binding redress against a business or public body. This is something in our consumer regime that we can truly be proud of.
Ombudsmen now cover all levels of government as well as significant industry sectors. It is strange to think of a world without ombudsmen now, but in fact they are a relatively recent arrival on our shores. Back in the 1960s, they were seen as something of a risky leap in the dark, so it is to the enormous credit of the ombudsman community that policy-makers often now turn instinctively to them when introducing new consumer redress arrangements.
This article focuses on private sector ombudsman schemes. There seems to be a general consensus that they are serving consumers well, as measured by customer satisfaction surveys and stakeholder opinion. However, while individual schemes appear to be operating satisfactorily, the issue of whether the system as a whole is working well has received far less scrutiny. A forthcoming pamphlet by the National Consumer Council, Lessons from Ombudsmania, seeks to answer this question. It takes a strategic look at the private sector ombudsman landscape, asking whether it is delivering for consumers and identifying where things could be improved. In this article, we give a flavour of the five main ideas put forward in the pamphlet.
The pamphlet coincides with a root-and-branch review of the UK consumer protection regime – of which consumer redress is a key element - being conducted by the Department for Business, Enterprise and Regulatory Reform. The review presents an opportunity to look at issues afresh and claims to be willing to listen to radical ideas. So this, if needed, is a genuine opportunity to achieve real change.
Lesson 1 – Mind the gaps
Consumers can access ombudsmen in many important areas of economic life, from financial services to energy suppliers. But in many industries which most frequently cause consumers problems, such as home repairs or the purchase of second-hand cars, the availability of ombudsmen, or, indeed, other forms of alternative dispute resolution, is patchy or lacking altogether.
Generally speaking, ombudsmen are features of regulated industries. Indeed, the experience of ombudsmen in unregulated consumer markets, most notably the Funerals Ombudsman, has been troubled. In sectors which are fragmented, consisting of many small traders, for example builders or mechanics, it is perhaps unsurprising that industry has proved unwilling or unable to organise sustainable independent redress schemes.
Consumer access to out-of-court redress mechanisms in unregulated industries remains an unresolved problem. Given that effective redress is central to the Government’s strategy of empowered consumers driving competition, we hope the root-and-branch consumer protection review will give this serious thought. One possible approach is to extend the model in the Consumers, Estate Agents and Redress Act 2007, to provide the Secretary of State with reserve powers to require businesses carrying on specified economic activities to subscribe to an independent redress scheme, overseen by some sort of oversight body. There would be a lot of detail to work through, but this offers a targeted and risk-based approach that chimes well with the better regulation agenda.
Lesson 2 – Narrow perspectives
Ombudsmen are typically created as one part of sectoral regulatory arrangements. For example, Otelo exists alongside Ofcom, and the Energy Supply Ombudsman alongside Ofgem.
This vertical approach is increasingly out-of-step with the modern economy, where companies provide bundled products and deliver services in one-stop-shops. Take buying a home: the consumer may use the services of estate agents, providers of Home Information Packs, mortgage providers, financial advisers, surveyors and lawyers. Increasingly, providers are establishing mechanisms which link these services into packages, and, when the Legal Services Act comes into force, it will be possible for one provider to do the whole thing seamlessly.
This may be brilliant for consumers when it goes right, but what happens when something goes wrong? Since there are different redress schemes for different bits of the process, how does the consumer go about unravelling where things went wrong especially when the buck gets passed around? There are growing signs of gaps and overlaps. Arrange your survey through your bank, and your complaint might have to be routed through the Financial Ombudsman Service instead of the Surveyor Ombudsman Service. The Legal Complaints Service recently acted to close a loophole which prevented consumers from complaining about a solicitor’s handling of their re-mortgaging transaction. The problem arose because the lawyer’s client was technically the mortgage company, not the end consumer.
The economic trend is towards convergence; we believe ombudsmen should head in the same direction. Ombudsmen are finding fixes to get around these problems, but arguably this isn’t sustainable in the long-term. We would like to see the consolidation of existing ombudsmen around core themes related to how consumers operate in markets, such as property and utilities.
Lesson 3 – Competition for whom?
The legislative model currently favoured by policy-makers - at least within the Department for Business, Enterprise and Regulatory Reform - permits more than one redress scheme, and, indeed, different types of schemes, to operate in any single market. This competitive element is designed to encourage efficiency. We share the concerns expressed by a number of other stakeholders that this model is flawed.
The “telecommunications model”, as it is known, really falls down because the choice of redress scheme lays with the firm, not the consumer. This creates a perverse incentive for firms to choose the scheme which is cheapest, or, worse, develops a reputation for making industry-friendly decisions. Regulators can prevent firms from exploiting their power to choose, by setting the scheme criteria at the right level and by monitoring performance. However, when industry designs the scheme, there is a danger that regulators will accept the lowest common denominator – a risk exacerbated in a deregulatory climate.
The model also works against the grain of modern markets, as outlined above. Switching between suppliers is an important driver of competition, but when the two companies involved belong to different schemes, consumers could become confused and business exasperated by inconsistencies.
Efficiency is a valid policy objective – after all, consumers pay in the end through higher prices. However, there may be other ways to achieve efficiency without losing the benefits of the single scheme model. Increased external scrutiny and the tendering model followed recently for surveyors – offering competition between redress providers, the market, rather than for regulated firms – offer interesting possibilities.
Lesson 4 – Learning from experience
Ombudsmen have two core roles. The first is to resolve complaints from individuals. The second is to use the intelligence gathered from complaints to help raise standards across the industry, for the benefit of all consumers.
Compared to their counterparts in the public sector, where ombudsmen issue special reports and develop best practice guidance, private sector ombudsmen appear to do comparatively little of the second role. Partly, this may be because industry has accused ombudsmen of straying into pseudo-regulatory roles. Clearly, ombudsmen should not be regulators – they perform different functions and use different tools – but we feel that ombudsmen are being over-cautious. They will not maximise their unique potential unless they make better use of the privileged information they receive from complaints.
We would welcome public debate about where the appropriate boundaries of this wider role of ombudsmen should lie. Unless the parameters are clearly understood, the opportunities will remain under-realised. In the pamphlet, we outline some ideas where ombudsmen, in our opinion, could legitimately do more. For example, we would like to see them develop explicit dispute prevention strategies, supporting business to avoid problems through early warning systems and advising on best practice in complaint handling. We want ombudsmen to have powers to trigger an investigation by the industry regulator into a matter which their complaint intelligence indicates is of concern. Finally, we would like to see ombudsmen publish the details of upheld complaints about individual firms – an issue explored previously by the NCC. By putting this information into the public domain, ombudsmen can tap into the impact of business reputation on consumer behaviour to spur companies to comply with market rules.
Lesson 5 – Time to regulate ombudsmen?
The pamphlet also explores issues around the appropriate level of regulation of ombudsmen. We consider there is a need to give ombudsmen protection of title, but we do not think additional regulation of ombudsmen is needed at this stage. This is because nearly all ombudsmen are already subject to checks and balances through their relationship with sectoral regulators. This might change if new ombudsmen begin to appear in unregulated sectors.
However, there is an urgent need for one organisation to have responsibility to develop, and keep under review, a joined-up strategy for ombudsmen of all types, across the private and public sectors. The common thread running throughout the pamphlet is a lack of coherence – consumers need an organisation that can take a strategic view across the piece.
The best candidate for this task is the new Administrative Justice and Tribunals Council (AJTC). In the white paper proposing its creation, the government envisaged the AJTC would evolve into an advisory body for the entire administrative justice sector, including public sector ombudsmen. Although it could be argued that private sector ombudsmen do not count as deliverers of “administrative justice”, we consider that the wide definition of this term in the Tribunals, Courts and Enforcement Act 2007 provides scope for the AJTC to take on the role we envisage. Since ombudsmen are part of regulatory frameworks created by statute, the relationship between consumer and ombudsman can also be said to involve an interaction between citizen and state. This suggests that industry redress mechanisms linked to statutory requirements are not purely a matter of private law, but also are part of the public law system in a wider sense.
In addition, there are good policy reasons why a distinction between administrative justice and private sector ombudsmen is artificial and unhelpful. First, the private sector ombudsman model is no longer an experiment: it merits recognition as an effective mechanism operating on a large scale. Second, private sector ombudsmen have relationships and interdependencies with other parts of the justice system and are affected by changes to the way these operate. Third, and perhaps most important, from the consumer’s perspective ombudsmen are simply one route to redress a wrong suffered at the hands of another individual, a company or an agency of government. Therefore, since consumers see ombudsmen as one element of the wider justice system, there is a good argument that they should be treated as such.
Conclusions
Private sector ombudsman schemes should be proud of what they have achieved for consumers. However, while individual schemes seem to operate effectively, when the ombudsman landscape is viewed as a whole some flaws are apparent. This is a consequence of the emergence of ombudsmen in an ad-hoc fashion in regulatory silos, rather than as part of a joined-up vision about how they should develop strategically.
The current consumer protection review offers an excellent opportunity to rethink the present arrangements. We see the AJTC as being central to the future direction of ombudsmen of all types, ensuring they continue to go from strength to strength.
Steve Brooker is a Senior Policy Advocate at the National Consumer Council. The pamphlet, Lessons from Ombudsmania, is due to be published later in February. Visit www.ncc.org.uk.