Cost of 'root cause' rule changes unknown

03 June 2011

The FSA's confirmation that the PPI complaints handling guidance relating to root cause analysis will be applied to all complaints handling from 1 September has clarified what the FSA expects of firms.

Its consultation paper, though, admits there is no evidence as to the likely cost for firms of compliance.

The FSA is introducing new guidance into DISP 1.3.2 requiring firms to operate management processes so that "relevant learning from ombudsman determinations and published material are identified and cascaded to complaints handlers".  The guidance suggests firms should "ensure that lessons learned as a result of determinations by the Ombudsman are effectively applied in future complaint handling, for example by: (1) relaying a determination by the Ombudsman to the individuals in the respondent who handled the complaint and using it in their training and development; (2) analysing any patterns in determinations by the Ombudsman concerning complaints received by the respondent and using this in training and development of the individuals dealing with complaints in the respondent; and (3) analysing guidance produced by the FSA, other relevant regulators and the Financial Ombudsman Service and communicating it to the individuals dealing with complaints in the respondent".

Firms will likely have to be able to demonstrate that such procedures are in place and work. In implementing such procedures, firms should note the important distinction between determinations by an Ombudsman (i.e. final determinations by one of the FOS' panel of Ombudsmen) and guidance produced by the FOS as a whole.  In deciding whether to refer a complaint for final determination by an Ombudsman, firms will (whether deliberately or not) thereby be encouraged to accept adjudications rather than risk an adverse determination by an Ombudsman which would have to be applied in future complaints handling.  The distinction may be a drafting error as the factors relevant to assessing a complaint under DISP 1.4.1 still include 'decisions by the Financial Ombudsman Service' as a whole.

The emphasis on process is even more apparent in the new root cause guidance. Processes require systems and controls which can be supervised and subjected to enforcement investigation if necessary. Firms will not simply be able to rely on privileged legal advice to the effect that there is no systemic or recurring problem.

DISP 1.3.3B G will provide: "The processes that a firm should have in place in order to comply with DISP 1.3.3R [to put in place appropriate management controls and take reasonable steps to ensure that in handling complaints it identifies and remedies any recurring or systemic problems] may include, ...: (1) the collection of management information on the causes of complaints and the products and services complaints relate to, ...; (2) a process to identify the root causes of complaints; (3) a process to prioritise dealing with the root causes of complaints; (4) a process to consider whether the root causes identified may affect other processes or products; (5) a process for deciding whether root causes discovered should be corrected and how this should be done; (6) regular reporting to the senior personnel where information on recurring or systemic problems may be needed for them to play their part in identifying, measuring, managing and controlling risks of regulatory concern; and (7) keeping records of analysis and decisions taken by senior personnel in response to management information on the root causes of complaints".

The senior manager responsible for complaints handling within a firm (from 1 September) will, when faced with all these procedural requirements, be little comforted by the FSA's statement that "it is therefore not our intention at the present time that an individual would be subject to enforcement action for failure to provide adequate oversight of a firm's compliance with DISP" (my emphasis).  Given that the FSA fined and banned a compliance officer in May for CASS breaches before the CF10a significant influence function was introduced, the person appointed 'CF Complaints' will want to watch carefully for an announcement that the FSA plans to start to take such enforcement action.

Root cause guidance in DISP 1.3.6 G will say, where a firm identifies recurring or systemic problems, it should "consider whether it ought to act with regard to the position of customers who may have suffered detriment from... such problems but who have not complained and, if so, take appropriate and proportionate measures to ensure that those customers are given appropriate redress or a proper opportunity to obtain it. In particular, the firm should: (1) ascertain the scope and severity of the consumer detriment that might have arisen; and (2) consider whether it is fair and reasonable for the firm to undertake proactively a redress or remediation exercise, which may include contacting customers who have not complained" (my emphasis).

In response to the objections that firms would never choose to provide redress to non-complainants without being forced to by the FSA and that their insurers would not support them in performing root cause analysis that might lead to increased redress, the FSA simply repeated that the new guidance is merely a re-statement of the existing guidance and that it will expect any redress or remediation to be 'appropriate and proportionate' to the circumstances of the case.  I anticipate much debate about those three words - 'appropriate and proportionate'.

In answer to the criticism that the FSA had provided no estimate of the possible costs to firms of redress payable to non-complainants, the FSA referred to a similar estimate it gave in respect of PPI complaints (which will likely prove to be very conservative at £1bn - £3bn) but it accepts "because there is no way of reliably predicting the scale of future cases of widespread detriment, we are unable to provide any meaningful estimate of costs or benefits for this particular proposal".

The costs are, literally, immeasurable.

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