Ombudsman Schemes in the Banking Sector and How They Can Enhance Access to Justice

By Kelly Shuttleworth

This post is based on the Report ‘Ombudsman schemes and effective access to justice: A study of international practices and trends’  written for the IBA by the Bingham Centre for the Rule of Law and a related seminar held at the Bingham Centre on 6^th December 2018. For wider reading, please see UKAJI’s previously published content on ombuds, and  Hertogh and Kirkham’s recent handbook (2018).

Introduction

Ten years have now passed since the collapse of the giant US investment bank Lehman Brothers, and the subsequent global financial earthquake. The consequences are still being felt, and it is unsurprising that the resounding majority of the British public still do not trust banks to work in the best interests of society. The banking sector has come to epitomise the stark power imbalance between large institutions and the citizens that use them, and all of the problems this dynamic brings. Considering that banks have this immense capacity to impact economic and social rights, the need for users to be able to challenge their decisions effectively is paramount. Besides battling through costly tribunal processes, some solution might be found outside the realm of formal justice, in ombudsman schemes.

An extended use of Ombudsman schemes

Ombudsman schemes have become a significant feature of legal systems and informal justice processes across the world in recent decades. There are now over 200 in operation worldwide. They are distinct from the justice system implemented through the courts, and have immense potential to bridge the gaps created by (often) formal, expensive and lengthy dispute resolution processes. Ombudsman offices can ddress complaints from individuals, as well as act to investigate, review and address individual or systemic violations or maladministration, and they typically do so without prohibitive fees to access the process. This is where their potential to enhance access to justice lies.

While ombudsmen were first established in the public sector as a constitutional accountability tool, they have since been transposed to the private sector with great success. In fact, the largest ombudsman office in the world is now in the private sector. The private sector model emerged in the late 20^th century against a backdrop of surging consumerism, unprecedented expansion of regulation and a continuous privatisation of public services. They can be created by parliament, government or the industry itself, and aim to protect citizens against the undertakings of dominant institutions such as banks, insurance companies and media companies.

Ombudsman Schemes in the Banking Sector

The principal hallmark of an ombudsman lies in its power to redress the abovementioned power imbalance, as epitomised by its role in the banking sector. As noted, the banking sector has the ability to hugely affect economic and social rights, including in a uniquely damaging way. For example, a bank’s refusal to open a client account can hinder access to housing, wages, or other critical services where banking details are required. These decisions are also usually made on a wholly, or partially, automated basis, contributing to the impression that banks are removed and distant from their users. Banking ombudsmen have reported that users of banking services are not sufficiently aware of their rights in these interactions, and some have taken on a preventative responsibility to inform and educate.

When this is added to the collapse of public trust in banking services, the role that ombudsmen can play becomes even clearer. Consumer polls have indicated markedly higher levels of trust for companies signed up to ombudsmen schemes, and this is not an unprecedented move to boost public image. The UK insurance industry explicitly stated that its intentions when forming an ombudsman were that it was both ‘ethically desirable and commercially advantageous’. Thus, to rebuild this public trust, banks worldwide have frequently made in-house ombudsman- available, which use a variety of alternative dispute resolution methods. Arbitration-based approaches used within this sphere include mediation and negotiation, while decision-based approaches include adjudication, arbitration and expert determination. The IBA report notes that both in-house processes and independent public bodies may be necessary in certain cases to expose abusive practices.

Challenges: are these ombudsman models really sufficient?

There are questions over whether it is appropriate to rely on ombudsman schemes, as opposed to recourse to a tribunal, especially within the banking sector. The argument goes that a tribunal would supply a resolution that was public and adhered to the rule of law, defined in a narrow sense, whereas an ombudsman is largely private and does not make strictly legal findings. This view is particularly prominent within the financial sector, where companies and institutions may have gone to great expense to ensure that they have followed their contracts and contract law. The All-Party Parliamentary Group on Fair Business Banking has proposed a new financial complaints tribunal for small businesses, however a report commissioned by UK Finance found that this would be overly costly and take years to set up, especially with parliament currently clogged up by Brexit. It instead supported ombudsmen offices, recommending a voluntary ombudsman scheme to support larger businesses, and a new division within the FOS to focus on disputes between banks and small and medium-sized companies.

A critical insight into the capabilities of ombudsmen also made headlines in Australia, after the Australian government established a Royal Commission into alleged misconduct in the banking, superannuation and financial services industry. The Commission, established in December 2017, has publicly aired the extensive dirty laundry of Australia’s banks, including fabrication, executive inaction and poor decisions which hurt users. Significantly, it exposed dismissive attitudes towards the ombudsmen schemes there. CommInsure was accused of “serious misconduct” for misleading the Financial Ombudsman Service, and the chairman of the National Australia Bank, Ken Henry, described negotiating with regulator as akin to dealing with children.

Conclusion

It seems clear that the ombudsman schemes are not, and should not be touted as, a perfect solution to all the problems within the banking sector. They risk not being taken seriously, are limited in their remedies, and there are considerable ongoing issues with transparency. What ombudsman schemes provide, however, is an easily accessible and less intimidating platform for consumers to present their grievances and access a form of justice. They can help rebuild trust in a widely distrusted sector, and reassure millions of people that banks are not untouchable. It’s easy to see why ombudsmen have taken on an increasingly substantial role in the private sector over the past few decades, and if they can address the challenges that arise given this increasing significance, it seems likely that this trend will continue.

Kelly Shuttleworth is a Research Assistant at the Bingham Centre for the Rule of Law.