12
Examination of witnesses
James Dipple-Johnstone and Rachel Lam.
Q124 The Chair: Welcome to this session, which is the final oral evidence session as part of the committee’s inquiry into the regulation of the consumer insurance market. I thank Mr Dipple-Johnstone and Ms Lam for attending this session. The session is open to the public, broadcast live and is subsequently accessible via the parliamentary website. A verbatim transcript will be taken of the evidence and will be put on the parliamentary website.
Could I ask you, Mr Dipple-Johnstone and Ms Lam, to introduce yourselves for the record, and then we will move on to questions.
James Dipple-Johnstone: I am the chief ombudsman of the Financial Ombudsman Service.
Rachel Lam: Hello. I am the interim ombudsman managing director of the Financial Ombudsman Service.
The Chair: Thank you both very much. We will start with some background on the work of the FOS in consumer insurance, specifically in home and travel insurance, which is the focus of our inquiry. Can you outline the scale of the FOS’s work on consumer insurance issues compared with other financial services and how much of that work relates to home and travel insurance?
James Dipple-Johnstone: Thank you very much, Chair. Thank you to the committee for inviting us to give evidence today. The Financial Ombudsman Service is the free and independent dispute resolution service that investigates complaints that firms have not been able to resolve themselves. We typically see just over 200,000 complaints escalated to our redress scheme each year. Within that, about 45,000 relate to insurance products, and within that 45,000 approximately 14,000 a year relate to home and travel insurance of various types. We will look at what the firm has done against the regulatory rules and the relevant laws to consider what is fair and reasonable in all the circumstances of the complaint to resolve that dispute.
I will turn to Rachel to set out a little bit more in terms of the issues that we see relating to the committee’s work.
Rachel Lam: Yes. Across the 45,000 and 14,000 complaints, the majority of the complaints that we will see are around claims and the claims experience. That may not be a surprise because it is when something has gone wrong for a consumer, or they think something has gone wrong, that they will raise a complaint with the insurer. If that is not put right—in most circumstances, it is put right—they will raise a complaint with us. That complaint will be around the claim. There can be a range of issues around the claim: a declined claim, a delayed claim, the handling of the claim or the amount that is redressed around the claim.
The Chair: If we just focus on home and travel, have you seen any significant trends in what consumers complain about or how insurance providers are responding to complaints?
James Dipple-Johnstone: In terms of those two particular types of product, we see shifts over time, particularly in travel insurance. Recently, with the travel disruption in the Middle East, we see an influx related to decline claims coming through there. If there has been a season of particularly bad storms, we might see a periodic increase in terms of claims related to that.
The kinds of issues that we see coming through are, however, familiar across both. It will be the decision to decline the claim or it will be around exclusions and the communication about the exclusions or limitations to the policy terms. We will sometimes see claim delay. If the firms have been responding to large volumes of claims on the policies, that can sometimes cause backlogs in firms. That will then feed its way through the system to us.
There are also complaints related to general administration, communication, rudeness or lack of explanation that we see throughout all our financial services work. I do not know whether there is anything in addition to that.
Rachel Lam: The only other trend that we have seen generally over the last four years or so was coming through the end of Covid after people had been through lockdown. We saw an increase in the number of complaints and the uphold rate. That was due to a combination of factors. One was around people getting back into work, moving and travel. We saw that during Covid people were not travelling at all. They might have had an annual policy. There were issues that we resolved around that with refunds, et cetera. When we started travelling again, you will recall that there was quite a bit of disruption, and so we saw complaints around some of those issues. We see longer-term trends around issues such as those.
Q125 Lord Sharkey: Can you tell us whether or not, according to your data, the consumer duty has in fact brought any measurable change in the home and travel insurance markets? Perhaps it would help if you would, in answering the question, also explain how it is that the FOS actually works with the FCA.
James Dipple-Johnstone: Certainly, yes. In terms of the consumer duty itself, it is something that we would consider in complaints that come through to us. It is probably too early to see any definitive longitudinal trend coming through in terms of the consumer duty.
In terms of how we work with the Financial Conduct Authority, as it referenced this morning, we give a data feed of cases that are coming through to the service. That will include information about the firm against which the complaint is made, the issue that has arisen, anything specific in terms of what we found through our investigation plus the outcome, if we have awarded redress or made a recommendation to the firm. They will get that data feed from our systems.
In addition to that, we are structured, directorate by directorate, based on products. We have a directorate that focuses on our insurance work. The leadership team in that directorate will also meet regularly with their counterparts at the Financial Conduct Authority as well as consumer groups and industry to share lessons learned coming out of the cases, any trends or patterns that are coming through and any firms that are giving rise to concern in terms of what we are seeing coming through the data feed.
Lord Sharkey: I was not quite clear about whether you feel that the consumer duty has brought any measurable change. Do you think it has?
James Dipple-Johnstone: At the moment, we feel it is still too soon in terms of seeing any observed trends. The complaints that we see have to be raised first; they then have to work through the firm’s system; and they have then got to come through to us and be investigated through our processes. While the consumer duty is relatively new, we are still seeing that behaviour feed through the system. It is too soon for us to draw any firm conclusions.
Lord Sharkey: You mentioned that you were independent. Your operating system at the moment, as I understand it, is the MoU of July last year. Did the MoU introduce any really significant changes that might benefit the consumer?
James Dipple-Johnstone: In terms of our basis for co-operation with the FCA, there are some statutory provisions in the statute that governs our work in terms of how we have to share information and, likewise, places certain obligations on the FCA around the redress scheme and making sure that the service is appropriately funded and resourced to do its work.
Within that, we are impartial, looking at the individual cases. The MoU formalises some of our working relationship with the FCA. It is to the assistance of consumers because, where we identify that there is an issue coming through that might potentially have wider implications or impact many consumers, we can formally refer that through to the FCA for its consideration as to whether it might want to make a regulatory intervention or set up a consumer redress scheme. That provides a quicker and more formalised route of escalating concerns that we see through to the regulator for it to consider whether it should take action.
Q126 Lord Hollick: Does the work of the FOS on consumer insurance point to serious market failings?
Rachel Lam: To start with, on average we receive about 45,000 complaints across the insurance sector, which is a small proportion of the complaints that the firms will deal with, which is a small proportion of the claims that are handled and the policies that are out there.
We can only comment on the 45,000 complaints. It would only be right that we only comment on those 45,000 complaints. Within that, we see general trends. Generally, we see complaints around when something has gone wrong or someone thinks something has gone wrong, which are around claims. That may not be a surprise because that is when the value of the product really comes to the fore and it really matters for the consumer. We tend to see the complaints much more around claims issues, such as claim decline or claim delay issues.
We share that actively, as James has described, with the FCA and with the ABI and with firms. We regularly have an engagement where we share that insight. There may sometimes be a range of complaints that are connected. We may see similar consumers having similar issues or similar detriment across a range of complaints. If that is around a small range of complaints, we will share with the FCA and it might be that it connects that with its supervisory activity and sees that there are wider issues. It might be that there are not wider issues, but there is really good learning for firms or an individual firm to take forward. We will always actively engage and share that with firms.
Lord Hollick: What are the exact problems that you have identified in terms of market failings? What are the two or three priorities that come through the work that you are doing?
Rachel Lam: To give you a particular example that we have shared with the FCA—it was picked up earlier—when we came out of Covid, we were definitely seeing an increase in complaints around valuations around vehicles. We were seeing a number of issues around when a consumer has lost their vehicle and is needing to replace their vehicle. The value that was being offered was not enabling them to replace their vehicle. That was the essence of the complaint, and we were seeing issues around that. We raised those with the FCA and it took action around that. We also raised that with the ABI and the firms. There has been quite a lot that has been addressed around that. We have seen those uphold rates and the volume of those complaints come down.
Q127 Baroness Bowles of Berkhamsted: I am interested in the interaction that you have with firms beyond complaints, when you have this learning from volumes and cases. Are there general communications with firms rather than the specific ones where you have been involved in the same way that you have general communication with the FCA?
James Dipple-Johnstone: We will have specific communication with the firms on the cases that we have looked at. An example of this was flagged to me when I first started in the service. There was a firm that had a travel insurance policy document. As part of the advertising material, it showed skiers skiing off-piste, but that was one of the exclusions in the policy. There was immediate feedback with that firm because that was giving rise to complaints that were coming through about that firm.
We will have specific communication related to what we see from the firm on each case that we determine, but we also try to aggregate our learning and then we share that with the sector through a number of different routes. We publish case studies on our website. We also send out a publication periodically called Ombudsman News that shares broader trends and patterns. We share statistical summaries that are generic in nature of the kinds of issues giving rise to complaints by sector and the firms that are giving rise to complaints. We publish that twice yearly and on our website. Where we identify bigger trends and issues, we flag those to the FCA and to firms and share insights where we think there may be some joint work that needs to be done, for example around communication and understanding by consumers. We work at those different levels.
Similarly, we work with consumer groups. We share that insight with consumer groups, particularly those consumer groups who have advice functions. It is often quite helpful for them to understand what the service is thinking about a particular issue so that they can advise anybody who contacts their advice line about whether to make a complaint to the service.
Baroness Bowles of Berkhamsted: Has there been any change in your work consequent upon this switch to the consumer duty? Have you noticed any differences? In the previous session, we were looking at the fact that maybe there will be fewer rules and more reliance on the consumer duty. How is that going to impact your work? What is the difference between the consumer duty and “fair and reasonable in all circumstances”?
James Dipple-Johnstone: In many ways, from our perspective, particularly in terms of the focus of the committee’s work on insurance, because there are already quite prescriptive rules around the insurance sector, the service, even under its “fair and reasonable” remit, has to consider the relevant law and the relevant rules and work through that list.
A lot of that does not change. We continue to apply the regulatory rules case by case. As I say, it is still too early to draw firm conclusions about the impact of consumer duty. We have not seen that come through our casework yet, but many of the issues that we continue to see we will flag back with the firms and the regulator.
While the issue around communication is consistent, for example, it might be with particular firms or products over a particular period of time. From the statistical data, it might just look like it is communication and it is continuing to be an issue, but within that the numbers might show that we have addressed a particular problem with a particular firm at a point in time and that has got better, even if it may have got worse in another firm over here.
That is why it is still too early to draw out any firm conclusions around the consumer duty from our perspective, with the caveat that we see a few thousand cases out of the millions of products out there.
Q128 Lord Turnbull: There have been several references to the uphold rate. It sounds like a very simple concept—someone makes a claim, it is refused and you say, “No, it should have been paid out”—but there are all sorts of variants on that. It could be that you make a claim and you asked for £20,000; they offer £10,000 and you do not think it was enough; and you end up with £15,000. Is that all part of your uphold rate? Of the 45,000, for how many of those do you come back with some degree of amelioration, which could be certainly less than the full claim? How many of those do you end up paying out the full thing?
James Dipple-Johnstone: Our uphold rate is based on whether there has been a change in outcome. We do not have a concept of “partially upheld” or the extent to which it is upheld. The way our systems gather information at the moment means that, if we have achieved a change in outcome, that will count as an uphold.
In terms of travel insurance, for declined claims, in about one in three cases we change the outcome for the consumer. In terms of home insurance, in around one in four cases we change the outcome.
Lord Turnbull: Is there any sense in which the claims companies are thinking, “We will get a bit tougher and decline more claims. They will go to the ombudsman. Let them sort it out. There will be some reprieves, but we still end up net better”? Is there any degree of cynicism in the way that people are behaving?
James Dipple-Johnstone: It is difficult to see that from our position in terms of the numbers that we are seeing. Some of the numbers have been fairly stable. We would be alert to that kind of thing, if we felt that a particular firm was suddenly generating a higher uphold rate. That is exactly the information that we would be sharing and flagging with the regulator and picking up with the firm through our process of engagement.
Rachel Lam: We would see that in the complaint handling. We would see how the firm had addressed the initial complaint. If we felt there were a significant number of the same complaints not being investigated in the way that we think would lead to a fair outcome, we would raise that with the firm and notify the FCA.
Lord Turnbull: When the FCA is talking about the acceptance rate, is that what was finally agreed or is it what it first accepted and then left to you to add something on?
James Dipple-Johnstone: I would not know enough about how that works. We do not see the acceptance rate. We only see the complaints that have been escalated through to us. Quite often, these are people who have had their case declined. We very rarely see cases where the claim has been accepted and paid out.
Rachel Lam: That is right, yes.
Lord Turnbull: The FCA is defining it as what finally the consumer got, whether they got it first go or whether they had to fight and get it through you.
Q129 Lord Eatwell: In some of your written evidence, you said that there were complaints arising from declined claims, disputes over policy terms and disclosures. On the issue of the cynicism, which we have just referred to, I was wondering whether you see a pattern of refusals due to irrelevant disclosures. Let us say it is the case that there has been a fire in the house and the insurance company finds that an inaccurate disclosure was made about subsidence and therefore void the policy even though the subsidence has nothing to do with the fire. Do you see that pattern in these disclosures issues?
Rachel Lam: It would be difficult to say that we see it as a pattern. That is often where we get into the depth of individual complaints. We step away from the quantitative data and look much more at the qualitative data. We do see some of those issues where the complaint is about a declined claim and the firm has voided the policy because it has identified that information might not have been shared and therefore it may not have offered that insurance policy. Those become very case-specific. Those are cases where you can see particular detriment. The example that you have described is a very good example. We are making sure we really understand the arguments, the policy terms, what the consumer has disclosed and what is insured.
Lord Eatwell: Given that one of your guiding principles is fairness, how do you react to situations like the one I described?
Rachel Lam: Our role is to look at the complaint, the evidence that is provided by the consumer and the evidence that is provided by the firm and then to balance all that evidence and form a judgment in light of the rules, the legislation that will apply and industry practice at the moment, et cetera. That is exactly how we do that.
Lord Eatwell: If the ordinary individual would see this as extremely unfair, that does not come across your horizon. You are looking at industry rules, the nature of the contract and so on. The fact that an ordinary citizen might regard it as unfair is just too bad.
Rachel Lam: When we are not upholding a complaint, which is the majority of the time—and sometimes that can be a really tough outcome for a consumer—our role is also to explain why that is the answer and what has happened in the circumstances. Even in those circumstances, consumers can be better informed and understand how the product has worked and why that was the answer, even though they may start from a position that is, “That feels unfair”.
Q130 Lord Lilley: I know someone who is making a claim—it looks as if the claim is going to be accepted and they are very satisfied—who was rather complimentary about the way it has been handled by the insurance company but was told by cynical neighbours, “The insurance company will get it back. Subsequently, your premium will go up”. Does that happen? If so, is it the sort of thing that you deem to be unfair and would be subject to claims?
James Dipple-Johnstone: That is something that somebody could complain to the service about. It is not coming through in significant numbers, from what we see, but we can go and double-check to see whether that is coming through. We would always look at what the complaint is specifically about. We do get complaints about pricing coming through in terms of the disclosure, the information that is used or people being unhappy with the price or value that they have been offered. We can get you information about that.
Q131 Lord Griffiths of Fforestfach: Let me just ask you how you allocate resources within the ombudsman. You receive 45,000 complaints and 14,000 just on home and travel. That is an enormous amount. How do you decide to go deeper into some than others? How do you decide, “That is not really for us; that is for the FCA”? It seems to me resources are always scarce in this connection. I would have thought that managing it is really quite a challenge.
James Dipple-Johnstone: In terms of how we allocate our resources, we produce a plan and budget every year that forecasts how many investigations we expect to carry out and therefore how much resource we are going to need for the coming year, which is collected through the levy on firms and a case fee.
In terms of how we organise ourselves, we have just under 2,500 colleagues working in our casework teams, which are our teams that accept cases at the front door, make sure we have all the evidence ready to carry out an investigation and, as you say, decide whether this is a complaint that fits what the service does, which is to act as a fair and informal alternative to the courts process. That team will set up the case and it will then be allocated in a stream to one of the product-specific directorates, whether that is general banking, fraud and scams, pensions, investments and insurance or mass claims.
As part of that process, we look at prioritisation. If there is a particularly vulnerable consumer—they may have lost their home and they may be living in a caravan—we would want to try to get those complaints dealt with as quickly as possible. We would then look at what the complaint is about and it would be allocated to the next available investigator who has the skill set to carry out that investigation.
As a senior leadership team, we are always looking at where the queues are within the service and how quickly we are getting through the investigations. As we bring more colleagues in, we can retrain colleagues and move them across to help with particular work pressures as they come through to try to maintain the overall provision of the service. If something happens on a bigger scale over a longer period of time, we go back through our planning and budget process to ask for more resources.
Lord Griffiths of Fforestfach: To what extent has the introduction of the consumer duty or the change in orientation in the way that the FCA is looking at the problem affected the way that you respond to the complaints you have?
James Dipple-Johnstone: We will always apply the relevant law and the relevant regulatory rules, as they apply at the point of time that the complaint issue arose. From our perspective, it is about making sure, through that process of engagement, if the rules change or the interpretation changes by the regulator, that works through our knowledge management system so that our investigators have the latest information available.
Similarly, if there is anything that we spot coming through the cases, we escalate that back to the regulator as quickly as possible. We are always trying to work contemporaneously with the rules as they were at the point at which the problem arose for the consumer.
Q132 Lord Davies of Brixton: This is a question for Rachel. We are told in the biographical details in our briefing papers that you have clearly taken a particular interest in supporting vulnerable customers. “Vulnerable customers” is a fairly heterogeneous term, but it is not something that we have really given any great thought to so far in our study. Are we missing something? What would you add to the things we should be thinking about when looking at claims experience?
Rachel Lam: Across insurance generally, as described, the complaints that we see are when something has gone wrong. People may have put their claim in and it has not been resolved in the way they expected or it has been declined. They then raise the complaint and come to us. That is quite a lengthy journey for consumers. Something has gone wrong and they have raised a claim. It might be that it has not gone wrong in the way they expected it to, but it has not been put right in the way that they were expecting it to.
By nature, we see that. That creates an inherent vulnerability, a vulnerability that most consumers may step into. They may not be in their home. They may have lost their vehicle or they may not have access to it, et cetera. We are very conscious of that and, to James’s point, we are very conscious of making sure that timeliness matters in how we are progressing. We try to maintain that balance between the quality of the work we are doing, the timeliness and how we are able to progress those answers for consumers.
Within that, there will be individuals—it is around about a quarter of our casework—who are really struggling with raising or progressing the complaint or handling the situation. Those can be quite significant. For example, someone may not be in their home or there may be a cash settlement and they are really struggling to be able to put things right and handle the funds that they have been given to address the detriment or put things back in the way that they should be.
We can see quite extreme elements of vulnerability. I must note, though, that those are a very small proportion of the insurance complaints and we are a very small part of the whole system, but they can be quite extreme examples. We have done quite a lot of work in sharing those particular examples and supporting our own people to handle those situations and surface those examples. To the point that was raised earlier, even where firms may not have their own experience of those examples, they can take learning from other firms.
Q133 Lord Vaux of Harrowden: One of the themes that has emerged as we have gone through this process is that one of the reasons for claims being declined is the fact that the consumer did not really understand what they had bought, things such as wear and tear, storm damage and various other things. How could the industry improve consumer understanding to reduce that problem?
James Dipple-Johnstone: It just needs constant focus and clarity of message for consumers, recognising that this is something that typically can go wrong. They need to explain the terms as well as possible, focus on the exclusions and be very clear about the exclusions. As you rightly say, that might be the wear and tear provisions. Lots of consumers might think that, if their garden fence is blown down after a storm, it will be covered as part of their buildings insurance. It is often not.
For those common things that the average consumer might think is part of the policy, be really clear whether they are excluded and what the policy limitations are and focus on the disclosure elements, particularly in travel. Make sure that accurate questions are being asked, which are focused on the issues that are going to impact the extent of cover or the price of cover, recognising that insurance is, as Rachel highlighted, price-sensitive at purchase and value-sensitive at point of use. Focus on those known issues.
Lord Vaux of Harrowden: Would you recommend sharing common policy misunderstandings and things like that at the point of sale?
James Dipple-Johnstone: Really thinking about them in terms of the design of the product and the customer onboarding process would be, in our view, good advice for firms to avoid things going wrong further down the line.
Q134 Baroness Donaghy: Could I just be clear about the figures that you gave? You said that one in four get a change in outcome on home insurance.
James Dipple-Johnstone: It was one in three change in outcome on home and one in four on travel insurance. Sorry, it is the other way around. I beg your pardon. You are right. It is one in four in terms of home insurance and one in three in travel insurance claim decline.
Baroness Donaghy: In other words, there is quite a high refusal rate from these organisations. Is that right?
James Dipple-Johnstone: Potentially, yes, with the caveat that we do not see the refusal rate at the firm level. That is just the cases that have come through to us. This is where the consumer has exhausted the complaints process in the firm and has then asked us to look at it on that issue of claim decline.
Baroness Donaghy: I understand that, but basically they have not got what they came for, as it were, from the last-resort organisation.
James Dipple-Johnstone: That is correct, yes.
Baroness Donaghy: I suppose I am repeating Lord Turnbull’s question. You do not know what you do not know, but what proportion are your cases of the refusals or not-enoughs in the industry as a whole? It is the desperate ones who come to you.
James Dipple-Johnstone: We do not have visibility of the industry as a whole because we just have visibility of what comes through to us. The firms will provide a feed to the FCA around the complaints that they are seeing, but that is not information that comes through to us.
Baroness Donaghy: Is there sufficient awareness of your organisation?
James Dipple-Johnstone: There is always more that we can do. We are trying to do a lot more around advertising. We have recently been doing some more explanations about what the service does through social media so that, if somebody has a dispute and the firm has not resolved it, they know they can come to us. We are easy to use; we are impartial; we are free to use. Sometimes consumers think we might charge them a fee, but we do not. We are free to use; we are impartial.
There is always more that we can do in this space. When firms deal with a complaint, they are under an obligation to signpost to our service at the end of that complaints journey as well. We also work with a lot of consumer advice groups to make sure that their advice lines can also help people come through to the service seamlessly when they contact their services.
Baroness Donaghy: If I were the CEO of an insurance company, I would argue that this shows that the system is working quite well, if such a small proportion come to the FOS and between 66% and 75% see no change of outcome.
James Dipple-Johnstone: In terms of the service that we feed through, you could make that argument. I would also say that any insights, trends or patterns that come through, even though it is a small number, can identify problems either within a particular firm, such as that travel insurance brochure, or broader systemic issues over time. It is helpful to have an impartial, independent body to be able to cast the mirror back on the industry.
Q135 The Chair: I have one last question. When you examine a complaint, do you pay any regard to the distribution channel through which the product was purchased? Can you shed any insights on whether complaints have any relationship to how the product is bought, such as whether it is bought directly by the insurance company, via a price comparison website or through a broker?
James Dipple-Johnstone: At the moment, we cannot because the data we gather is focused around the investigative process, but that is something in terms of the lessons learned pieces. As we are doing more around sharing lessons learned, with some of the reforms to the service coming through, that is something we are looking at in terms of how we gather data at the front door.
The Chair: Thank you very much for coming in. That has been a useful filling-in of a number of questions that we had unanswered in relation to our consumer insurance inquiry. You have both been very helpful, so thank you.
