Treasury Committee 

Oral evidence: Independent Review of the Financial Ombudsman Service, HC 1400

Wednesday 18 July 2018

Ordered by the House of Commons to be published on 18 July 2018.

Watch the meeting 

Members present: Nicky Morgan (Chair); Rushanara Ali; Charlie Elphicke; Stewart Hosie; Mr Alister Jack; John Mann; Wes Streeting.

Questions 1-154

Witnesses

I: Richard Lloyd, Independent Reviewer

II: Caroline Wayman, Chief Ombudsman and Chief Executive Officer, Financial Ombudsman Service, and Sir Nicholas Montagu KCB, Chairman, Financial Ombudsman Service

Examination of witness

Richard Lloyd

Q1                Chair: Good afternoon, Mr Lloyd. Thank you very much indeed for being here for this first evidence session today on your review into the Financial Ombudsman Service. Before we begin, for the benefit of those watching online, please introduce yourself.

Richard Lloyd: I am Richard Lloyd and I have carried out the independent review of the Financial Ombudsman Service.

Q2                Chair: Thank you. I remind you that everything you say today is covered by parliamentary privilege. Before we begin with any detailed questions, I want to ask you if you had access to everything that you needed to complete your review of the FOS?

Richard Lloyd: It was a very tight timeframe, but I have asked for a lot of documents, I have interviewed personally over 70 staff, I have had a lot of engagement with people in the industry and outside the FOS. In fact, I have had a lot of people bringing evidence to me. I feel that I have been able to get a clear picture of how the service is performing and what it needs to do for the future.

Q3                Chair: Thank you. A general question: having concluded your review, what concerns you most about what you have seen at the ombudsman service?

Richard Lloyd: I think the biggest challenge that they are facing—and this was at the heart of the “Dispatches” programme that triggered this review—is how they are going to organise themselves in the future to deal with new complex cases and what have they learnt from their recent reorganisation that has been in place over the last couple of years. Given consumer expectations of much faster resolution, and rightly so, given that the service is free to the consumer, and again rightly so, but there is more complexity in products, the marketplace is changing very fast, how is it going to keep up pace with what consumers need and with the changing nature of the marketplace? That includes all kinds of complexity, vulnerable consumers, for example, as well as products.

They have had a huge number of demands placed on them, for example through PPI, which in my view they should not have had dumped on them in the way that they did. There is a lot coming their way. They have tried to change how they operate and they need to learn from that, but they now need to set out a really credible plan for how they are going to meet those demands that are coming their way in the future.

Q4                Chair: I think a lot of the problems seemed to begin with this restructuring in 2016. I would be interested in your views about the extent to which the board and senior leadership are responsible for the problems that arose in that restructuring. Would you agree with the premise of my question?

Richard Lloyd: They are entirely responsible for big strategic decisions. I should say that the board, as legally constructed, is the non-executives but it is advised by and has participating in its meetings the senior leadership and together they have developed a plan for changing how the organisation operates. What I found was that the origins of the decision to change how it operates were soundly based. The principles were to help more consumers more quickly, to resolve cases earlier, to have expertise nearer the front line, in my view a correct recognition that the service was not as modern and as effective as it ought to have been prior to the reorganisation.

They identified a series of risks with the changes that they were making. It was going to be a significant change to the staff who had been used to working in a particular way prior to 2016. They needed to have technology and to have knowledge captured and available to people who were going to be working in a more generic way where previously they had been used to working on a smaller set of products, a smaller set of issues, and the change was high risk. Their own assessment that went to the board was that the key risks were critical. The counter to whether or not they should have taken that risk is that not changing was equally risky and they were not performing well enough in the old model either. But I think there is a lot that they needed to learn from in particular the early stages of that reorganisation. They now need to take stock and work out how they are going to make the new design of the organisation work much better.

Q5                Chair: Do you think the new model was tested? In your report you said that the reorganisation trials did not test the final detailed design of the new model. Was that a crucial error?

Richard Lloyd: In my view, they could have taken longer to test what became the final design, although the final design itself has evolved. It is no longer now what it was in 2016, and rightly so. But in reviewing the trials that were done in particular in 2015, there always are in organisations different ways of approaching and meeting those objectives, the principles that I described just now. The model as it was introduced in early 2016 had not been tried in full live with members of the public. Quite quickly I could see evidence that it was being adapted, it was changing, to the extent that while I was doing the review, teams that had originally been operating largely generically—although there were specialist teams still waiting in the wings to deal with a set of more complex cases, during the early periods of this reorganisation. The teams in what are now called investigations are given a specialism; 30% of their casework is intended to be on an area that they specialise in. There has been what I call in the report a softening of the approach and a blend now, a specialism and generic working while maintaining that objective for expertise to be nearer the front line.

The other thing that has softened a great deal, and again I think there has been learning from this, is that originally there were very demanding productivity targets for the teams. There is nothing wrong in principle with asking people to work hard—consumers pay for the FOS like they do the rest of the landscape in financial services through their fees for financial products—but I think the combination of the way the model was introduced and those very stretching productivity targets at least were perceived by staff as being all about getting more cases solved and that it was all about productivity and less about quality. Now the internal message has been it is important that staff take their time to get cases right to do the right thing and it is not solely about hitting casework target numbers.

Q6                Chair: I am interested in the impact on staff. It seems that a lot of the executive team have been at the FOS for a long time. In your opinion, do you think they should have been more cognisant of the likely disruption caused by the restructuring?

Richard Lloyd: It is easy for me in hindsight to say this, but I think it was obvious that there was going to be a degree of resistance to the big changes that were being put in place. It was quite a big bang. It was a demand for people who had been used to not dealing with the public in the way that they have been asked to now, asking them to change their working practices really significantly. It became obvious quite early on in that restructuring that quite a large number of staff simply were not going to be willing to do that. At the same time, there was a need to keep large numbers of staff on to handle the casework volume. Very unusually in a restructuring, people who did not like what was happening and what they were being asked to do were also being asked to stay on and deal with casework, and they have. They are still there in quite large numbers and in fact are dealing with quite a lot of important casework, so part of the way that the reorganisation was made less risky for consumers was the retention of people who did not like the new operating model, if you see what I mean.

To answer your question a bit more directly, I think it should have been obvious to the leadership that there was going to be that level of resistance. Therefore, there ought to have been more time taken to persuade people to demonstrate the value of the new model before trying to get so many people to join into it.

Q7                Chair: I am going to ask you to keep your answers fairly brief because we are on a tight timescale. You also talk about the FOS needed more inclusive leadership. What do you mean by that?

Richard Lloyd: The feeling in the organisation has been, and this was shown in a staff survey last year, that the senior leadership has become detached from some of the staff. It is quite a big organisation, about 3,500 people now. There is a feeling, again shown in the staff survey, of mistrust with the senior leadership. I think the changes that have happened in the organisation have been quite top down. By “inclusive”, I would want to see an approach that involved many more people in planning and designing the strategy for the future and being brought along with those changes rather than the top-down approach that was tried in 2016.

Q8                Chair: Did any staff report any bullying or harassment to you?

Richard Lloyd: I looked into that carefully. I did not find a problem there out of kilter with what you would expect to see in any large organisation of that kind. That is not to say that everybody was—

Q9                Chair: The answer is that there is some bullying?

Richard Lloyd: There had been reports of some bullying and there had been the usual processes put in place to deal with that, including whistle-blowing and, while I was there, a confidential e-mail address for people to tell me about it. I was not given one specific instance of bullying that made me think the organisation was not handling it properly.

Q10            Chair: But you did receive e-mails to that confidential e-mail address?

Richard Lloyd: I received a lot of e-mails to that confidential address from a lot of staff who were saying what they thought was good, bad or ugly about the way the organisation was working.

Q11            Chair: As you say, the restructuring is not complete and the next stage of restructuring presents a greater strategic risk. What level of confidence can you give this Committee that the FOS board and their senior leadership team are fit for purpose going forward?

Richard Lloyd: I think if they accept the recommendations I have made, which require them to change the way that they are leading the organisation, require them to put in place a clear, credible strategic plan, it is right that they keep the organisation being modernised and doing better for consumers. But they need to respond positively to the recommendations I have made.

Q12            Chair: There was talk about them taking on redress for small and medium-sized companies. Do you think that they would be ready for that?

Richard Lloyd: I think they could if they quickly respond to what I have said I think they need to do and they have a credible plan for putting in place the right capabilities for dealing with another set of complexities and a different set of issues in some respects. I also think it would not be good for consumers, SMES or microbusinesses to have more complexity in the dispute resolution landscape. That does not tend to work. For me, it is all about in particular, in the time that they have available, putting in place the right strategy, being very realistic about the capabilities that they need, and getting that in place before they take on more complexity.

Q13            Charlie Elphicke: Mr Lloyd, your report concludes that the FOS is not institutionally biased. How exactly did you come to that conclusion? “Dispatches” seemed to take a slightly different approach.

Richard Lloyd: The approach in “Dispatches” was built largely around individual allegations. I have gone through the 14 allegations in detail, including some that specifically refer to bias and individuals talking on camera about what about appeared to be bias. What I did was looked at the data across the organisation, across all the product areas. I looked at how the organisation checks the quality of its work and what systems are in place to spot bias and whether case handlers are consistently waving through cases in favour of banks, as the allegation broadly seemed to be.

What I found was that the system of quality checks was pretty strong. It was more than I have seen in other similar organisations. There are some areas where I have said it needs to be stronger, but most importantly what I found in talking to groups of staff and individuals in the organisation was just the culture, the horror that that would be what the organisation was doing as an institution. People there are very clear about their legal remit, that they have to be impartial, but equally they are clear that Parliament put the FOS in place to address an imbalance between consumers and large financial firms. People have spent, in some cases, their entire careers there because that is what motivates and drives them.

As I say in the report, for me the biggest guard against bias is the culture, the values of the place, plus the evidence, the data that shows uphold rates and, in particular, in some of the product areas where “Dispatches” was focused.

Q14            Charlie Elphicke: Let’s just look at those 14 cases that you looked at, presumably in absolute detail and went through the files. What exactly did you find? Why did people think they were suffering from bias? Did they mess the cases up, did they have a point, or were they just people who had bent themselves out of shape because they felt they had been unjustly treated and that was that?

Richard Lloyd: I think from the consumer point of view there are people, and there always will be people, going through—

Q15            Charlie Elphicke: What was it in those 14 cases? Were the consumers right or was the organisation right?

Richard Lloyd: In the cases that I have looked at, and I have looked at it not in terms of the specific cases that the substance—

Q16            Charlie Elphicke: Did you look at those 14 cases in detail and go through the files?

Richard Lloyd: I looked at the allegations as they are constructed in the terms of reference, which is, for example, in payday loans cases was there bias against consumers.

Q17            Charlie Elphicke: There are 14 specific cases. Did you get those files out and look at them or did you just look at the summary?

Richard Lloyd: In the cases where the terms of reference asked me to do that, I did that. I looked at the cases and I found—

Q18            Charlie Elphicke: How many cases were those?

Richard Lloyd: I think in the summary I have identified a case about fraud, a case about distress and inconvenience and a set of cases to do with payday loans and a different kind of fraud, PIN fraud.

Q19            Charlie Elphicke: Mr Lloyd, I am just trying to understand this. How many cases did you review in detail going through the entire file to look at it, look at the correspondence, look at what the consumer was saying, look at how they handled it, look at what an industry participant said about why they had not done wrong, and take an analysis as to how the whole thing was handled in detail, or did you just look at summaries?

Richard Lloyd: I looked in detail in the cases in the terms of reference where it required me to do so.

Q20            Charlie Elphicke: How many cases?

Richard Lloyd: I have just said it was three cases.

Q21            Charlie Elphicke: Three cases?

Richard Lloyd: Yes, but all of those cases were illustrative of a wider set of issues and the terms of reference asked me to look at whether there was a wider set of issues in relation to those product areas.

Q22            Charlie Elphicke: Let me understand this. You concluded that there could not possibly be any kind of bias because you looked at three cases and—

Richard Lloyd: No, I went through—

Charlie Elphicke: Let me finish. And you thought that the staff were personally very committed so, therefore, it must be all fine?

Richard Lloyd: No, that is precisely not what I am saying. I did not look at only three cases. I looked at the data, the evidence in relation to hundreds of thousands of cases, the entire caseload. If you read the report you will see that what I have done is looked at the evidence across the board. If I had looked at only three cases, it would be ridiculous to draw conclusions. It would also be ridiculous for me, by the way, to look at individual cases and try to make a judgment in the number of days I have had about whether all the evidence was there and whether the case had been handled in its entirety in the right way.

What I have looked at is the way the organisation handles cases in the round and the evidence for how it checks that. I have looked at the specific cases in the terms of reference and I have made recommendations arising from those, but I think it would have been the wrong approach for me to pick out just three cases in an organisation that last year handled something like 400,000 cases. I had to look at the data across what the organisation was doing to make a conclusion about how it operates institutionally.

Q23            Charlie Elphicke: If I understood you rightly, you are saying that “Dispatches” raised 14 cases.

Richard Lloyd: No, sorry. There were 14 issues in the terms of reference of which there were three specific cases that they referred to in the programme. The issues were, for example—this is on page 5 of the report—issue 12 is that there is a major backlog of PPI complaints. That is about a stock of 1.5 million complaints. It is not about opening all the files in that instance. There were 14 issues rather than 14 specific consumer cases.

Q24            Charlie Elphicke: You do not really need the FOS to be doing PPI cases because the regulator has told the banks to pay them all out and deal with it all very quickly. What were they doing going to the FOS with all these PPI cases?

Richard Lloyd: In 2008 the Financial Services Authority said that complaints on PPI that can’t be resolved with the banks or anyone else that had sold them had to go to the FOS. This is well-trodden ground. It is a huge stock of cases. What I was looking at was whether, for example in PPI, the way that casework is done is to a good standard, where I can see whether or not the checks that are being done identified bias in any particular team or in any particular product area. My answer is that across the institution the data showed that that was not the case.

Q25            Charlie Elphicke: You look at the data; you look at three cases. To what extent did you speak to consumers who are concerned, some of whom I think seem to be sitting behind you?

Richard Lloyd: I spent some time with a group of consumers, not necessarily people who had written in to me with their personal cases. I asked to see a random sample of recent service users to get their view about how the FOS operates and how they had been treated and so on. I also had a lot of people write to me about their own personal cases, as I am sure they write to members of the Committee. What I said to them, as I have said in the report, is that it would have been wrong for me to look at all of those cases specifically individually. There just would not have been time to do it justice, but I referred some of those cases on to ombudsmen where there was clearly a problem and I took their experiences into account. I spent time with a group of consumers who were randomly selected recent service users rather than those who self-presented.

Q26            Charlie Elphicke: Okay. Finally, there is this concern that some cases are quite complicated and they might think it is just easier to sweep them under the carpet. Did you find evidence of cases where, “We will sweep them under the carpet and say we can’t question the assumptions of the financial institutions in these sorts of cases. They must be right. It is all far too complicated”?

Richard Lloyd: That is clearly the risk in complicated cases that involve a huge amount of correspondence and a huge amount of law or a huge amount of evidence. If there were not the proper checks, they could be not handled properly. What I did was, as the terms of reference asked me to, look at how those cases are handled. Those complex cases are identified and dealt with differently. They are handled by people who have casework knowledge; that has been the system in that product area. There are checks on how those cases are being dealt with and, if necessary, lawyers are involved as well. Again, I have not gone through millions of cases myself but overall what I found is that that system should spot where people are waving cases through in favour of banks, for example, because it is just too complicated.

Q27            Charlie Elphicke: Mr Lloyd, I still have this nagging concern that you almost did an audit of the systems they have in place rather than rolling up your sleeves and getting your hands dirty to actually look at what was going on under the bonnet and that some people might think it was all a bit of a whitewash.

Richard Lloyd: Mr Elphicke, if you could show me an individual who in the course of two months could review 1.5 million cases, or 400,000 cases as were resolved last year, I would be delighted to meet them. The terms of reference were very clear. Your terms of reference that you agreed with the FOS were very clear, that I should look at underlying problems, that I should look at these 14 sets of issues, not personal cases but sets of issues, and that is what I did in the time available. Where I did get people’s files, people’s personal cases, I looked at them to see whether there was evidence within them of an underlying problem.

Chair: We will come back to that if we have time.

Q28            John Mann: How many consumers are having to wait longer as a consequence of the restructure?

Richard Lloyd: I looked really hard at that because clearly what they were trying to do was to get more consumers’ cases resolved early through the restructure. That had been driven in particular by what was shown to me as casework on payday lending where people in financial crisis can’t be left hanging around while that case is being resolved. The teams that were involved in the early stages of the restructure were getting their cases or overall casework done quicker. As I have shown with the data in the report, it has now slowed down. What is impossible to unpick from that is why it is that that number of cases is slowing down. Is it because there are the legal challenges from claims management companies; is it because it is a new product; is it because the staff are organised differently, and so on?

Q29            John Mann: How many?

Richard Lloyd: On page 14 I have shown how many cases are resolved within 45 and 90 days and this last March it was between 30% and 40% that were resolved within 40 days. If you look at page 17—

Q30            John Mann: How does that compare to before?

Richard Lloyd: The trend goes back to April 2016 where the organisation at that point in time was doing slightly better on the 45-day timeframe. Midway through that timeframe they were doing better. It has gone up and down.

Q31            John Mann: So people are waiting longer?

Richard Lloyd: If you look at page 17, I have shown you the stock of cases awaiting an ombudsman decision and that is now, if my eyesight is right, about 4,500 cases awaiting an ombudsman decision in March. Again, I could not solely attribute the reasons for that to the reorganisation. The reasons for that, as I have said, may be because there is a set of new issues to do with a certain product or there is a rethink being done about certain products being handled.

Q32            John Mann: More people are waiting longer?

Richard Lloyd: Right now, more people are waiting longer than they were in March 2016.

Q33            John Mann: Can you quantify how much the detriment to them is?

Richard Lloyd: This is my point, that it is hard to work out what the detriment is because it might be better for people to wait slightly longer and get the right answer than for the FOS to do it quicker and get the wrong answer. The detriment is not necessarily solely a product of the time that is being taken to look at a case. I personally would rather a case—

Q34            John Mann: Has the quality of casework gone up or gone down?

Richard Lloyd: If you look at what customers are saying about that the—

John Mann: I am asking what you found.

Richard Lloyd: Well, let me say that what matters more than my personal opinion is what customers are saying. The quality of metrics from customers has stayed pretty stable throughout this period. What I found is that the things that can go wrong with casework now are different to how they would have been prior to the reorganisation. It is a different set of risks to quality and that is why I want the organisation to stop and look at those risks.

Q35            John Mann: But has the quality gone up or down?

Richard Lloyd: I think the quality overall has stayed broadly where it is. The timeliness improved for a period, so that is one measure of quality. It has now fallen back a bit, but I don’t think the quality has overall come down relative to what was there prior to the reorganisation. It may have suffered different risks as a result of the reorganisation.

Q36            John Mann: You are saying that the quality is the same and the wait times are longer. Has the restructure been successful?

Richard Lloyd: I think the restructure has not delivered everything that it was intended to, certainly that quicker resolution time is not happening at the moment. I think the fact that there is a group of ombudsmen and adjudicators outside the restructured part of the organisation, in particular also in PPI claims still handling those volumes of claims, has muddied the picture. There is no pure model pre-2016 and post-2016, but what is in question now, what I have questioned here, is whether the risks to consumers in particular that the restructure was trying to address have been sorted out or not, and that is still up in the air.

Q37            John Mann: Has the amount of influence that the bank or financial institution being complained about has on the FOS increased or decreased?

Richard Lloyd: Sorry, what was the first part of your question?

John Mann: Has the amount of power and influence that the bank or financial institution that is being complained about has in relation to their dealings on the individual cases for the ombudsman’s service increased or decreased?

Richard Lloyd: I think that overall the financial services market is getting more clobber from FOS than it was previously. I have talked about this in very specific terms about the preventative work that they are doing. I think they are doing much more now to clobber the market when it is not performing right as shown by the casework. For the mass of consumers who do not use the FOS, I think the FOS is doing more now than it has done previously.

Q38            John Mann: For those who do, does a bank or financial institution have too much power and influence when it comes to dealing with the ombudsman service who themselves are dealing with a complaint against that financial institution?

Richard Lloyd: I don’t think so, no. I think the risks around the reorganisation were to do with inexperienced people facing up to more experienced people in financial services firms. But because of the way the FOS has worked around that, I don’t think there has been a material difference.

Q39            John Mann: Is there any category of consumer that is significantly still under-empowered in its ability to be able to advocate for themselves with a complaint against a financial institution? Has that improved or worsened?

Richard Lloyd: I think before people get to the FOS, in some respects it has improved. When they get to the FOS, I think it has not worsened or improved over the last two years. What I want to see is it improve at the FOS end and at the banks’ end.

Q40            John Mann: The restructure has not improved the power of the consumer, has led to longer waiting times, has not increased the quality of casework. That has remained consistent. A particular claims management company has been kicking up about the numbers and times of claims awaiting final decision. What is your view on this claims management company and what it is saying?

Richard Lloyd: There is a specific claims management company, We Fight Any Claim, that I have met. It was the one meeting I had where I did have a witness because it started the meeting by saying it was going to judicially review the FOS unless I made the FOS change its policy on a certain stock of cases. That is a legal dispute. It has said that it is going to take that to the High Court and I think the judge should look at that. If it has a strong argument, it will win that. My view, and this is not just about that particular CMC, is that the system that the FOS operates under was not set up to deal with litigious claims management companies, effectively in some cases gaming the system so that consumers are being held up in queues while the FOS has to put lawyers on their cases.

Q41            John Mann: Is the fundamental issue that we should be concerned about the power that the individual consumer has against the financial institution as opposed to the powers that a claims management company has against a financial institution, which has featured quite a lot in the media? Should our fundamental concern be to look at whether the consumer has sufficient ability and power to take their case properly?

Richard Lloyd: I think that is exactly right. It has to be not least because, as a consumer with a straightforward case, if you use a claims management company you are going to wave goodbye to perhaps a third of your compensation. I have always said that people should be very wary of using a claims management company when they can bring a complaint themselves. What I want the FOS to be is more accessible to individual consumers, for them to explain their rights to escalate a complaint when they go to the FOS, to give them confidence that their case will be handled properly and quickly, and then to use their knowledge about what is going on in the marketplace to put pressure on individual banks or the marketplace generally to get complaints at the pre-FOS stage handled much better. That is what I think the scheme was set up to do and, because of the continuing imbalance between consumers and firms, it needs to keep doing that.

Q42            Chair: I want to pick up something on the bias that Charlie Elphicke was talking about. For understandable reasons, you said that in the two months available, going through 1.5 million cases is just completely not feasible. I asked you at the beginning if you had had everything that you needed and you said in the time available. The first question is: do you think in order to fulfil the terms of reference you needed more time?

Richard Lloyd: I think Charlie was confusing cases and the 14 specific areas in the terms of reference. I think I had enough time to get to the bottom of those 14 issues, of which a subset was about a small number of very specific individual cases and how they were handled. I think that I have been able to make a judgment about how the institution overall is operating. There is a separate question about how the FOS handles what are obviously very strongly held views by some consumers on how they have been treated by the FOS. That is why I have made recommendations about how complaints about the FOS’s handling of complaints should be improved. But I think it would be wrong for me to say, in fairness to the number of people who are in that position, that I can parachute in and look at lots and lots and lots of individual cases, not least because once a final decision has been made by an ombudsman, the law does not allow for a case to be reopened unless there is new evidence. It would take more than just me with some more months to be able to look at all those cases.

Q43            Chair: In terms of having more time to sample cases in order to reach a conclusion about bias, one would have thought that you or the people working alongside you would have to sample a number of cases, which obviously takes time. Do you feel that your conclusion at the top of page 16 that, “This review finds that consumers and firms can have confidence that FOS is not institutionally biased against them and acts independently” is too strong given the limited time available to you and the inability for proper sampling of cases in that time?

Richard Lloyd: I think the data that I have had, the very large samples looking at, for example, whether when people are under more pressure to perform faster there was a reduction in uphold cases or when that pressure was reduced there was a decline in upholds, all of the things like the time I spent sitting alongside staff doing casework, the evidence I have seen of how cases are handled, the thinking behind the approach, the technology that is used to decide things like jurisdiction and so on, gave me confidence to be able to say that. I would not have written that down otherwise. A sample of cases in some of these specific instances has been looked at and is being looked at, and I have said where that is the case and where I think that needs to be done ongoing. But I think it would not have been the best use of my time to be sifting through thousands of cases even if I had extra time.

Q44            Chair: I want to move on now to the restructuring and particularly the advice the FOS had on that. In your review you mention the impact of “a consultant-designed staff performance model”. Which consultants are you referring to?

Richard Lloyd: That was PwC.

Q45            Chair: Did you contact PwC during your review to get their views on the FOS’s readiness to undertake the restructuring?

Richard Lloyd: Yes, I interviewed them. I didn’t get very much out of them, to be honest. They were leaving the contract.

Q46            Chair: The contract with work for the FOS was coming to an end?

Richard Lloyd: That is right, and in fact they have left the FOS now.

Q47            Chair: Did you find them to be not forthcoming in their interview with you?

Richard Lloyd: I found that they were giving fairly shortened, brief answers to my questions, which were unsurprisingly saying to me that they had done what they had been asked to do.

Q48            Chair: Did you ask for anything in written form or was it just face to face?

Richard Lloyd: It was face to face, but I also asked for a series of documents showing how the thinking had been developed and what they had produced for the FOS board.

Q49            Chair: Did you get those documents?

Richard Lloyd: Yes.

Q50            Chair: Do you think there was a lack of experience about change management among the senior leadership team at FOS?

Richard Lloyd: I think there were two things. One was a set of people leading the organisation who had been there for quite a long time. In some respects, is a very good thing; in other respects, if you are looking to change a large organisation rapidly you do need outside advice.

Q51            Chair: But do you think that the senior leadership team did not have that change management experience? Is that why they then brought in consultants?

Richard Lloyd: I am sure that is true and I think if I had have been part of that team I would have wanted some expert external advice. The issue with external advice of that kind is always the degree of challenge it has and whether the risks of, for example, bringing in a model that has been tried elsewhere and transplanting it on a particular culture and way of working, a group of individuals, can be quite high risk. What I have said in my report is that I think they did not recognise sufficiently the cultural context into which their ideas were being—

Q52            Chair: This is PwC you are talking about?

Richard Lloyd: PwC.

Q53            Chair: Going back to the experience of the senior leadership team, do you think that they did not have the knowledge to be able to sufficiently challenge the advice they were getting from these consultants?

Richard Lloyd: I think they knew what they wanted to do. That was really clear and I think some of them had been involved in reorganising the FOS when it took on PPI mass complaints. I don’t think they were naive, but it seems to me that PwC, with less challenge than they ought to have had, were bringing a way of working into the organisation that has plainly had to be softened and that has been recognised.

Q54            Chair: In your report you state the new model was perceived to be more suitable for a sales environment.

Richard Lloyd: That has been the feeling among some of the staff, in particular on the approach to driving productivity.

Q55            Chair: You said that the senior leadership team were clear about what they wanted, but do you think that was a misguided set of asks?

Richard Lloyd: I think the principles behind it were not wrong at all, the notion that you need to have a modern organisation talking to consumers, resolving problems earlier and having expertise nearer to the front line. The issue and the hot debate inside the organisation has all been about how you do that effectively and without putting casework quality at risk.

Q56            Chair: You talked about softening a couple of times. I think what you mean by that—and correct me if I am wrong—is that a model was proposed. When it hit reality it did not work as well as expected, therefore it has had to be changed. Do you think the model proposed by PwC was unfit for purpose or is it inevitable that when something on paper hits reality it is going to have to be changed?

Richard Lloyd: I would have been surprised if there had not have to have been some change. What I think was unwise was the scale of the change at the pace that the organisation was not prepared to take on. For me, it was about not having enough time to prove that that model could be done without affecting morale and in that respect I think it was done with too much haste.

Q57            Rushanara Ali: I want to go back to the theme of money and power, starting with powers. I know you had to focus on your specific terms of reference, but bear with me. Do you think the FOS has the adequate powers to address some of the complexities that you are talking about that it is going to face going forward in the light of what has happened and, therefore, have the right tools and right things in place going forward to deal with the complexity that is coming their way?

Richard Lloyd: I think they have the powers and the criticism of other ombudsman schemes is they don’t have the power to impose decisions on firms. For me, this is all about capability and whether the organisation, for example when it is dealing with SMEs in the future, if it comes to that—

Q58            Rushanara Ali: Will it have powers, though? That is my point. It is linked to money. What is the maximum that they could be requiring in terms of compensation?

Richard Lloyd: The scheme limit at the moment is £150,000 and the proposal that the FCA is looking at is £600,000 for SMEs. By the way, I think the role of the FCA in this in ensuring that the decisions the FOS makes are enforced is crucial because it is regulated firms that are on the receiving end of this.

Q59            Rushanara Ali: You mentioned earlier the point about gaming the system, in response to, I think, John Mann’s questioning, and the length of time it can take. Do the powers adequately address that? That is what I am getting at. Are there areas where we should be suggesting further changes that would put the FOS into a position where, if they find themselves in similar circumstances when new work is sent their way, they are better prepared? What can be done in that area where it is not working? In a sense, that is kind of what you have said.

Richard Lloyd: There is a really important point here, which is that by the time people get to the FOS, by and large they have had to exhaust an eight-week period with the firm that they are complaining about. They have arrived already frustrated by a very slow process and that seems wildly out of kilter with what you would expect in a 21st century complaints system. There is an issue around giving the FOS the ability to intervene earlier more formally. Secondly, it needs to be an organisation that can face up to quite significant legal threats. They have had to get in place a bigger in-house legal team. That is partly where cases are getting stuck sometimes, or not stuck but they are on hold in that area while lawyers are looking at cases where there is a litigious firm or CMC on the other side of the dispute. Provided the FCA is enforcing its decisions, it is about the bit in the middle, about the capability, about having the right level of expertise and legal capability and the ability—

Q60            Rushanara Ali: Have they got a big enough legal team and the right amount of resources allocated to take on powerful institutions that successfully manage to intimidate consumers? You will have seen some of the evidence in a TSB case recently where over 300 letters were sent to local agencies saying they were dead when they were alive, where the frustration and the effect on people’s lives was so bad and the FCA said they could go to the FOS, for instance. You mentioned in an earlier comment that the choice for people going to the FOS was either speed, which in your assessment could end up leading to mistakes, so it could be a good thing but it takes time. That is not satisfactory, is it? In what we have heard so far, I don’t feel particularly assured that we are going to get there, hence my focus on resources where there is powers.

This is your opportunity to really go for broke and say exactly what is needed so that we are not coming back here saying, “If only we had had a wider remit for Mr Lloyd so that he could have helped fix this and the institution could have helped fix this and the FCA could be given the right amount of pressure, whether at this Committee or elsewhere”, and that things are put in place to stop this stuff happening and that consumers in future who are going to be queueing up to go to the FOS get the service they need because their lives have already been ruined.

Richard Lloyd: Yes. It is the right question. I try to address it in the report and I will give it a slightly different go. I think what the FOS needs to do now is my recommendation about working out what capabilities it needs. How many lawyers does it need to be able to deal with potentially more difficult, more litigious firms in the future? What is it going to need to deal with the likely caseload that is coming its way? Is there a need for more expertise external to the FOS to help it do its job? I think yes. It needs to work out what it needs that will give it the ability to try to meet that competing demand of speed and quality. It has always been there; it has been a tension in the scheme right from the start. People want the scheme to be free, they want it to be quick but they also want things done really well. That is absolutely right but there are trade-offs there and difficult judgments about how you do all of that. In the end, it is not a cheap machine. It should not be cheap because we will get poor quality and we will not get speed either.

What I want the FOS to do is to work out what is its strategy: what as an organisation does it need to be over the next five or more years; what is it going to need to have for its legal resource, its capability, its expertise in certain product areas; what does that cost; and how is that going to be paid for? At the moment it is being driven largely by what are the casework numbers and what are the fees that are going to be brought in off the back of that. We need a strategy for the FOS.

Q61            Rushanara Ali: You mentioned the idea of a new levy funding structure. In terms of the costs that are borne, the current range for FCA-regulated businesses is around £100 a year for a small firm of financial advisers or over £300,000 for a high street bank or a major insurance company. That is not very much money if you are TSB, for instance.

Richard Lloyd: There are different sources of funding at the moment. It is a bit of a patchwork, but it is a casework fee of £550 a case, the first 25 cases free I believe. There is a levy on the industry that is about £24.5 million and then larger firms contribute more. My view is that we should work out what a really properly equipped, fit for the 21st century FOS should look like, what it would cost, and then levy the industry to pay for that, rather than rely on a potentially unstable revenue stream of fees per case.

Q62            Rushanara Ali: That is really helpful. I wanted to pick up on emerging issues that are coming up and return to the sort of cases that are coming up to do with technology-based problems, as we have seen with TSB and a number of cases, and the fact that there is a good chance that quite a lot of people will have to go to FOS. Are there other more creative ways in which, for companies that are doing very badly in the way they behave and treat customers or businesses, if small businesses end up being covered by FOS, there is another formula to ensure from the outset—you have alluded to it—that they pay a penalty pre-emptively if this stuff ends up with FOS? At the moment it has already been months since these problems have arisen and there are about 100,000 cases, of which they had only dealt with 25% when they last came to see us. Tens of thousands of them could be heading in the direction of FOS and these guys can shrug their shoulders and tell us that it is all going to be fine, knowing very well that this stuff could take months or years, while consumers suffer and the FOS is not fit for purpose to address it, in terms of resources and, in my view, powers to get this sorted. What we have is a systemic problem with consumers not being shored up by institutions like FOS because of resources and internal issues that are the subject of this review, as well as powers.

It would be really helpful to get some closing remarks from you about how you pull yourself out of the review and say what needs to happen so that we are not coming back here with perhaps someone else or a deeper investigation by you.

Richard Lloyd: I think this is a really important point. I have alluded to it but I will expand on it, if I may. The regulator, the FCA, has the power to say to a regulated firm under section 404 of FSMA, “You have poorly treated, missold, failed this large number of customers. This is what you need to do to put that right”, a mandatory redress scheme. In my view, that is what should have been done with PPI. The FOS has ended up clearing up this mass misselling problem in a way that has completely distorted the organisation for a decade. What I would rather see is the regulator imposing good redress schemes on firms that have harmed, caused consumer detriment on a large scale, rather than to say to consumers, “It is up to you. You have to go and raise a complaint and when that complaint has not been handled properly you have to go to the FOS and spend potentially years of your life”.

Rushanara Ali: That is basically what they do. They pass the buck.

Richard Lloyd: Precisely. I think what has been missing in the debate about the FOS is that there is a bigger, in my view more effective, way of tackling these kinds of systemic or widespread consumer harms earlier. That is for the FCA to use that power better to force the firm to put things right in the first place, proactively contacting its customers, saying, “This is what we are going to do to put it right” than to wait for the individual complaints to work through the system and potentially to end up at the FOS that then has to scramble to work out what its position would be on TSB IT failures, for example. We are addressing the solution too far down the pipeline. I think we need to force firms to sort out complaints properly on a mandatory basis, using the powers that exist rather than to have them swept at the end through individual complaints.

Q63            Stewart Hosie: Part of your terms of reference agreed with the Committee were that you were asked to assess the allegation in the “Dispatches” programme that said, “Some PPI complaints were wrongly rejected because, although it was concluded PPI had been mis-sold, it was assumed that the cover would have been useful”. You did not investigate that on the grounds, I understand, that there was “an ongoing dispute between a claims management company and the FOS about the law”. Could you elaborate on that?

Richard Lloyd: I did look into that. I had an enormous amount of correspondence from the firm involved. I looked at the way the FOS had been handling those cases. In the end, as I do say in the report in summary, this goes to an argument that has been going on for some months now about how the FOS interprets the law and interprets the circumstances surrounding sales of certain types of PPI. The CMC that came to see me suggested that that was a very large number of PPI cases that had not been upheld and had not been upheld for reasons they argued were unlawful.

Q64            Stewart Hosie: They may have argued they were unlawful and you may be correct that there is a disagreement about the law, but there was no ongoing judicial review proceedings, there were no legal restrictions on you fulfilling that part of the terms of reference. Did you just make a judgment that it would be too controversial to reach a verdict?

Richard Lloyd: No, I don’t mind making controversial judgments and I don’t mind defending my controversial judgments. What I do object to is being put in the place of a High Court judge. I was told very clearly by the CMC concerned that it was going to bring a judicial review. I looked at both sides of the legal argument, of course I did, and in my view it would have been wrong for me to make a judgment about what moved from 500,000 cases up towards nearly 1 million, 900,000 cases over the course of my review, about whether there had been a systemic legal problem in the interpretation of the law that the FOS had been using. I think that is beyond my paygrade.

Q65            Stewart Hosie: I understand the concern you had but there was a terms of reference to look at a particular issue. You rejected it because of an ongoing dispute. That ongoing dispute may have been about the law but it was not a judicial process. There was no sub judice, there was nothing to debar you, no one was putting you in the place of a High Court judge. Had you made a decision that then went to court on one side or the other, a judge would have determined whether you were right or wrong or someone else was right or wrong. There was no legal reason not to do this, was there?

Richard Lloyd: No, I am not saying there was a legal reason. I am saying that it was wrong for me to make a judgment of that magnitude and in particular in the context where I had been already told by a CMC that it was intending to bring a judicial review. By the way, the substance of this dispute had been in front of a High Court judge in relation to the Plevin judicial review and the High Court judge had made some remarks about it, so it is not as if it had not had some exposure to judicial review proceedings. But I simply repeat that for me to make a judgment that could set the context for how a very large stock of complaints was going to be handled, knowing that that was going to be dealt with by a firm that is very well capable to bring a judicial review—it has lawyers. It arrived at its meeting with me with a lawyer in tow. It felt to me wrong to rush to interpret their interpretation of the law when I knew full well that that was going to go to the High Court.

Q66            Stewart Hosie: I do not think we really have the time to explore what that debate is technically about today, but I am sure we will come back to it, if not the specific issue, certainly the interpretation of the terms of reference.

However, as part of your work you approached consumers, industry bodies, the FCA, the Treasury, the advice charities and consumer policy people, but you did not proactively approach any CMCs, as I understand it. Can I ask why not?

Richard Lloyd: I was very proactively approached by CMCs and spent a lot of time looking at submissions from CMCs and met with one CMC. They are an important part of the landscape, and I felt I had got a very clear understanding of their views from that specific meeting and the other correspondence that I had had.

Q67            Stewart Hosie: You have also previously said that there are firms of a poor reputation, especially over rip-off fees for PPI claims, and that your advice was to avoid them. Is it fair to say you rather disapprove of the CMC business model?

Richard Lloyd: I have said in the past to consumers repeatedly, “If you have a PPI claim, you do not need to pay for that claim to be handled”. Not just me but Parliament and the regulators have also said that CMCs have been behaving inappropriately with their fees and some other approaches. I am not talking about this one specific CMC now, but in general there has been concern about the regulation of CMCs.

My point is slightly different, that the FOS was not set up. It was not ever imagined that there would be a PPI-style context within which claims management companies would be operating. The regulation of CMCs needs to bear in mind and the conduct regulation needs to bear in mind, first of all, what the FOS is able to do, and secondly, their behaviour in relation to the FOS.

Q68            Stewart Hosie: I think it is probably true that no one envisaged that scenario. Nevertheless, we are where we are, and I am sure the CMCs themselves will claim they have won back substantial amounts of money for consumers, even though you are right technically that one does not need to go through one to make it.

However, you are chairman of Resolver, a consumer complaints resolution service. Is it fair to say that Resolver is in competition in some regard with the claims management companies?

Richard Lloyd: Absolutely not, and there is a very simple difference, which is Resolver is entirely free to any consumer that uses it. CMCs, as I have said, will charge if a consumer wins any compensation—perhaps a third or more of that compensation—for handling a complaint.

I agree with you, though: we are where we are, and we are where we are because of the point I was making earlier, which is that the regulator opened up the marketplace for CMCs in a very, very big way in 2008 by saying that consumers had to bring individual complaints about PPI. In my view, that was a wrong decision. That is in part why we are where we are.

What it does not do, though, for me, is mean that it is right or fair for CMCs, even if they have got compensation for people that otherwise would not have done, to take a very large slice of that for effectively transmitting a complaint that people could do through Money Saving Expert for nothing.

Q69            Stewart Hosie: Indeed. Let me just finish with this. I have no candle to hold for the claims management companies, but many of them will argue that commissions are substantially lower than what the banks took when they missold the products in the first place. They will also argue that if people are worried, anxious or nervous about dealing with the banks, they would rather choose to have a third-party organisation, including Resolver, do it for them. Many of them, as you know, are ex-finance or ex-bank people, and they have uncovered issues of missing data, of missed calculations. I am trying to understand what your approach to the CMCs is, given clearly some people like to use them and they are not universally high-fee, ambulance-chasing organisations.

Richard Lloyd: As I say, there is a place for them. Absolutely, there are some people who would get comfort from having their complaint handled by a firm of solicitors, for example, who are regulated, and they have legitimately in many cases moved into a landscape that has been laid out for them.

Q70            Stewart Hosie: In your review you call on the FCA to look at the impact on the FOS of the CMCs. Has that horse not bolted?

Richard Lloyd: What I have tried to say throughout this review is that there is a need for lots of institutions to learn from the recent past. I agree, the horse has bolted, but CMC regulation has gone to the FCA. I have looked very specifically at the impact of CMC activity on the FCA, and, by the way, how certain CMCs’ behaviour holds up other non-represented consumer cases. This is not a cost-free impact to other consumers. The vast majority of consumers that do not use the CMC may well have to wait longer if a CMC is using the system in a certain way. What I would like the FCA to do is to have that in mind as it regulates CMCs in the future.

Chair: Thank you, Mr Lloyd, very much indeed for your evidence this afternoon, and we have read the review with great interest. I will be picking it up in our next session, but for now we are very grateful to you for your time this afternoon. Thank you.

Examination of witnesses

Caroline Wayman and Sir Nicholas Montagu

Q71            Chair: Good afternoon. Thank you very much indeed for being here. You have obviously both been sitting through that first session and have heard Mr Lloyd’s evidence this afternoon. Just for the benefit of those watching, I am going to ask you to introduce yourselves.

Caroline Wayman: Caroline Wayman, Chief Executive and Chief Ombudsman at the Financial Ombudsman Service.

Sir Nicholas Montagu: Nick Montagu, non-executive Chairman of the Financial Ombudsman Service.

Q72            Chair: Thank you, as I say, for being here, and we are obviously looking at that independent review that Mr Lloyd has conducted. Do you accept the findings from the independent review? Let us start with that. Do you accept the findings?

Sir Nicholas Montagu: It is an extremely helpful review. Obviously I have not yet had a chance to talk about the detailed findings with my board. We will be doing that next week. The way that I see it, it is the latest, in one sense, in a series of reviews we have had done over the years. Reading the report, it gives us a number of extremely valuable pointers towards ways of improving both our service to our customers and also ways of improving our management in areas like communications with our own staff. My answer is it is a very useful review. There was not any recommendation where I found myself screaming mentally, “No, no”, and I will be talking about it with my board next week.

Caroline Wayman: I would share that, absolutely. It is a very constructive set of recommendations. There are a number of areas we are already working upon, and we are very keen to look to the future and try to do ever better for our customers.

Q73            Chair: There are no findings that you have disputed? Have you communicated back to Mr Lloyd to say anything further to publication of the review?

Sir Nicholas Montagu: No. Richard Lloyd knows that this is a report to our board that we want to talk about, and we will want to talk to him when we have done so. Similarly, as I think we have said publicly, we will expect to publish by the end of the year our views on the report and our progress on implementing its recommendations.

Q74            Chair: I was going to ask you about that because the review makes a recommendation that the ombudsman service should publish its review of the progress against the recommendations before the end of 2018. Are you making that commitment today that that will be published before the end of the year?

Sir Nicholas Montagu: I am assuming that we will do so, yes.

Q75            Chair: “I am assuming”, or you are going to recommend to the board that it will publish?

Sir Nicholas Montagu: I will recommend to the board that we do so, yes.

Q76            Chair: We touched before on the restructuring, and we will come on to the details of that. Clearly, there is criticism in the report of the restructuring. You will have heard the view from Mr Lloyd that potentially the consultancy that advised you did not get the model right because the model has had to be changed. Do you think that the restructuring has failed?

Sir Nicholas Montagu: No, I do not. Do you want Caroline or me to answer?

Chair: I will ask Ms Wayman.

Sir Nicholas Montagu: Caroline will be able to talk much more than I about the operational detail of it because my board is statutorily entirely non-executive. From where I sit, I certainly do not think the restructuring has failed, and it is noticeable that the report at no stage says that the restructuring was wrong. In fact, it says in terms that the core principles behind the new organisational design were soundly based.

What is undoubtedly true is it has not all gone smoothly. I think it is still the right design and the right approach. We could not continue with the old, very bureaucratic model that we had been operating ever since our inception. Where I think the report is valuable both in terms of the restructuring and in terms of lessons for the future is in giving us pointers about how we take it forward from here on.

Q77            Chair: Ms Wayman, you are in charge on a day-to-day basis. We have heard that the restructuring in the model proposed had to be softened. Why has it had to be softened, and why was the model proposed? Why did it not work?

Caroline Wayman: In some of the discussion earlier there were a couple of different things going on, so I would like to provide a bit of clarification, if I may. Part of the discussion earlier was relating to the specifics of the performance management approach that we took in the early stages of the restructure, which the report found—and I would agree—that it probably was not right in its early stages. We have evolved it to make it better and more “us”. It has always absolutely been our intention that this is not just about doing things more quickly. That is important and that is a measure of quality, but fundamentally this is about providing a better service for customers. Absolutely, that is what we are doing, and we can do ever more.

Have we realised all of the benefits yet? No, but this is a complex restructure. I do see some very strong evidence in relation to the individual complaints I see, to consumers who tell me about the difference we have made in their lives. Absolutely, we are heading in the right direction. There are two different models being described in the conversation, though, if I may. One was the specifics of our performance management model, which I think was the main area that was under discussion in relation to PwC.

Q78            Chair: Do you really believe that you are making a positive difference to consumers’ lives, given the number of complaints that you get and the unhappiness expressed to this Committee and to Mr Lloyd?

Caroline Wayman: I do, genuinely. It is really important to see this in the overall context of the work that we do. We make difficult decisions every single day. Do I think we can do better? Absolutely I do, and I really welcome the recommendations, and we absolutely want to focus upon the areas where we can do ever better. It is really important to recognise that the overall review findings are that we are about providing an effective and essential service to thousands of consumers every year. As I said, I do think we can do better, and we will do better.

Q79            Chair: As we heard before, wait times on case decisions have increased, staff morale has decreased—we are going to explore that in a moment—and costs are the same or higher. How can you say that restructuring has been a success?

Caroline Wayman: It is really important to recognise that there are a range of different things going on within the reasons for wait times, for example. That is not just about restructure. Part of the reason for that is that since the new organisational model, we are reaching more people. In the first year, we were anticipating initially we would get around 106,000 cases. This is away from PPI; it is important to say. I would like to say a little bit more about that and other mass claims, if I may, as well. We actually reached 130,000 people, and that has been the same for the last two years.

Part of what we wanted to achieve, which has not been discussed here yet this afternoon, was about making sure that when people call us, it is not just about processing a complaint. Nick referred to the bureaucracy that I think we would all recognise in complaint handling as a real feature. This is about, when someone phones us up, having someone on the end of the phone who can listen, understand the issue and be able to get to the bottom of it. What we are trying to achieve is, wherever possible, when somebody phones up, we have someone skilled at the end of the phone who can try to resolve things not in months and years but in hours and days. We are seeing those benefits, there is absolutely no doubt, and we are reaching more people, and that is essential. That was a big part of what we wanted to do.

It is also true that we are seeing ever more complex cases. It is also true to see that we see more litigious parties on all sides of the debate. It is really important to recognise that there is a lot going on. There are a lot of demands on our service, and I am sure you will want to touch on other areas. In particular, an area of concern at the moment—you were talking about claims management companies towards the end—is that in short-term lending we are seeing an explosion of activity from claims management companies. That of course puts further strain on our resources, and we have to balance those very carefully. It is really important, though, to recognise that there are a lot of different factors that go into that.

Q80            Chair: As a senior leader, you are not just worrying about cases and resolutions. You are also very much responsible for staff. I think the independent review states that staff communication around your organisation was “too weak and late”. Did you understand how disruptive the reorganisation was going to be for your staff?

Caroline Wayman: I certainly knew that it was a big change and that it was going to have a significant impact. I would absolutely say that we have learned lessons on the way about our communication. It is a fair criticism to say that it was a bit top down, and that is something we take on board. I also think that as we look to the future there is a real opportunity to get more input from our staff. That is a fair criticism.

I would say, though, that when you are trying to make a significant organisational change in a large organisation, sometimes, as leaders, you do just have to take tough decisions, and I have needed to do that. I definitely think there are lessons for us in terms of how we have communicated, and I think the report reflected that staff gave us quite positive feedback about our communications around the “Dispatches” programme, which of course was a very challenging time for the organisation and for our people. That was good to see.

The report also reflects that morale is improving but that it is delicate. I think as well we have to be very realistic about the fact that our organisation, in a post-PPI world, will almost certainly need to be considerably smaller. That is something we have been open with staff about, but of course that creates uncertainties for people. That is something that we do not take lightly. As I said, most certainly there are things we would take from that and lessons to learn. It is important that we are able to do that and look that in the eye. We have never, I think, not thought about our staff, but it has been very difficult at times.

Q81            Chair: We are going to come on to that in a moment. I think Stewart is going to probe that further. I wanted to ask Sir Nicholas about your reorganisation of the board and the reduction in the number of non-executives from nine to six and executives down from six to three. Do you think that had an adverse effect on the board’s ability to critically oversee the reorganisation?

Sir Nicholas Montagu: No, I do not think that at all. Paradoxically, I think it has had a beneficial effect. When I arrived at the ombudsman, as you have mentioned, Chair, nine and six is an awful lot. For getting proper discussions, you tend to get one person getting their chance at one set-piece intervention. Coming down to six and three or four, I can honestly say we have proper and very constructive conversations. People do not mind arguing. They do not mind disagreeing. We do not have posturing. Obviously, we assess our effectiveness pretty critically on a yearly basis and with periodic outside reviews, and that has tended to show that we have become more effective, rather than less, with the smaller numbers.

Q82            Stewart Hosie: Ms Wayman, the independent reviewer said that the FOS should show a “demonstrable commitment to an inclusive style of leadership”. What is your assessment of that finding?

Caroline Wayman: I suppose it is something that I always seek to achieve, but, as we were just reflecting upon a moment ago, there are always opportunities for us to learn from the reorganisation, making sure there is enough input from our staff looking forward. It is something that many organisations are grappling with. We are an organisation of about 3,500 staff. I would dearly love to be able to spend more time face to face with staff. I try to do a fair bit of that, but it is something that I am very happy to take on board. Already I am thinking about ways in which we can get more input from people and get their ideas contributed. I do not push against it at all. Many organisations grapple, particularly in a time of change, with how to make sure that voices are being heard.

Q83            Stewart Hosie: Change is always disruptive—everyone recognises that—but I am pretty sure a number of the longer-serving staff will say nothing was ever perfect. They might argue, at least historically, it was a supportive and mutually respectful culture within FOS. The fact that the reviewer is making that recommendation: in what ways do you think your leadership style has not been inclusive and might be interpreted as not being inclusive?

Caroline Wayman: It is just challenging to reach everyone when you are quite a large organisation, as I said. Certainly, when I spend time, as I try to whenever I can, with groups of staff, that is always really beneficial. As I said, to my mind this is about the fact that, for a lot of the reorganisation, it was fairly top down and we were making decisions and we were saying, “Here is the decision. We have made it”. To some extent, there is an element of necessity in that and the heart of a big change because it is quite difficult to include everybody. As I said, I am happy to take that on board. Very much it is not averse to my style as a leader at all to want to get input from people and to talk to people. I am very happy and keen to do that. It is just about how we make sure we have a range of mechanisms for doing that, which is everything from groups of staff and conversations through to how we can use technology better to facilitate that.

Q84            Stewart Hosie: I will come to the groups of staff and conversations in a little while, but have there been any complaints of bullying made against you as CEO or anyone else in the executive team?

Caroline Wayman: I think that there was one complaint made in a speak up context, but there was found to be no basis for that, against me personally.

Q85            Stewart Hosie: What is your process for whistle-blowing?

Caroline Wayman: As the report reflects, we have a whistle-blowing policy that is overseen by our audit committee. That is published and available. We also have, in addition to the channels that are set out there, our head of risk and governance, who is answerable to the chair of our audit committee, who is part of our non-executive board. We also have the facility to use Public Concern at Work as well. We do have a channel. It is used. I think the report recommends that we look to strengthen the sense of an external channel there, which again we are happy to do.

Q86            Stewart Hosie: Did you not think about doing that before the review?

Caroline Wayman: As I said, we have a process, and the finding overall is that it is effective. Particularly in a time of change, I want people to be able to speak up. It is really important, and it is something I always emphasise when I am talking with groups of staff and I am talking to our staff representative body. If there are ways in which we can strengthen that, I am sure the board will be keen to look at that.

Sir Nicholas Montagu: If I might add to that, in case it is helpful.

Stewart Hosie: Yes, of course.

Sir Nicholas Montagu: As Caroline says, this is an area that we take extremely seriously. The head of my audit committee is deeply involved. He is the pivotal person in this. In the context of change, he wrote a long and detailed account of our whistle-blowing procedures for information to the Financial Conduct Authority, whose oversight committee has asked us about this. They I think were well satisfied with it. Equally, the review report will, as you suggest, make us think again. As far as they go, the structures are strong. I would not want to chair an organisation where they were not. However, if an outside reviewer says, “Hang on, you need a bit more”, that is not a recommendation we are just going to brush off.

Q87            Stewart Hosie: That is helpful and I do appreciate that. Can I just carry on with the train of questioning? Ms Wayman, you spoke about meeting the staff. Of course, the organisation does have or had a series of “ask the executive” sessions. Has anyone ever had their appraisal weighting reduced after being honest for airing criticisms, perhaps with the director of strategy, at any of these “ask the executive” sessions? Is that an allegation that you are aware of?

Caroline Wayman: It is not an allegation I recognise, no. At our most recent staff event, one of the ways in which we tried to combat any sense that people could not ask the difficult questions was through the use of technology. We used an app called Slido, which enables staff—you are probably familiar with it for conferences—and people to type in their questions and people vote on the question they want asked. The questions then appeared on the screen behind us and we answered the questions that were most asked. That was a good way of demonstrating that we were happy to answer those difficult questions. It is obviously always difficult with, as I said, quite a large group of staff to be able to reach everybody in the way I would like to.

Q88            Stewart Hosie: The question I have asked you, you do not have any knowledge of that and you are saying it is not true. The issue is if that is perceived to be true by staff. What on earth does that say about the culture of openness and the ability for staff to speak to management if they believe they could be punished for being open in a meeting where they are invited to share their thoughts with people in the executive?

Sir Nicholas Montagu: If I may, I am going to leap in again, Mr Hosie, because I chair the “ask the executive” sessions. If there were any substance in that allegation, I would, for all the obvious reasons, be appalled. You clearly have a particular allegation that has reached you. I can honestly say that having chaired all three of the sessions, they were extremely open, they were extremely frank. I could say that in the strongest sense they were uninhibited. To me, they represented a genuine step forward in the climb back towards improving our communications and regaining a degree of credibility, which the staff survey showed that we had lost. I can say without, I hope, risking complacency that I do not believe that to be a general perception. If there were a particular case, I would want to know of it and I would be seriously disturbed by it.

Q89            Stewart Hosie: Again, thank you for the answer. That is genuinely helpful.

Let me move on to something slightly different. In the last annual report, it said the number of working days lost due to sickness was 10.4 days a year per full-time equivalent employee. That is almost twice comparable organisations. PRA lost six, FCA 6.5. Why is the absentee rate so high? Does that not tell us something about morale?

Caroline Wayman: It is definitely something we need to tackle, and we have recently appointed a very experienced new HR director, and this is a significant priority for her. As ever, with headline figures, there is quite a lot going on underneath that. One of the things of course she will be looking at is different areas, different reasons. It is not where we want it to be.

Q90            Stewart Hosie: Ms Wayman, I understand exactly what you have just said. Technically, that is true. Are there local issues? Is there an office environment issue? To reel off the potential excuses does sound slightly complacent when the numbers are almost twice as bad as comparable big financial regulators. I do not want to labour this point, but a bit of understanding of what is going on would be helpful.

Caroline Wayman: Sure, and I certainly did not mean to affect complacency. Far from it. As you would expect, it is an issue I am very well aware of and that we need to take action to address. I was just seeking in my answer to explain that there are a range of different reasons within that, but that we are not where we need to be—I am very clear about that—and it is a high priority for us.

Q91            Stewart Hosie: Sir Nicholas, in the 2017 staff survey, some of those results were pretty awful—55% of respondents believe that people progress at the FOS by means other than merit. Again, that may not be true but if that is the perception among 55% of respondents, if that is a perception of that organisation more generally, what is being done to change that and to tell your staff it is a meritocracy?

Sir Nicholas Montagu: The results of the 2017 staff survey were not good. We did not expect them to be reassuring. They are not, generally, at a time of major change, but they were worse than we expected. They gave none of us cause for complacency. There are a whole range of steps that Caroline and her team, with the strong support of the board and with board involvement, are taking to rebuild the confidence. I have put it as an absolute on every board agenda that as an intrinsic part of reviewing the progress with the new organisation we specifically address the communications and people issues that the staff survey revealed.

Q92            Stewart Hosie: That is helpful. You will be aware there was a lot of anger felt by staff in relation to the change programme and in particular the communications around it. Who headed up the communications committee? One thing that comes across loud and clear is that the staff did not feel engaged or even informed properly about what was going on.

Sir Nicholas Montagu: I think, quite honestly, that if you have those findings, it is not a question of saying, “It is so-and-so’s fault”. It indicated a degree of collective failure on all of our parts, non-executive and executive. As I have indicated, this is something that we are serious about addressing.

I think too that while we still have a way to go, a lot has been done. We have talked about the “ask the executive” sessions. I spend quite a lot of time going around the organisation and I am picking up a great deal more in the way of confidence in both the organisation and in communications. Caroline and each individual member of her senior executive spent a long time, not just going around, but having drop-in sessions to which anybody could come and ask any question. That has helped a lot. Again, as I think Caroline mentioned, the internal communications in and around the “Dispatches” programme were seen throughout the organisation as a real move forward in terms of communications and involvement.

Q93            Stewart Hosie: Thank you for that answer, and I do recognise the collegiate way in which you answered it that everyone was responsible. Just for clarity, can we just confirm it was Ms Wayman who headed up the communications committee? Is that correct?

Caroline Wayman: We do not have a thing called a communications committee. Ultimately, I am—

Stewart Hosie: The communications for the change programme.

Caroline Wayman: I am the chief executive, so of course ultimately I am responsible for all of that. What I tried to do in some of the heart of the particularly difficult moments was to be at the front of that and to take personal responsibility for that because that is the right thing to do. we have learned a lot about how we might communicate differently in the future and what people’s needs are. Again, technology can help, but there is no real substitute for face to face. We are at the moment in the midst of strengthening our communications team, our engagement team, and looking at new tools that will assist us in that. It is not straightforward. I do not make excuses. I take responsibility. As I said, I very much put myself front and centre of those communications because I thought that was the right thing to do, and I take responsibility for that.

Q94            John Mann: Ms Wayman, did PwC design the staff performance model?

Caroline Wayman: They provided us with a performance management framework. They did not design the casework model. That was the thing I was looking to—I obviously did not succeed very well. I was trying to—

Q95            John Mann: They were involved in it?

Caroline Wayman: They were involved in supporting us in terms of change management.

Q96            John Mann: Is that a problem for you, Sir Nicholas?

Sir Nicholas Montagu: Is what a problem, Mr Mann?

John Mann: Having PwC involved.

Sir Nicholas Montagu: No.

Q97            John Mann: You were on the advisory board of PwC.

Sir Nicholas Montagu: I was on their corporate finance advisory board a long time ago, and when I became Chairman of the Financial Ombudsman I had ceased to have any engagement with PwC and I gave up the two other paid appointments that I had, utterly unconnected with them, that could have given rise to any conflict.

Q98            John Mann: I am sure there was no personal conflict. I am not suggesting that. It is a question of whether it is the same old people, the same old circle going around.

Sir Nicholas Montagu: I do not think so at all, and not least because the selection of PwC is not something that I, as chairman of the board, would have been remotely involved in.

Q99            John Mann: I was in a meeting set up by another MP last week with one of the country’s most eminent lawyers, who for 40 years has represented banks repeatedly in consumer disputes, obviously on behalf of banks, one particular bank especially. I raised with him the question of what happens if someone gets defrauded by their bank. He said, “It is very straightforward in law. I have been doing it for 40 years. The bank is liable if your money is defrauded when they are looking after it”. That is not what your ombudsman service rules, is it?

Caroline Wayman: Could I take that? That is an ombudsman question as opposed to a board question. We are required when we are deciding cases to look at the law, the regulatory rules, good industry practice, and overall what we think is fair and reasonable. There are a complex set of rules in relation to the mixture of different circumstances that people might term fraud or being defrauded.

There are quite different rules and regulations in relation to what are known as push payment frauds, where you authorise the transaction, as compared to unauthorised transactions, where then it is a question of gross negligence. We apply those tests as they stand today. We have quite a large number of cases, as you may be aware, in this territory at the moment, and we have been taking a closer look at the sorts of frauds that we are seeing. There is no doubt that we are seeing significant consumer detriment in this territory. We apply the rules and the law as they are today.

Of course, the Payment Systems Regulator, as you will probably be aware, is currently thinking about what other regulations may be brought into force, including potential voluntary schemes. If that happens, we would take that into account as well. We are required to, and we do, take account of the law and the regulations as they stand today.

Q100       John Mann: What he said to me was, “Of course, we haven’t got a leg to stand on, but money is thrown at it, and money can count”. How much are you taking, when it comes to those cases, the side of the financial institution as opposed to the consumer, who through no fault of their own has been defrauded?

Caroline Wayman: I do not think it is a question of taking sides at all. What we are doing is carefully investigating the circumstances of the complaints, needing to look at the evidence that has been provided to us, and assessing overall whether or not it is fair and reasonable to uphold the complaints, to find against the bank, which we do do in instances where it has not met its obligations. As I said, it is a complex picture. It is very important that we look carefully to see whether they are authorised or unauthorised transactions because different rules apply. That is a finding of fact in itself in a number of cases, and it is very hotly disputed.

I myself last week had conversations with an eminent consumer adviser who has some very strong and clear views about this territory. I also met with industry representatives, who also had very clear views about this subject, and they were pretty opposing. In our casework, what we do is look very carefully at the evidence and overall decide what is fair and reasonable. That is what we are obliged to do, that is what we are asked by Parliament to do, and I am absolutely confident that that is what we do.

Q101       John Mann: Sir Nicholas, you will be having a look at this kind of thing as well. When I look at cases, I am seeing quick decisions made that favour the financial institution. The trade-off between staff doing a thorough job and a quick decision against a financial institution, throwing eminent lawyers against individuals, let us say pensioners who have lost a lot of money because they have been defrauded. The pensioner versus the eminent lawyer who has been doing it for 40 years, and says they do not have a leg to stand on: you must be looking at that and working through in terms of the time taken with your reorganisation and the trade-off between quality and quantity.

Sir Nicholas Montagu: I have two things to say on that, Mr Mann. One has to be necessarily general. It is intrinsic that there are issues in any adjudication of providing a speedy service to the depths that you go into. I have run a service of that sort myself. That is a generalisation. It is by definition a generalisation because, as I emphasised in my self-introduction, I am the non-executive Chairman. I have absolutely no locus when it comes to the decisions of the ombudsman service. I think I must leave Caroline—

Q102       John Mann: No, that was not the question I asked you. I asked you about the trade-off between speed and quality. That is within your locus. I am not asking you to comment on an individual case. I would not be right to do that.

Sir Nicholas Montagu: The reason I made that remark was you spoke in very specific terms about the ombudsman, about the people reaching decisions within the service. That very specifically I cannot talk about. Of course we do not go for speed at the expense of justice. We are guided at all times by what is fair and reasonable. Caroline can—

Q103       John Mann: Some of your staff said to me when I visited that you did and that the changes have worsened that.

Sir Nicholas Montagu: It is our absolute guiding principle. Caroline will bear that out. If you want to talk to her about the operations, about a perceived conflict between speed and quality, that is fine. It is not, as I say, something that I can comment on in detail about the service.

Q104       John Mann: Obviously there is an imbalance in power. You would all recognise that. Sir Nicholas, what is the criteria on which the ombudsman service is determining client vulnerability?

Sir Nicholas Montagu: Again, this is an operational issue on which Caroline is better equipped to answer.

Q105       John Mann: An operational issue?

Sir Nicholas Montagu: It is an operational issue. The determination of whether a consumer is vulnerable or not is—

Q106       John Mann: I am asking the criteria.

Sir Nicholas Montagu: Caroline will answer. These are operational criteria. I have to make this clear, Mr Mann. I am not trying to be unhelpful. The job of the board of the Financial Ombudsman is to ensure that there is an ombudsman scheme. We cannot and we do not get involved in the operations of the scheme. For example, the determination of vulnerability is a matter for the service. Where my board does get involved is—

Q107       John Mann: You never look at what the criteria is for assessing vulnerability?

Sir Nicholas Montagu: Where my board does get involved is in seeking and receiving assurance that we have criteria for assessing vulnerability and that we are doing all that we can to meet the needs of vulnerable consumers. Just to give you a further example, every year my board takes part in a so-called file review, where we review in depth, again, as an important exercise, cases that have been determined and draw the lessons from them. This is in no way intervention in the cases themselves. Last year we very deliberately majored on cases involving vulnerable consumers because we wanted to increase our understanding of them. Caroline will now tell you how we assess vulnerability.

Q108       John Mann: How many in the last year of people who have come to you are illiterate?

Caroline Wayman: Sorry. This is ground I think we covered when we previously appeared before the Committee.

Q109       John Mann: We did, but I am trying to find out if the board knows any of this or has asked.

Caroline Wayman: I think we have been clear in our previous evidence that we do not have a category of that nature. We take very seriously our responsibilities in trying to reach vulnerable consumers, and indeed we have done a lot of work to improve that, as many organisations are seeking to do. Our case handlers have had some excellent training from the Money Advice Trust. We use its model for looking at vulnerability, its TEXAS model, which you may be familiar with. We work with charities to be able to assist people who are vulnerable. We also look carefully that the FCA does in thinking about what vulnerable customers mean. They said something in one of their papers yesterday in this territory.

What we recognise is that it is complex and it is situational. As an organisation, it is about equipping our people to be able to support people in the way they need to be supported in the moment. For me, it is not about labels. It is about understanding people’s individual circumstances and needs. We do a lot to try to adapt our communication style, to make sure we are listening to people. As I said, our staff are provided with support. We also have a practice group in place, which supports our staff. We have an outreach team, who are able to provide additional expert support. We get some really great feedback in this territory, too, from individual consumers where we have made a big difference in their lives. It is something we are wholly committed to, and we will continue to seek to make further improvements.

Q110       John Mann: A final question I have for Mr Nicholas. Should it not be concerning you that you are sending out huge wodges of paper with complex arguments from eminent lawyers on behalf of financial institutions to people without making an assessment of whether they have a reading age of 10 or five? You are ringing them up without assessing the level of trauma they might have had from the experience they have had, for example, with fraud, or without assessing the industrial deafness or other hearing loss. Is that not an issue that you and your board ought to be majoring on to ensure that there are not people who are not able to properly deal with the eminent lawyers and others representing the financial institutions that they are complaining against?

Sir Nicholas Montagu: I am not sure I can usefully add to my previous answer, Mr Mann. I have made clear that assurance that we are dealing appropriately with vulnerable consumers is indeed a matter of concern to my board, and we discuss with Caroline and her relevant people what we are doing to meet those needs. If we are failing to meet those needs, this is clearly something that she, as Chief Ombudsman, would want to know about and to remedy.

Q111       Rushanara Ali: Good afternoon. I want to start off with some questions about the review suggesting that a sample of casework handled during the early stages of the restructure should be reviewed. You have said you have accepted the recommendations and you will be discussing it with the board. Can you say how you will ensure that that review is sufficiently independent?

Caroline Wayman: As Nick said earlier, we will be formally discussing it with our board next week, but it is something I can say categorically that we will be very happy to do. I would like to emphasise that we think—and the review reflects—that there were strong systems and controls in place at the time and we had a lot of mitigation, but I am very happy that we should take an additional look. It is like that I will want—

Q112       Rushanara Ali: Is it going to be independent?

Caroline Wayman: What is most likely and probably most effective, because we need someone who can look at the cases and form a view, is probably to use one of our most experienced ombudsmen to look carefully at the cases against the standards that we asked people to follow at the time. We have not set out the details, and obviously we are happy to hear the views of the Committee as to how—

Q113       Rushanara Ali: Standards that ended up being problematic?

Caroline Wayman: No. I am talking about the statutory framework against which we operate. It is really important to recognise the framework we operate in in assessing the extent to which we have met our obligations. We have not specified precisely how that will be done yet, but I can say without hesitation it is something I will be very happy to do.

Q114       Rushanara Ali: The review says that there was not an institutional bias against those people, but “institutional” does not mean that there are not major problems, and that is what he is basically referring to in requiring you to do this. How will you address the problems if you identify them?

Caroline Wayman: It depends what the problems are if we were to find any. I think if we were—

Q115       Rushanara Ali: Do you expect to find problems?

Caroline Wayman: No. I think we had strong systems in place. We ask our people to make—

Q116       Rushanara Ali: Would he be asking you to do this if he did not have an instinct for there being problems? He is giving you a pretty good hearing on other areas. He is saying there is not an institutional bias, but he is still saying you need to dig deeper. He mentioned in his session earlier that obviously his terms of reference did not lend him to—nor did the timeframe—look at the hundreds of thousands of cases and so on. I am just not getting enough of a sense of how much this is keeping you awake at night. I am not suggesting it should, but we need you to sleep well and do the job well.

Caroline Wayman: I would like to sleep well. We all would.

Q117       Rushanara Ali: There is a problem here, otherwise you would not be asked to do this.

Caroline Wayman: I think it goes to the line of questioning from earlier, which is that overall what the report was able to do was to look at our systems and controls to be able to assess the various measures we have used to satisfy ourselves systematically. On the point of bias, the findings were very clear, and I think that is absolutely right. This is about saying, for an additional level of assurance, it would be sensible to go and have a look at some specific cases and make sure that there have not been any issues, which, as I said, I am very happy to do. This is something that we do routinely as we look back at what we have done. We do deep dives into cases.

One area that we often have looked at as a deep dive is to say, “What did we think about the quality of our work and what did our customers think?” Quite often we find we are tougher on ourselves than our customers are, but that is one of the ways in which we will look to see whether we think there might be issues. I am very happy that we should go and have an additional look, but I want to be clear that it is not because I think there is a problem. It is important to be able to provide that additional level of check.

Q118       Rushanara Ali: What you are saying is really interesting because when we heard the evidence earlier on, he was very clear that the terms of reference were such that there was not scope to do a deep dive and a deeper, more comprehensive review. He is not letting you off the hook, so it is really important that you recognise the importance of doing this properly and look thoroughly to ensure that you can be satisfied that nothing is going to get missed.

I am going to move on to the point about bias. The reviewer highlighted the possibility that there is a potential that individual staff could reject claims to avoid technical arguments with the firms. This Committee received written correspondence from the FOS staff that employees are encouraged by managers and mentors to reject cases in order to meet targets. You are saying that you have been cleared of bias, but during the process of this review this Committee has received submissions from your staff pointing to the opposite.

There is also an issue about targets and how targets apply pressure, and it is not just your institution. An overreliance on targets can be counterproductive. How can you assure us that you are going to look carefully at this question? The dissatisfaction among your staff has not gone away. Usually, there are problems. If there are insights within the institution that are not being addressed through your own engagement that you talked about earlier, those problems could become bigger and could fester. Can you say a bit more about that point?

Caroline Wayman: I am absolutely clear that our role is about providing a fair and reasonable answer. I was horrified at the allegation that we are biased. The report reflected that the strong values of our staff were such that our staff—I cannot speak for every single person in the 3,500, but that is an allegation we would be collectively horrified by.

You are absolutely right to say that targets need to be carefully managed. For me, that is about having a balanced set of objectives. For our case handlers, that is about not just how quickly we respond to things or how many people we help. It is about a whole range of things, including customer satisfaction. One of the measures we particularly look to is the customer satisfaction among people who do not get the outcome that they were seeking. Any ombudsman scheme in the world will tell you that customer satisfaction is of course heavily influenced by that. That is not to be an excuse; that is the opposite, actually, so we should really actively look at that, and we do. We have seen significant improvements in that. We are seeking to look at our performance management framework this year again and make sure it is absolutely as it should be.

I would want to assure the Committee that I want our staff to be really clear that if they are in any doubt about whether they should meet a target for numbers or get the customer the fair answer, it is the second one. I am absolutely categorical about that. We will continue to measure people and what they do, of course. We have to do that. That is sensible. It will be across a range of measures, which include customer satisfaction, quality, and a whole range of different things to make sure that we are getting that balance.

Q119       Rushanara Ali: Great. Just on the point about powers, which I was asking about earlier, if you do find yourself with the responsibility of having to deal with the complaints coming from small businesses, even with the ceiling being raised for compensation and also complaints coming as a result of the TSB fiasco, how resilient are you against what you have to do here? A further review that you have essentially committed to here today, sorting out your organisation, dealing with the pressures that you have to respond to what has come out of this review. How are you going to cope with additional responsibilities? Do you feel you have the powers to say, “No, thank you, we have too much on our plate”, or do you have to say, “We can only do this if we get XYZ”, otherwise you do not have the power to turn down business, if you like?

Caroline Wayman: I think we always want to be able to help if we can.

Q120       Rushanara Ali: Yes, but that might be a problem, with respect.

Caroline Wayman: I see that. I see where you are coming from. In relation to TSB, we have a specific team in place. We are speaking to them daily, I think, at the moment. For the Committee’s information, we have had about 1,500 complaints I think so far, and we are making good progress. As was alluded to earlier, there are an awful lot of customers who have been affected. We will certainly be encouraging TSB to do as Richard Lloyd was referring to earlier, which is to get people the fair answers without them needing to come to us. We have also—

Q121       Rushanara Ali: You cannot stop them, can you?

Caroline Wayman: We cannot, and we would not want to.

Q122       Rushanara Ali: The point is you cannot, because they can sit back, as frankly some of them were, and they can just pass the buck. They pay their fees, but they can just let you bear the responsibility. Perhaps Sir Nicholas might want to come in as well on these sorts of—

Caroline Wayman: It is more strategic. Yes. It is certainly a concern we have had in previous mass claims areas. It is something, back in mortgage endowment territory, that we were really concerned about, that there was quite a significant element of almost outsourcing the firm’s complaint handling to us. It is not something I am specifically concerned about in relation to TSB, but I think—

Q123       Rushanara Ali: We are. I certainly am.

Caroline Wayman: To be clear, there is a lot to be done.

Q124       Rushanara Ali: We have had a session on this twice.

Sir Nicholas Montagu: Just picking up the point you made, Ms Ali, yes, there is a strategic element to this. Obviously, one of the things that my board is concerned with is ensuring that the ombudsman is properly resourced. Clearly, the three key resources are money, people and information. We take a close interest across the piece. This is certainly something, whenever there is the prospect of new work, whether it is new work because of unexpected demand, say TSB, say a spurt in a particular area greater than we expected, or the possibility of new work, then, yes, this is something that we will discuss closely and continuously with Caroline and her team.

The only reason I was smiling was the thought when you said, “Can you turn away work as it comes in?” Chance would have been a fine thing with 1.7 million PPI claims, would it not?

Q125       Rushanara Ali: It is a systemic point. That is all. If you are not up to doing it because you have too much on, is it right that consumers should then face more problems, more delays, if you are not prepared and do not have the confidence to say, “No, sorry, FCA or Government, we can’t do it”? You fix some of the other systemic issues.

Sir Nicholas Montagu: I think this raises a really serious point. It is a point about good anticipation. We are better at anticipation, again. We would have been stupid not to have been after the experience of recent years. If we had really serious issues, we would clearly need to talk to the FCA about them. I think that we are better now at seeing things on the horizon and we have good experience at gearing up quickly and without detriment to quality or ever to the fairness of our judgments.

Chair: Let’s push on with that a little bit further.

Q126       Wes Streeting: Yes. On this point, how would you characterise your working relationship with the FCA?

Sir Nicholas Montagu: Appropriate, and that is not meant to sound cold. It is extremely constructive. We have a lot of contact with them, from Charles Randell and me through Caroline and Andrew Bailey and other directors there, and obviously at working level. We go to meetings of their oversight committee, which is extremely helpful as it has evolved in discussing things like our budget, indeed discussing things like the “Dispatches” programme and how we were proposing to handle it.

When I said it was not meant to sound cold, the reason why I was quite formal is it is a close relationship but there are formalities. They have their responsibilities; we have ours. We are well aware of the boundaries and discussions are constructive, but it is certainly fair to say that there are also robust and very open discussions with them. I think that it is a good relationship but, above all, as I say, I think that it is appropriate, which has to be the important point.

Q127       Wes Streeting: In terms of that appropriate dialogue, do you feel kept sufficiently in the loop by the FCA when it is considering rules that could affect FOS?

Caroline Wayman: Could I chip in on that because I think that would be more likely to be with myself and my team? Yes, I do. I think it is something that to my mind has definitely improved over the years. Definitely, I think that we now have a very strong dialogue. What we are able to do for the FCA is to provide it with the real-life examples of the ways in which certain issues affect consumers. We are able to feed in case examples and we are very keen to do that. We do that regularly at all sorts of different levels, both in terms of data and also examples.

Q128       Wes Streeting: When it is considering rule changes that could affect your service, you feel kept sufficiently in the loop during its deliberations?

Caroline Wayman: Yes, I think so. Just one point of clarification in relation to SMEs that I think was suggested earlier. In the present proposals, my recollection is, in fact, that our award limit would not be increasing at this stage. That, I think, is what was consulted on. That is an open question in relation to powers, which was the set of questions that were being asked earlier.

Q129       Wes Streeting: We will come back to that in just a moment. I just want to follow on from Rushanara’s questioning around the PPI redress scheme. This is clearly a really unhappy experience for everyone involved, so what lessons have been learned by the Financial Ombudsman Service and the FCA following that very, to put it mildly, unhappy experience?

Caroline Wayman: Significant ones. It is something that back in 2008 we did write to the then FSA and asked them to consider not having a complaint-led response and to think about systemic solutions. I think that remains something that does need to be thought about as these large issues emerge. At times, I think that it is not the right thing to have it being complaint led. It does depend on the circumstances. The FCA has put in place various consumer redress schemes, some of which I think have been quite successful in reaching consumers. It is a judgment.

The other thing that often complicates it is that quite often the sorts of issues that emerge can be about things that straddle regulation. Sometimes they are about things that both are covered by FCA regulation where they all have powers and also about events that precede that. If you take consumer credit, for example, obviously the regulation passed to the FCA so in relation to previous activities they will have some powers but not the same powers they have in relation to firms that they have regulated throughout.

Q130       Wes Streeting: Returning to the restructure, how involved were the FCA in discussions around your restructure?

Caroline Wayman: We kept them up to date through the oversight committee. I think that it is important to say as well that this has been something we have talked very publicly about in our publications that we put out for consultation. It is something that we have talked regularly with stakeholders about. It is important to reflect that although, of course, we focus here today on the concerns, rightly, about making things better, we have had really strong feedback on both sides of the debate. Constantly in our world we are listening to at least two sides of a debate, so we have had very strong consumer feedback in response to some of those changes. We have had very strong feedback from financial businesses, who I think recognise the value in us—when someone is fed up enough to phone us instead of the financial business—having someone skilled to be able to help that day. Very much it is about removing bureaucracy, and that is something we have seen the benefits of. We have been very open about that and we have discussed it across our stakeholders, including the FCA.

Q131       Wes Streeting: What was the FCA’s view and advice?

Caroline Wayman: I am not sure we specifically asked for advice. With the FCA, of course, we talk back to them about a range of issues all the time. Very often, we are focused on the areas of collective interest. At the moment, a particular area of shared interest is, as I mentioned earlier, payday lenders and the volumes of complaints we are seeing there. We anticipate that we may get double what we had originally thought this year. We forecast 20,000 complaints this year about payday lenders and other short-term credit. We now think it may be closer to 40,000. That is obviously a particular area of concern, so we will be and are talking to the FCA about that.

Q132       Wes Streeting: The sorts of conversations you have with the FCA are less about seeking their advice or input in terms of the practicalities of your restructure but more about the general demands on your business and where you allocate resources?

Caroline Wayman: Yes. It is a mixture of things. I think that very much it is about trying to make sure that the framework that Parliament has established is working effectively together. The FCA rightly scrutinises us in relation to our budget and how we are spending our resources and asks us, as you would expect, tough and demanding questions around that. Of course, we publicly consult on all of that, so this is all something that is very much subject to public debate as well. We seek to try to provide the sorts of insights that will help to ensure that the market is operating effectively, and I very much believe that we can contribute to improving confidence in the market. I want consumers to feel more able to participate because they know there is an independent person they can come to.

Q133       Wes Streeting: How about your board restructure, Sir Nicholas? Did you discuss that with the FCA?

Sir Nicholas Montagu: No.

Q134       Wes Streeting: The FCA approves all board appointments, doesn’t it?

Sir Nicholas Montagu: I did not discuss in the sense that it did not require FCA approval. Obviously, in my informal discussions with Adair Turner, it would have been still at the time, I would have told him what was going on and if he had any major objections to it. It was based very largely on board discussions. I talked with the FCA about what we were doing. They saw no difficulty in it, but it was essentially an internal matter for improving the effectiveness of ombudsman board discussions.

Q135       Wes Streeting: Given that the FCA approves all director appointments, would it not be appropriate to discuss that with the FCA?

Sir Nicholas Montagu: I think that it was appropriate to discuss it at the level that I discussed it with the then chairman. If he had expressed any reservations about it, that would clearly have given us pause for thought. When I said to him that the general feeling in the board was that meetings were too big to be effective, that we needed to reduce in size, he raised no difficulty about this.

Q136       Wes Streeting: Finally, I want to turn to the issue of SME redress. Considering the findings of the independent review, have you reconsidered your position on your own readiness, which is an issue we discussed when you last came before the Committee?

Caroline Wayman: We will be ready if people choose to give us the expanded jurisdiction. I think that it is important to say that we do recognise the need to think about this differently to other areas of casework. The proposed expansion does take us into reasonably sized small businesses that we have not dealt with before. We are preparing on the basis that the extension does happen, albeit that is a choice ultimately for the FCA, not for us. We are looking at the skills and capabilities that we will need, and indeed the processes that we will need.

For example, we do think that potentially more formal mediation might play a part here, and we are very much engaging again with stakeholders to seek views about, first, the sorts of disputes that will come to us but also getting input from the people affected by these issues. We are trying to reach far and wide in terms of getting the expertise of others as part of that process. I think that the review reflects that we do need to look at our capabilities for new complex case areas, of which this undoubtedly would be one. We are preparing on the basis that that expansion does happen.

It is important to say that we do have experience of expanding our jurisdiction. I have mentioned consumer credit a few times. That was a very significant expansion of our jurisdiction a number of years ago, which brought in I think at the time over another 100,000 additional businesses that were then subject to our jurisdiction. We are practised in that and changes to our jurisdiction do happen from time to time. I would emphasise, though, that I do not seek to say I do not think we need to change or that we do not need to do things differently. I think that we do and we need to look both internally at the capability we already have, and we have a good deal of experience, but also at what else we will need. That is the planning we are doing right now.

Q137       Wes Streeting: Is this an expansion of your remit that you want?

Caroline Wayman: It is something that we think we can assist with, so in that sense, yes. It is not that we have put ourselves forward. We have been asked in the context of the FCA consultation, but I absolutely am confident that we can provide a service that will be the right one. Inevitably, as a decision maker, we will have to make tough decisions and that will not always please everybody—that is in the nature of being a decision maker—but I am absolutely focused on providing a service that quite crucially is about designing from first principles and wherever possible trying to design something that might assist small businesses at the earliest possible point when something starts to go wrong rather than when things have become much more crystallised and very difficult disputes. I see those in our existing caseload and do not underestimate the challenges.

Q138       Wes Streeting: In the context of the concerns that have arisen through the report of the independent reviewer and the concerns expressed by members of the Committee this afternoon, are you not concerned that taking on SME banking disputes would be at this stage too ambitious?

Caroline Wayman: No. I think that we absolutely can and will be ready. I would not say that if I did not think we could. My absolute wish is to provide a service that is absolutely best in class. The review has helped us with areas that we can do better in, but it is really important to recognise the difference we make in people’s lives every single day and the incredible work that my staff do. They do a tough task really well. Are we perfect? No, but I do not think that the review has made me think that this is a bridge too far. A lot of the areas highlighted by the report, as you would expect, are the areas that we were absolutely focused on. We will take those fresh insights absolutely, but I do not think that it is a bridge too far for us, no.

Q139       Wes Streeting: I do not want to go into the details, but the constituent that I wrote to you about, who had waited over four years for the Financial Ombudsman Service to resolve their case, with great emotional and financial distress caused as a result while they are left in limbo and have people knocking on their door demanding debts to be settled, those people and people like them who are at risk of losing their homes and their whole way of living, I am not sure they would have confidence in the Financial Ombudsman Service’s ability to reach into a new area when you do not seem to have mastered the area for which you are currently responsible. This is a huge area of risk and complexity.

Caroline Wayman: Inevitably, in what we do there are difficult cases; there are difficult issues. In the case you referenced and many others like it, we are balancing needing to make sure that the decision that we reach is one that we absolutely will be able to stand behind legally, and in that instance and in others we face significant challenge at times.

It is true to say, though, that we absolutely do pursue them to their very end to make sure that we get a fair answer. Indeed, I got an e-mail yesterday from two consumers who had waited for a very long time but that was because the financial business had judicially reviewed us in relation to their case and we had defended that challenge. We defended that challenge successfully. Unfortunately, that meant the case took a very long time, but I think that, albeit recognising that was in no way the speed with which we would have wanted to get them their answer, we persisted and we got them a fair answer. That is crucial, but I also agree that we must strive to do that wherever possible as speedily as we can, but making sure that people are getting fair answers is fundamental.

Wes Streeting: Thank you. I have no more questions.

Q140       Chair: I have a couple of final questions. On that point about how long things take, the independent review says that your target is to resolve 50% of cases within 45 days. That target has not been met since June 2017. Why not?

Caroline Wayman: As I think that I reflected earlier, there are quite a lot of things that go into the time that it takes us to resolve cases. If you look back at our performance over the last few years, it has improved. Last year was slightly less good than the year before, but if you followed the trend from the year before that, it is still improving but there is more to do. We are grappling with new areas of casework and significant challenge, as I said, in relation to short-term lending. That is probably our biggest challenge at the moment. There is a lot going on there, and we will be looking to improve the picture over the course of the year as well.

Q141       Chair: That tells me that the structure that you currently have or the way the FOS is currently organised basically means you cannot meet that target.

Caroline Wayman: I do not think that is right. There is a question—

Q142       Chair: If you have not met it for a year, it is a target that presumably is set on the basis that it is stretching but hopefully achievable.

Caroline Wayman: Definitely stretching, yes.

Q143       Chair: But it has not been met for over 12 months, so you are saying the service cannot do what you have set it to do.

Caroline Wayman: We have set ourselves more demanding targets than, for example, the ADR regulations set us, which we are meeting and which we will be publicly reporting on soon. As I mentioned earlier, there are many things that go into this, including the fact that we are reaching more people and that is a good thing. We have operational plans in place to improve things. We are under headcount at the moment, so we are out recruiting. We will be bringing more people in and looking at different sorts of skills that we need as part of that. I do not think that it is an unachievable target. It is something that we will look to improve over time, but it is a good thing we are reaching more people. It is very important to see it in the round.

Q144       Chair: Earlier on, in answer to Wes, you thanked, quite rightly, your staff, who do a tremendous job. The independent review said, “But the concerns that remain among staff are exacerbated by a perception that operational leadership at the FOS lacks credibility and accountability. A number of staff turned to posting their feelings about the changes and leadership at the FOS anonymously on an external employer review website.” How do you as the top person in charge on a daily basis feel about that?

Caroline Wayman: I am very disappointed. It is something that we put an awful lot of time and effort into to try to improve the dialogue with our staff. As we discussed earlier in the session, in a time of change it is very challenging. No one is more committed than me to improving our engagement and trying to help make sure it is a great place for people to work. I think that our values continue to shine through. In relation to culture, I think that we have a really strong culture and terrific people, but we are going to be a considerably smaller organisation and we have to be open and realistic about that. That will bring its own challenges.

Of course, I am disappointed and that is why we have put an awful lot of effort into a number of initiatives, which I think have been received well by our staff. Again, the report reflected that it is an improving picture, but there is more to do and we are absolutely committed to that.

Q145       Chair: Sir Nicholas, you were very clear earlier on in answer to Mr Mann that there were certain things that were operational and that were for the Chief Ombudsman to do. One of the things that is not operational but is strategic was the review carried out by the management consultancy, which I think was PwC, in terms of restructuring, correct?

Caroline Wayman: PwC assisted. There were two bits of work PwC did for us. They assisted us in terms of providing project management support in relation to the change programme, and then they provided a specific set of input advice and programme in relation to performance management. So, there were two elements.

Q146       Chair: I am presuming those were discussed very heavily, those two pieces of work, at the board?

Sir Nicholas Montagu: Yes.

Q147       Chair: The independent review stated that the new model was perceived to be more suitable for a sales environment. How did it end up that PwC came up with a recommendation that was totally unsuited to the environment of an ombudsman service, Sir Nicholas?

Sir Nicholas Montagu: For a start, I am not sure that that is actually going to prove to be the case. As Caroline has indicated, what PwC was coming up with was trying to provide us with a performance management system that was suited to a wholly new way of doing business. We have adapted it since then and I think that the system that we have now is a good one. It provides the right sort of signals and incentives at both the individual and the collective level. The answer to your question, Chairman, may be that this was a very new type of way of doing business and quite difficult in that environment to get something that is absolutely apt at the first attempt.

Q148       Chair: Basically, it sounds like PwC on the basis of adaptation did not come up with the right model?

Sir Nicholas Montagu: It is probably fair to say they did not come up with a model that fitted without adaptation. Caroline, you may have views on that.

Caroline Wayman: I would agree with your answer, Sir Nicholas. It is not a question of us having said we abandon it in its entirety. It is a questioning of saying we need to make it more fit for purpose for us. As ever with these sorts of things, it is a question of balance. It is really important that we are focused on how many people we are helping. In the end, that is a really important metric and that is not about numbers for the sake of it. That is about the number of people we help.

Q149       Chair: Presumably, the consultancy came up with something on the basis of the terms of reference or the contract, the asks that were put in place by the board. Were those asks wrong? Did the consultancy just fail to understand what the ombudsman service was about?

Caroline Wayman: As ever, it is slightly more complex than that. Some people responded very well to it and it worked really well for them. It did depend a bit on what people had been used to in the past. We did need to adapt it and make it more us, is the word that we have tended to use, so in that sense it was not immediately as we needed it to be. It is not a question of us having said, “It does not work at all”. It is a question of adapting it and making it more right for us.

Again, with many of these things—and I think that it was in one of your earlier questions—the extent to which that is a thing that you should just know and not even have tried it or whether some things you find out when you do, we knew we needed to be ambitious. On reflection, it is definitely a lesson for us and one that, of course, we have fed back to the consultants as well in terms of our own experience.

Q150       Chair: Getting it right and then coming up with a model, was that reflected in the fees and the terms of engagement that you had with PwC?

Caroline Wayman: Yes, I think so.

Q151       Chair: You paid them less because they had come up with a model that you have had to adapt yourselves?

Caroline Wayman: I could not say definitively on that off the top of my head. Certainly, we had extensive discussions in relation to how this was working and the extent to which it was delivering what we needed it to. We adapted it with their support to make it more fit for purpose. Again, though, it is important to emphasise it is not a question of saying it was just all wrong, it is a question of saying that in tone as much as anything it needed to be adapted for our environment, so that is exactly what we have done, listening to our people.

As ever, when you are trying to make quite a big change, sometimes you do have to make quite a significant shift and then adjust slightly, otherwise nothing changes. That is the other risk that in some senses we have not really reflected on necessarily in discussion today, but something that I am very cognisant of—Richard Lloyd may have mentioned it as well—is that the risk of not changing, the risk of not tackling these fundamental issues, to my mind is greater. You cannot stand still as an organisation like ours. We have to continue to improve and that is what we are looking to do.

Q152       Chair: I have two final questions. How much have you paid PwC?

Caroline Wayman: Over the course of the last—I am trying to think—three or four years it would be about £10 million, I think, in total across both project management and the particulars of the performance programme, but we could provide that.

Q153       Chair: Could you perhaps write to us with a definitive answer on that and for what and everything else?

Caroline Wayman: I was going to say I can happily provide clarification about that.

Q154       Chair: If there is any detail about any fees that were not paid because you were not happy with the work, it would be helpful to know about that.

The final thing is you talked about listening to your people. Your people, the staff at the Financial Ombudsman Service, have made it very clear that they think people do not progress through the organisation on merit. What are you going to do to listen to them to change that?

Caroline Wayman: We are already doing a lot to listen to that. For any of them watching, absolutely my commitment is I want the best talent to rise to the top. As I mentioned earlier, we do have a new HR director and there is a lot we are doing already, including looking at our recruitment processes, thinking about how we do that. It is also about internal progression within role and how we improve those areas, including thinking about how we get sufficient diversity across our workforce. We have made quite good strides compared to many organisations, particularly in relation to gender, but we have work to do there as well. We are absolutely committed to that and there are a number of things in train, but we will keep at that as well.

Chair: Your staff and those who work with you have not been backwards in coming forwards, both to us and clearly to Mr Lloyd as well, so I am sure that if they are watching—and I am sure they will have been—they will want to comment on what has been said this afternoon. We will, of course, as a Committee welcome hearing from them. Thank you both very much indeed for the evidence that you have given this afternoon. It has been extremely helpful. Thank you.