New knight to save us from chaos

A brave knight in shining armour - or, more boringly, a Financial Services Ombudsman - is about to ride to the rescue of consumers who suffer abuse from financial services firms.

The ombudsman's appearance, forged out of a confusing array of lesser ombudsmen, aims to provide mere vassals like ourselves, unversed in the minutiae of financial services regulation, with a single source of redress for our complaints.

In his new role as champion of the people, the knight (sorry, ombudsman) will act as an Arthurian hero, chairing a semi-Camelot consisting of all the old ombudsmen, for whose activities he will now be responsible.

The creation of a supreme ombudsman, set to happen by the end of the year, marks the culmination of a months-long consultation process by the new Labour Government. In his new role, the ombudsman will merge eight separate redress systems presently operated by banks, building societies, insurance firms, financial advisers and investment firms.

In so doing, he will end the confusion at the heart of the existing system, whereby even key questions, such as consumer eligibility to complain, limits on awards made, time limits and procedures to be followed, vary wildly between ombudsman schemes.

The Financial Services Authority (FSA), the new, all-encompassing City watchdog, will regulate the scheme, with all firms regulated by the FSA also being covered by the new ombudsman.

The change follows long-voiced criticisms by consumers about the current system. Up to now, complaints about the treatment dished out by a financial company could be dealt with by a variety of ombudsmen, depending on their nature.

For example, if at present an insurance company refuses to pay compensation on a matter concerning a household policy, the matter is considered by the Insurance Ombudsman. If it were life insurance or a pensions issue, this would be the fiefdom of the PIA Ombudsman. But if it is a fund management quarrel, the Investment Ombudsman takes over.

Compensation is also tricky. The PIA Ombudsman can force insurers and independent financial advisers to pay a maximum of pounds 50,000 compensation. In addition they may have to pay up to pounds 750 for distress or inconvenience. But the Investment Management Regulatory Organisation's Ombudsman can force investment houses to pay pounds 100,000 plus pounds 750 for distress.

The super-Ombudsman will have powers to force firms to pay up to pounds 100,000 in compensation and pounds 1,000 for distress and inconvenience.

Perhaps not surprisingly, not all current ombudsmen welcome the change in its entirety. They are also concerned that such a compulsory system with binding decisions could mean the FSA would be forced to introduce full court procedures. David Thomas, the Banking Ombudsman, feels the FSA could be contravening the European convention on human rights if it did not introduce such legal procedures.

Tony Holland, Ombudsman for the Personal Investment Authority, the existing frontline regulator, feels the new system will help consumers identity where to make a complaint.

Mr Holland says: "In today's market of many ombudsmen, the perceived problem is that there is a confusion among consumers about names and functions. A single body would help solve this confusion."

But he worries that the super-ombudsman could become a bureaucratic nightmare which will scare consumers if it is allowed to be to big.

More surprisingly, not all consumer organisations are too happy with the new supremo either. They fear it will slow down the complaints procedure and lead to a pile up of cases waiting to be processed.

The Consumers' Association believes the system could stack the odds against the complainant. It is worried the formal nature of the scheme will push consumers into the lion's den or count against financial heavyweights such as banks and insurance companies.

"The problem with the new system is that it will be run as a series of hearings which lawyers can attend. This could scare less well off people away," says Philip Telford at the Consumers' Association. Consumer groups favour the current free complaints system of independent arbitration over formal legal challenges.

Another stumbling block for consumers could come if mortgages are not brought within the FSA but banks and building societies are. Under this idea, consumers will be able to pursue a complaint against NatWest Bank or Nationwide Building Society but not against a lender like the Mortgage Corporation.

Mr Thomas, the Banking Ombudsman, and the National Consumer Council (NCC) are also concerned that many consumers will be unaware of the distinction between firms regulated by the FSA and those not.

They fear consumers will want to see a simpler definition. The NCC wants the Government to extend the ombudsman's coverage to areas outside those not regulated by the FSA.

Consumer groups also wants the best features from the existing ombudsmen saved when creating the new supremo. They fear the flexible nature of the current system will be lost.

The size of the new ombudsman also threatens to boost costs. Under the current system consumers can meet with the ombudsmen, making the process a more human, less cold one. Consumers could also lose out as the FSA cuts back on the number of staff with specialist knowledge and expertise.

The Government has already burdened the FSA with bringing the financial services regulatory regime under one roof.

Consumer groups fear the regulator may not have enough resources to ensure the new white knight's mission to protect consumers is a success. The problem could mean he is rushed into fully operational status with rusty armour and a weak lance.