APFA RESPONSE DEPARTMENT FOR BUSINESS, INNOVATION & SKILLS CONSULTATION IMPLEMENTING THE ALTERNATIVE DISPUTE RESOLUTION DIRECTIVE

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1 APFA RESPONSE DEPARTMENT FOR BUSINESS, INNOVATION & SKILLS CONSULTATION IMPLEMENTING THE ALTERNATIVE DISPUTE RESOLUTION DIRECTIVE ABOUT APFA The Association of Professional Financial Advisers (APFA) is the representative body for the financial adviser profession. There are approximately 14,000 adviser firms employing 81,000 people. 40% of investment and protection products are sold through financial advisers, with annual revenue estimated at 3.8 billion. Over 50% of the population rank financial advisers as one of their top three most trusted sources of advice about money matters. As such, financial advisers represent a leading force in the maintenance of a competitive and dynamic retail financial services market. INTRODUCTION APFA welcomes this opportunity to respond to the Department for Business, Innovation & Skills consultation on Implementing the Alternative Dispute Resolution Directive. Our response is informed primarily by our experience of the way the Financial Services Ombudsman (FOS) operates, but we believe that there are lessons to be drawn from financial services that have a more general application. RESPONSES TO INDIVIDUAL QUESTIONS UK ADR landscape Q1. Do you think there are any significant gaps in the provision of ADR in the UK? Please identify any sectors where you think the provision of ADR is insufficient. ADR for every consumer dispute: Do nothing Q2. Do you agree that the current provision of ADR in the UK is not enough to meet our obligation to have ADR available for all consumer disputes? If you disagree, can you advise which ADR schemes are suitable to handle all disputes, and whether there are limitations to the number of disputes or type of dispute that these schemes could handle? Would these schemes be able to process an increased volume of disputes within the 90 day deadline for concluding disputes set by the Directive? 26 Throgmorton Street London EC2N 2AN Registered in England No Registered office: 100 Fetter Lane, London, EC4A 1BN

2 ADR for every consumer dispute: Residual ADR Q3. Can we expect businesses not currently obliged to use an ADR scheme, to refer complaints to a voluntary residual ADR scheme? What steps could Government and others take to encourage businesses to use a voluntary ADR scheme? Q4. What volume of enquiries and/or disputes could we expect a voluntary residual ADR scheme to receive? Q5. Is there a specific operating model that a residual ADR scheme should adopt (e.g. mirror existing ombudsman models)? Q6. Can you suggest what an appropriate maximum and minimum settlement value for a residual ADR scheme should be? How have you arrived at these figures? Q7. What funding model would be appropriate for a residual ADR scheme? Can an ADR provider operate effectively if it is reliant on case fees rather than annual fees? Q8. Should a standard case fee be adopted? What would be an appropriate level? If not, how should the amount charged for each dispute be determined? Q9. Would it be better to have a single ADR body or several ADR bodies operating a residual ADR scheme? What would be the ideal number and what are the reasons for this? We have no comments on these questions. Better signposting for consumers a complaints helpdesk Q10. In light of the other requirements in the ADR Directive which are intended to assist consumers, would a consumer-facing complaints helpdesk be beneficial? Q.11 Do you have any comments on the type of service it should provide and the extent to which it should examine the enquiries it receives? Q12. Rather than attempt to create a new service, which existing service or body is best placed to provide this function? Q13. How could a helpdesk be funded? Whilst we have no strong views on whether a consumer-facing helpdesk is required, we would be wary of further cost being loaded on businesses. We would have thought web-based information would be a cost effective solution, without the need for a telephone access point. Furthermore, we do not believe that those industries where extensive information is already provided to customers, such as financial services, should bear any additional cost, as it is unlikely that their customers will need to use such a help-desk. 2

3 Appointing a competent authority Q14. Do you agree that regulators should act as competent authorities for the ADR schemes that operate in their sectors? Whilst we agree that regulators should act as competent authorities for ADR schemes, we believe there are some important lessons to be learnt from our experience of how the accountability and governance arrangements in the financial services regulatory regime have worked in practice, as they have not always proved to be as effective as they should be. For example, the FSA s (now FCA) oversight of the Money Advice Service, whilst not exactly analogous, serves as a useful example. The Financial Services Act 2010 sets out the legal responsibility of the FSA for oversight of the Money Advice Service. (This responsibility has now been transferred to the FCA.) When taking evidence on the operation of the Money Advice Service, the Treasury Select Committee heard that the arrangements for the Service's accountability to the FSA were, in practice, confused and ineffective. In its report on the Money Advice Service, published in December 2013, the Committee therefore recommended that consideration needed to be given to whether the FCA needs additional statutory powers to hold the Money Advice Service to account - for example, whether the FCA should have powers to intervene on operational matters and whether it needs additional powers to scrutinise the Service's budget. A further example is financial services firms experience of the operation of the FOS, and how it interacts with the regulator. FOS can make a redress award of up to 150,000 per claim, a significant amount of money for any firm, but particularly for a small business. So whilst the FCA makes the rules which authorised firms must follow, in reality many firms feel they also need to ensure they comply with the decisions being made by FOS. On some issues there have been apparent conflicts between the FCA s stance and that of FOS, which leaves firms feeling that, in effect, they are being regulated by two separate bodies, which do not always act consistently. We would therefore suggest that when developing the oversight arrangements for ADR schemes, lessons should be learnt from the experience of the financial services regulatory regime, and in particular the findings on Accountability and Governance contained in the Treasury Select Committee s report on the Money Advice Service. Q15. How should the fees paid by ADR providers to a competent authority be determined? Should the size of the fee depend on the size of the ADR provider (for example turnover or number of cases dealt with) or based on other factors? The way the funding of the FCA and the FOS operates means that the industry funds both, but by way of separate levies. There is no separate fee paid by the FOS to the FCA to cover any costs the FCA might incur in discharging its responsibilities in respect of FOS. This model has worked satisfactorily since 2001, and adding an additional requirement for there to be a charge between the two organisations seems unnecessary. It will simply result in additional administration and therefore cost. We would therefore suggest that any costs incurred by the regulator in discharging its oversight responsibilities form part of their normal operating costs, and provision be made for them to be recovered as part of its normal fee-raising process. 3

4 Procedural rules for refusing disputes Q16. Do you agree that the Government should allow UK ADR providers to use all of the procedural rules listed in Article 5(4) of the ADR Directive to reject inappropriate disputes? If not, please explain your reasons. We agree that the rules listed for rejecting inappropriate disputes are appropriate. In addition, we would suggest that the wording of the rule relating to time limits should make it clear that claims submitted outside the time periods provided for in the Limitation Act 1980 will not be considered (subject to the extension envisaged in paragraphs 76 to 79 of the paper). We understand that the FCA has queried whether any time limits are compatible with the directive beyond that envisaged in article 5(4). It is our view that Article 12 clearly recognises the effect that pre-existing statutory time limitations may have on the ability to bring a complaint and that it implies that the ADR should work within those limits. Businesses, particularly small owner-managed businesses, need certainty that they will not be subject to claims ad infinitum, and therefore it is not unreasonable to expect consumers to bring any complaint within the Limitation Act time limits i.e. within 6 years, or 3 years from when they became aware of a problem, with a backstop that no claim can be brought more than 15 years after the relevant transaction. This provides a balance between consumer protection and the risks businesses are exposed to. Where existing ADRs do not already include such provisions (for example, the FOS), then in order to comply with the directive, their rules or the relevant legislation should be amended so as to incorporate the Limitation Act time periods. Information requirements Q17. Would some suggested wording and guidance be useful in helping businesses meet these requirements? What kind of wording would be helpful? Whilst firms may find it helpful to be provided with some guidance, the wording should not be made mandatory. Where firms already comply with the requirements of an existing statutory ADR, such as within the financial services industry, it would be an unnecessarily bureaucratic and costly exercise to have to change all their documentation, website etc. given that the current rules are sufficient for the purposes of the directive. Online Dispute Resolution Contact Point Q18. Do you agree that the ODR contact point should only be required to assist with cross border disputes involving a UK consumer or UK business? Q19. Should the ODR contact point be allowed to assist with domestic complaints on a caseby-case basis? We have no comments on these questions. 4

5 Impact on limitation and prescription periods Q20. Do you agree that, where applicable, we should extend the six year time limit for bringing disputes to court by eight weeks, and mirror the amendment made to implement the Mediation Directive? If not, please explain why a different extension period is preferable. Q21. Are you aware of any sector specific legislation which contains time limits for bringing cases to court which we may also have to amend? We support the principle that where an ADR process has already started within the 6 year window, but has not been resolved before the 6 year limitation period expires, consumers should be given a further time period after the ADR process ends to launch any litigation. We therefore agree with the proposed 8 week extension to the six year time limit in these circumstances. However, given Article 12 envisages existing legislation on limitation periods should apply, we believe it needs to be made clear that where any of the Limitation Act 1980 time limits have already elapsed before the process begins (i.e. 6 years from the date of the transaction complained of, or 3 years of becoming aware of the problem, with a 15 year longstop) no claim can be brought to the ADR. Where existing ADR schemes do not already reflect these statutory limitations within their rules, as is the case with the FOS, then their rules should be amended to ensure they comply with this directive. In our view this provides the right balance between consumer protection and the risk of unlimited liability for businesses, particularly small owner-managed firms which are more likely to be sole traders or partnerships than limited companies. Scope of ADR: in-house mediation Q22. Do you agree that in-house ADR should not form part of the UK s implementation of the ADR Directive? If you disagree can you please explain why? Binding decisions Q23. Do you agree that the UK should allow certified ADR providers to make decisions that are binding? If you disagree can you please explain why? Applying the ODR Regulation to disputes initiated by business Q24. Do you agree that the ODR Regulation should only apply to disputes initiated by a consumer, and should not apply to disputes initiated by a business? If not, can you please explain why? Whilst we understand the reasoning behind not applying the ODR regulations to businesses, we would sound a note of caution. Small businesses are in many respects more like a consumer than a company, and thus can struggle to bring an 5

6 effective complaint against a larger organisation. The experience of small businesses being sold interest rate swap agreements by certain banks, which has been the subject of regulatory intervention by the FCA, is an example of when small businesses have needed the same protections as consumers. The FOS already accepts complaints from micro-enterprises i.e. smaller businesses with an annual turnover of less than two million euros and fewer than ten employees. We would not wish to see this important protection removed for smaller businesses. Call for evidence on simplifying the provision of ADR Q25. Would the benefits of simplifying the ADR landscape over the longer-term outweigh the costs? Who would the costs and benefits fall to? Q26. What evidence is there that a simplified system would make a major difference to consumers? Are there other ways to achieve the aim of greater awareness and take-up of ADR? Q27. Would simplifying the landscape in the longer term be compatible with the introduction of a residual ADR scheme by July 2015? Are there specific ways in which the creation of a residual scheme would need to be undertaken to enable the possibility of later simplification? Q28. What are your views on making the use of ADR a compulsory or voluntary requirement if the landscape is simplified? Whilst we have no strong views on whether the ADR landscape could or should be simplified over the longer term, we would counsel against making any decision to introduce further change until we have had experience of how the current changes operate in practice. We would be wary of further cost being loaded on businesses before a proper assessment has been done of the impact of these changes. Impact Assessment Q29. Do you have any views on the impacts of the options as laid out in the impact assessment? Q30. Do you have any views on the key figures, assumptions and questions set out in Annex C? Whilst we do not have detailed comments on most aspects of the Impact Assessment, there is one area we would comment on. The Impact Assessment assumes that one of the benefits to businesses is that there will be reduced costs for court cases as more cases will be dealt with through ADR. However, we do not think the experience of the financial services sector supports this assumption. The experience of FOS is of ever increasing numbers of complaints being referred to it, many driven by the proliferation of Claims Management Companies (CMCs) which actively encourage people to make a claim in return for a percentage of any redress they receive. This is particularly evident in respect of payment protection insurance (PPI) polices. It is highly unlikely that any of these consumers would have taken a case to court if the FOS did not exist. The existence of a low (or nil) cost, no risk option, together with the marketing tactics of the CMCs, encourages people to lodge a claim who may 6

7 not otherwise have done so, as they feel they have nothing to lose and may get some free money out of it. We therefore believe that an increase in ADRs is likely to lead to an increase in complaints, and therefore an increase in costs for businesses, rather than a reduction. APFA 3 rd June