It is perhaps no great revelation to discover that the chief ombudsman of the Financial Ombudsman Service (FOS) has a strong legal background, but what is perhaps surprising is the low regard with which he holds the legal system in the UK.

Walter Merricks has devoted his working life to helping those who might ordinarily not have had access to independent counsel and advice. But he has little time for the legal system in the UK, deriding it for being out of touch with what people really need. As such he sees his work within the ombudsman service as key to redressing the balance.

Merricks is a quietly spoken man but is passionate in his belief that ordinary people should have access to a fair system, whereby they can be compensated when necessary and be satisfied justice has been done. He says: “I have struggled for most of my career with what I regard as a pretty hopeless legal system that doesn’t give access to ordinary people to resolve disputes, so the FOS is really doing the job that a decently structured legal system would usually do.”

Merricks is eminently qualified to make such assertions, having begun his career as a solicitor in the 1970s, and then moving into lecturing, journalism and a senior role within the Law Society, before a change of direction took him into the Insurance Ombudsman Bureau in 1996. The FOS, as it is now, was created by the Financial Services and Markets Act 2000, which brought together the disparate complaints handling schemes covered by the Banking Ombudsman, Building Societies Ombudsman, Insurance Ombudsman Bureau, Investment Ombudsman, Personal Investment Authority Ombudsman and the Securities and Futures Authority Complaints Bureau.

And, on 31 October 2004, it will also take over complaints handling from the Mortgage Code Compliance Board, before taking over from the General Insurance Standards Council in January 2005. When the ombudsmen came together, Merricks was appointed as chief ombudsman, tasked with making the different elements into a cohesive whole.

Discussing the role of the FOS going forwards, Merricks says: “I see our key role as being to underpin confidence in financial services for the benefit of the industry and for consumers. It is of enormous benefit to a firm to be able to say to a customer that in the unlikely event of a complaint that cannot be resolved, there is a Parliament-sanctioned ombudsman that provides a completely independent and binding service.”

Because the system is not run at a cost to tax-payers or consumers, it therefore has to be paid for by those who come under the umbrella of financial services by a mixture of levies and case fees. The levy fee for brokers will not be set until spring next year, but as an indication, the minimum levy for a small investment intermediary with two or three partners is just £75.

One of the biggest issues for brokers at the moment is whether there should be separate levy blocks for mortgage intermediation, insurance intermediation and investment intermediation, or whether there should just be one block, or a combination of the three. After all there are a lot of mortgage brokers who conduct insurance business as well. The good news for advisers is that the calculations are likely to be made on the basis of net income, rather than the number of approved persons.

Merricks says: “We have to make a guess as to how many complaints we are going to get to give us enough money to run the service. In the new budget we reckon to get around 30% of the money from levy money and 70% from case fee money.”

The rising number of complaints made to the FOS has led to concerns that costs will spiral upwards, but this has not happened. While the overall cost has gone up, the unit cost has actually come down, which Merricks explains is largely due to the infrastructure he put in place in 2001, which has allowed it to grow while keeping costs low. “In terms of case fees, there has to be an incentive for the bigger firms to make sure complaints handling is up to scratch and so they don’t just dump cases on the FOS, but this has to be affordable for smaller firms too. And with the efficiencies now in place the average cost of a case has fallen from around £750 in 2001 to around £500 now,” says Merricks.

There are clear benefits to those who never receive any complaints, and this year Merricks is introducing a system where the first two complaints are free. This reflects the view of the FOS that there are a large number of firms who only have one or even no allegations made against them per year and so it was a disproportionately expensive system for these ‘occasional users’.

When a complaint is made to the FOS that requires further investigation, a case fee of £360 is charged to the currently regulated firm. However, around 50% of complaints are dismissed prior to this stage.

Merricks explains: “The moment somebody makes a complaint to the FOS, an adjudicator looks at the complaint and the firm’s response. It will give an initial view, unlike a judge, and then contact the party it thinks is not going to win to explain why they will probably not succeed with their stance. Likewise, if the adjudicator can see a firm rejected a complaint when it shouldn’t have, we will contact it and say we do not think it behaved as well as it ought to have done.

“So we have immediately and confidentially put people on notice as to what we think, and asked them to tell us why we are wrong. We will then take on more evidence and draw up a further review and if people are still not happy then people can ask for an ombudsman to make a final decision.

“The process is the opposite to what happens in a court where the judge only makes a decision after taking in all the evidence. In contrast, the FOS says what its thinking is and explains its reasoning very early on, giving people a chance to make their case or to concur. This is why only 10% of cases go up to an ombudsman.”

The FOS cannot fine firms, but it can order them to compensate the individual and can award up to £100,000. And, although these powers sound quite frightening to firms who do not know how it works, the fact is the vast majority of complaints do not require the FOS to use its statutory powers.

To help brokers with the transition, the FOS is allowing firms to join before regulation arrives and 300 firms have joined up already. It has now been confirmed that it will be responsible for transitional complaints, which was causing some concern to the industry earlier this year, but it does not expect too many problems.

Merricks notes: “We get very few complaints about mortgage sales and so do not anticipate large numbers of complaints about mortgage brokers and sales. With regard to self-cert mortgages, it is difficult to see how a large number of complaints will come to us and what they would be complaining about. I do have to say, we will investigate complaints where people have suffered financial loss or serious inconvenience, but if they have lost money then how much did the individual contribute to their own misfortune? Who knows what will happen, and I wouldn’t like to prejudge what will happen, but we are not forecasting a large number of complaints from mortgage borrowers.”

Merricks sees the FOS’ role as resolving disputes – it is not operating a legal process and does not expect to see solicitors become involved, unless people want them. He says: “We do not need solicitors and frankly they would just get in the way, we want to talk to the people involved directly. We want to make major efforts to communicate with brokers who are new to the service so there is an understanding of what the FOS stands for. We don’t want them to have the impression of a ghastly ombudsman who will bankrupt people.”