ABOUT THE AUTHORS: Steve Meiklejohn TEP is a
Partner and Edward Scott is a Senior Associate at Ogier,
Jersey
A joint Jersey and Guernsey Financial Services Ombudsman Scheme
has been proposed to offer independent resolution of complaints
made against financial services providers in the Channel Islands.
Broadly, the schemes in both islands would be available to
consumers and, unlike the UK and Isle of Man schemes, to the
beneficiaries of trusts. The ombudsman services would be free to
the complainant and funded by the finance industry. While the
intentions behind the proposed scheme are worthy, we wonder how
much benefit introducing any Channel Islands ombudsman service
would bring, and whether the cost of funding the scheme and of loss
of competitiveness is justified.
In its favour, as the consultation papers from the Jersey and
Guernsey governments (the States of Jersey and the States of
Guernsey) state, the scheme would offer a more accessible
alternative to the courts. Also, the influential 1999 Review of
Financial Regulation in the Crown Dependencies (known as the
Edwards Report) recommended the introduction of an
ombudsman scheme for financial complaints in the Crown
Dependencies. Further, the existence of such a scheme in the
Channel Islands would have the indirect benefit of supporting any
application for Jersey or Guernsey’s membership of the Single Euro
Payments Area (SEPA), which would be advantageous to clearing banks
operating on the islands.
It is in the interest of both Channel Islands financial services
users and the financial services industries themselves that
financial services in Jersey and Guernsey are well regulated.
However, the question may be raised whether there is a strong need
for an ombudsman scheme in the Channel Islands. The consultation
papers do not highlight any cases of consumer abuse or any call
from consumers (either Jersey residents or non-resident users of
Jersey financial services) for an ombudsman scheme.
Furthermore, the consultation papers indicate that uptake of the
scheme is likely to be low. They note that the Isle of Man
Financial Services Ombudsman Scheme has received between 230 and
390 complaints a year since its inception in 2002, and state that
these figures can indicate the level of complaints that any Jersey
ombudsman scheme may expect. This is not a great number and
presumably includes complaints that would be ineligible – for
example, situations where there has been no financial loss, or the
complaints are frivolous or vexatious – which may be expected to
make up a sizeable proportion of complaints received. The
consultation papers do not state how many complaints the Isle of
Man ombudsman has actually upheld since the scheme’s inception.
However, it does indicate that the average award in the Isle of Man
in 2003 was small, at about GBP600.
‘The cost of the ombudsman scheme is expected to be
disproportionate to any benefit it brings’
The cost of the scheme is expected to be disproportionate to any
benefit it brings. A report to the States of Jersey, dated 6 June
2006, estimates the annual cost of the Jersey scheme to be between
GBP500,000 and GBP750,000. More recently, a review paper presented
to the States of Jersey on 21 September 2009 suggested that
operating costs, five full-time employees, a panel of ten
off-island ombudsmen, and premises, accommodation and travel would
cost at least GBP500,000 per year. It anticipated that costs will
have increased even further by 2011, when the scheme may come into
effect.
Assuming that in each island the scheme costs GBP750,000 and has
a case-load similar to that of the Isle of Man ombudsman, the cost
per complaint (including all ineligible complaints and complaints
resolved against the complainant) would be about GBP1,900 to
GBP3,250. If, for example, a third of all complaints are eligible
and resolved in favour of the complainant, the cost of each
complaint resolved in favour of the complainants may approximate to
around GBP5,700 to GBP9,750. There is no reason to believe that the
average payout would not roughly mirror that in the Isle of Man, of
about GBP600.
You may expect the scheme, which will be a government
initiative, not directly answerable to industry, to be expensive to
the financial services industry, not just in levies or fees to fund
it, but also in time devoted to dealing with complaints made to it.
There may be a risk that, in certain sectors, the scheme will be
used as a subsidised way to dispute fees charged by trust company
business and other financial services providers. Key stakeholders
are concerned the scheme will make the Jersey and Guernsey trust
industries, and the Channel Islands generally as financial centres,
less competitive.
If an ombudsman scheme is introduced, we would argue that it
should not be available to beneficiaries of trusts. This would be
in keeping with the UK and Isle of Man ombudsman schemes.
Beneficiaries of Channel Islands trusts are not the type of
consumers that an ombudsman scheme is intended to protect, as they
generally have sufficient resources to make use of professional
advice and to have recourse to the court. In addition, persons
carrying on trust company business in the Channel Islands are
regulated by either the Jersey or the Guernsey Financial Services
Commission, and dissatisfied beneficiaries may address complaints
to these regulators.
‘We consider that there is no risk to the reputation of
the Channel Islands finance industries in not appointing
ombudsmen’
The courts in the Channel Islands apply the islands’
well-regarded trusts legislation and well-developed case law in a
fair manner, and this legal framework has given the islands a
pre-eminent reputation as proven jurisdictions for settlors to
establish trusts. It has been argued that the involvement of an
ombudsman is not only unnecessary but could be a complicating
factor in disputes between trustees and beneficiaries where it is
unclear whether an ombudsman will be subject to the same rules and
principles laid down in statute and/or case law.
The STEP Jersey branch has argued that it is unlikely any
financial ombudsman would have the requisite degree of expertise in
trusts to make decisions on the matters most likely to be raised,
e.g. a beneficiary seeking to challenge an exercise of the
trustee’s discretion, or a request for access to detailed
information on a trust going beyond the scope of that to which a
beneficiary is usually entitled, or fee disputes that are usually
time-based. This is likely to result in a need for expensive
external legal support and advice.
Furthermore, because on the face of it the scheme could extend
not only to trusts for which the governing law is Jersey law, but
also to any trusts administered in Jersey regardless of their
governing law, the financial ombudsman would need to involve
foreign lawyers in an appropriate case as well. It has also been
argued that the scheme would be unfair because it does not provide
for an appeal mechanism where the ombudsman rules against a
financial service provider.
While the Edwards Report did recommend that an
ombudsman scheme be implemented, we consider that there is no risk
to the reputation of the Channel Islands finance industries in not
appointing ombudsmen. As to the indirect benefit of the ombudsman
scheme supporting SEPA membership, the requirement for membership
is simply that an out-of-court system in relation to payments made
in euros is put in place. This system need not necessarily take the
form of an ombudsman scheme.
The industry response to the Jersey consultation process was
almost resoundingly against the introduction of an ombudsman
scheme. The STEP Jersey branch, the Jersey Association of Trust
Companies and individual trust service providers argued that if the
scheme is to be implemented then beneficiaries were not a suitable
group to be given access to the service and the ombudsman was not a
suitable arbitrator in trust disputes. The deadline for responses
to the Guernsey consultation document was 31 August 2011, and early
indications showed that plans for the scheme have been no better
received in that island.
Following the consultation exercise in Jersey, the States are
finishing an internal policy paper for the Minister for Economic
Development. After consideration of the policy paper and the
results of the Guernsey consultation, the next stage would be to
produce draft legislation to be lodged for debate by the States by
the end of 2011. It remains to be seen whether the governments of
both islands will continue with the plan for the ombudsman scheme
or whether, in light of the poor reception from the Channel Islands
finance industries, the plan is to be shelved.