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.