The role of the Financial Ombudsman

Walter LADDUWAHETTY

FINANCIAL SERVICES: The Financial Ombudsman Scheme came into operation in 2003 and the first Financial Ombudsman under the scheme was appointed in December 2003.

During this short period of the office, the number of complaints made against banks and financial institutions such as finance companies and leasing companies would suggest that a considerably large number of their customers have complaints to make against them which merit early disposal in the interest of healthy business activity.

It is relevant to observe that Banks and Financial Institutions provide a service to the public and as such complaints relating to such service would normally be made to the Consumer Protection Authority under the provisions of Act. No. 9 of 2003.

This is because this Act has a wide reach and applies to "goods" and "services". "Services" has a wide definition and covers all service providers including inter alia banking, insurance, financing and covers even professional "Services" such as doctors, lawyers, accountants, engineers etc.

However these financial institutions considered it prudent to establish a self regulating institution set up by themselves which could receive and inquire into complaints against them.

The guidance and inspiration for this course of action came from Dr. Wickrema Weerasooria who had distinguished himself by being the author of several valuable books of banking and financial matters, was also a well known academic having been the Professor of Law at Monash University.

He was at the relevant time the advisor to the Ministry of Finance and was no doubt influenced by the Australian Banking Ombudsman Scheme when he formulated the proposals for the Financial Ombudsman Scheme in 2003, based on which a company was incorporated under the Company's Act 17 of 1982. This new company was the Financial Ombudsman Sri Lanka (Guarantee) Ltd.

The concept of "self-regulation" is not only common in various professions but also in a sense conduces to its good health and integrity.

Such self-regulation is seen in the disciplinary powers vested in the Medical Council, in the rules framed by the Supreme Court and the Code of Ethics which has the force of law for the legal profession. Indeed this is one of the characteristics which distinguish a "profession" from other services that may be provided by traders or other service providers.

It is the recognition of the value of self-regulation and self- discipline that would have motivated the Banks and Financial Institutions to "set their house in order" rather than looking to a third party legally empowered to act as a regulatory mechanism.

An interesting feature of this self-regulation is that various financial institutions are voluntary participants. There is no rule to say that all financial institutions should be members of the Financial Ombudsman Scheme. At the moment 33 banks and 23 other financial institutions are within this scheme while 4 banks and 17 Finance Companies are outside it.

It is gratifying to note that while none of the institutions within the scheme have had any cause to complain about the working of the Financial Ombudsman scheme, as many as 48 Complaints have been received by the F.O against those outside the scheme.

The unfortunate aspect of this is that while banks and financial institutions accepting deposits come under a regulatory authority of the Central Bank, other institutions dealing in hire purchasing are outside the Central Bank control and if they have not joined the Financial Ombudsman scheme also, no complaint against them can be made to the Financial Ombudsman either.

This appears to be a lacuna. The Financial Ombudsman has drawn the attention of the Central Bank to this and one is confident that the Governor of the Central Bank will look into it as he has already observed that financial institutions are mushrooming.

Consequently the Financial Ombudsman Sri Lanka (Guarantee) Ltd. was incorporated under the Companies Act No. 17 1982 in September 2003.

The objects of the Financial Ombudsman Scheme as set out in the Memorandum of Association may be summarized as follows:

1. To appoint an Ombudsman to receive complaints made in connection with the provision of financial services by any member of the public or by an individual customer (other than a corporate entity) who has an account or contractual relationship with a financial institution who is a member of the Guarantee Company.

Note the following implications from the above:-

a) the complaint to the Ombudsman should relate to the provision of a financial service.

b) the complaint could be made by any member of the public or

c) by an account holder or by one having a contractual relationship with a financial institution.

d) the complaint should be by an individual-not by a corporate entity. This excludes the Financial Ombudsman entertaining complaints made by Companies or other institutions.

e) the financial institution against which the complaint is made should be a member of the Financial Ombudsman Sri Lanka (Guarantee) Ltd. The implication of this is that the Financial Ombudsman cannot entertain complaints against a Bank or financial institution which has not joined the Financial Ombudsman Scheme which is therefore outside the purview of the Financial Ombudsman.

2. To facilitate the satisfactory settlement of such complaints. This settlement process is not defined and therefore will include making recommendations or by making an award or by "such other means as shall seem expedient."

This broad phraseology is reminiscent of a similar position in the Arbitration Act No. 11 of 1995 which in defining the procedure which an Arbitrator can resort to states in Section 14 that "it shall not be incompatible with arbitration proceedings for an arbitral tribunal to encourage settlement of a dispute and with the agreement of the parties, the arbitral tribunal may use meditation, conciliation or any other procedure at any time...... to encourage settlement."

3. To resolve disputes between Institutions who are members of the Financial Ombudsman Scheme and its customers through conciliation mediation and/or arbitration.

4. To create a forum at which Banking and Financial Institutions can engage in discussion with the customers and the public for the better operation and utilization of the country's financial system.

All these objects are most laudable and will conduce to the integrity of our financial institutions and the good health of the finance "industry".

This aspect of the Financial Ombudsman Scheme specifically provided for under the Ancillary Powers of the Financial Ombudsman Scheme in the Memorandum of Association some of which briefly are:

i) to assist in maintaining and developing a sound financing system in Sri Lanka by mediation and settlement of disputes;

ii) to promote education and training in all aspects of banking and financial matters so as to upgrade financial decision-making.

Membership

Membership of the Financial Ombudsman Scheme consists of the following:-

i) A licensed commercial bank as defined in the Banking Act No. 30 of 1988 as amended by Act No. 39 of 1990 and No. 33 of 1995;

ii) A Registered Finance Company registered with the Central Bank in terms of the Finance Companies Act No. 78 of 1988 as amended by Act No. 23 of 1991; and

iii) "Other financial institutions". These are financial institutions who are and may come to be supervised by the Central Bank and includes Primary Dealers and licensed leasing companies.

Please note therefore that companies doing solely hire purchase business are outside the purview of the Central Bank and are outside the Financial Ombudsman Scheme.

The only possible institution to which the public can refer their complaints against such institutions appears to be the Consumer Affairs Authority as they too would be providing a "service" as stated at the outset. This is an aspect to which the Financial Ombudsman has drawn in a communication to the Central Bank.

What are the grounds on which a complaint can be made to the Financial Ombudsman? These are set out in Article 43 of the Memorandum of Association. A complaint should allege a "deficiency in financial services".

The concept of deficiency would suggest a shortfall in the expected level of performance. This concept it well entrenched in Indian Law and the wide range of claims made in India and referred to in the case law reported in the several volumes of the Consumer Claims Journal is most revealing.

A glance at these cases shows that claims have been made alleging deficiencies in service provided by Air Lines, Telecommunications authorities, Housing authorities, Railway and many more. Medical Institutions and Trade Agencies, Insurance Services and Transport Agencies also have had claims made against them. Of particular interest to us are claims made against Banks and Financial Institutions.

In a case filed against the Bank of India the complaint was against a wrong debit entry in a Bank Account. A case against the Central Bank of India alleged the wrongful dishonour of a cheque. Here it was held that there was no deficiency of service as the cheque was dishonoured due to a variation in the signature of the drawer.

In a case against the Bank of India delay in crediting foreign exchange receipts which resulted in a loss resulted in the Bank being faulted for deficiency in service. While in a case against the United Commercial Bank, the Bank had issued a draft which was not signed by one authorized signatory the first time and on return a draft was re-issued without completing formalities resulting in it being dishonoured a second time. It was held that the Bank was deficient in service.

The Punjab National Bank was held to be deficient in service where a cheque issued for debentures was not sent to the correct branch for clearance. When the Bank alleged that money was transferred to another account on oral instructions but failed to prove it, the Union Bank Ltd. was held to be deficient in service.

In a case against the Indian Overseas Bank, the failure to pay interest as shown in a fixed deposit receipt which the Bank said was due to a clerical error and where the lower rate of interest was paid based on the guidelines issued by Reserve Bank of India, the decision was in favour of the Bank in that there was no deficiency of service.

The concept of deficiency of service does not appear to find a place in our Consumer Affairs Authority Act No.09 of 2003. This Act in Section 30 states that no trader shall engaged in any type of conduct that is misleading or deceptive or is likely to mislead or deceive the Consumer.

Section 31 refers to false representation. These concepts however, it would appear are not quite the same as the concept of deficiency of service.

Deficiency implies any fault, imperfection shortcoming or inadequacy in the quality nature or manner of performance which is required to be maintained under the law or which has been undertaken to be performed in relation to a service. The concept of "deficiency" it is submitted is wider than the concept of "misleading" or "deceptive" conduct.

Though cases that have come up before the Financial Ombudsman cannot be reported on grounds of confidentiality, deficiency of services provided by Banks and financial institutions are far from being few and far between. A few of the following instances are illustrative-

i) a cheque book issued by a Bank in which the customer's signature was taken on blank cheque leaves;

ii) a party had to give a letter of guarantee. The Bank got a document signed in blank by the customer. This document turned out to be not a letter of guarantee (which creates a secondary liability) but a letter of indemnity (which creates a primary liability). The client's loss was Rs. one million for no fault of his.

iii) Banks promoting savings schemes with an illustration of the interest being computed at the then prevailing rate which was higher than the rate that prevailed when deposits had matured and ready for withdrawal.

The Bank's defense was that the rules referred to interest to being computed at the current rate, resulting in a client being misled as this information did not have the same prominence given to it as the schedule which gave much higher amount due at maturity.

iv) a case where after customer's death money lying in the account was encashed by unknown persons. This came to light when the beneficiary established his identity to the Bank and the money was replaced, all relevant documents having been destroyed.

These are all serious "deficiencies" amounting to fraud. Article 43 of the Memorandum of Association referred to above lists the grounds of complaint on which a complaint can be made to the Financial Ombudsman among which are non payment or delay in payment or collection of cheques, drafts, bills etc., failure to honour guarantee/ Letter of Credit, claims in respect of unauthorised or fraudulent withdrawals from accounts, fraudulent encashment of cheques etc. complaints regarding charges, interest, fees levied and an omnibus clause empowering the Financial Ombudsman to "deal with any such other relevant matters as may be specified by the Central Bank from time to time".

Procedure:

The procedure relating to inquiries is very informal and briefly may be stated as follows:

a) Any person having a grievance against a financial institution relating to the matters the Financial Ombudsman is empowered to inquire can make a complaint by himself or by his authorised representative. The complaint should be in writing and signed by the complainant.

The complaint should be made before the lapse of one year from the date when the ground on which the complaint is made had arisen.

It should be a matter which is not already the subject matter of a proceeding in a Court of Law, Tribunal or Arbitrator or any other similar forum and should not be frivolous or vexatious. The complaint should be accompanied by the payment of a fee of Rs. 250. This fee is refundable should the complainant be successful. If not, the fee is forfeited.

b) The Financial Ombudsman's Office will forward a copy of the complaint to the Financial Institution against which it is made and on receiving a response the matter is fixed for inquiry.

c) The inquiry is very simple and informal. No attorney can appear and the Financial Ombudsman is not bound to observe the legal rules of evidence.

The purpose of the inquiry is to endeavour to promote a settlement by agreement between the parties and for the purpose of effecting such settlement, Article 46 (2) says "the Ombudsman may follow such a procedure as he may consider appropriate and he shall not be bound by any rule of evidence or legal procedure".

d) If however the dispute cannot be settled by agreement, the Financial Ombudsman will make an Award after affording each party to present its case.

The Award can embody directions to the Financial Institution for specific performance of its obligations and also order compensation being limited to the actual monetary loss suffered by him subject to a maximum of Rs. 3 Million. If the amount is larger the Financial Ombudsman can recommend that the parties if they so wish can proceed to a Court of Law.

The Award it should be noted is binding on the financial institution while the complainant if he is not satisfied can proceed to a Court of Law. The financial institution is required to comply with the Award within one month from the date of its receipt.

Statistical Information

Total number of complaints from inception to date 495

Settled 369

Awards 23

Number of actions in Court being dissatisfied with settlement/ award Nil

The above figures lead one to the inference that the public had cause to complain against the practices followed by some of these institutions.

Otherwise there would not be as many as 495 complaints, one wonders where the aggrieved parties would have gone for the redressal by their grievances. Actions filed in Court are technical, time consuming and expensive.

That the Financial Ombudsman scheme is an unqualified success is the considered view of many who have appeared as complainants before the Financial Ombudsman.

Indeed the Institution of Ombudsman has taken firm root here and is well recognised. We have today not only the Parliamentary Commissioner for Administration (Ombudsman) established by Article 156 of the Constitution, the Financial Ombudsman established by the Financial Ombudsman Sri Lanka (Guarantee) Ltd under the Companies Act, a Tax Ombudsman looking into complaints relating to tax matters.

It is likely that in the future other areas of public concern where the interface between the public and various institutions such as Health, Education and Communications where the Public have cause for complaint, the early redressal of which is necessary for the social good, the office of Ombudsman, who is essentially a "grievance man" which found a place in many Traditional societies, and which originating in the Nordic Countries in modern times has spread to over one hundred countries today, will become firmly entrenched in diverse areas of public activity.