Customers who get up to skulduggery

Financial firms are accusing consumers of sharp practice. Steve Lodge investigates

Consumersare being accused of "blackmail" and holding financial firms "to ransom" to get claims for compensation paid.

If you have a complaint against a firm that you take to an ombudsman for arbitration then it costs the company, but not you, even if it wins the case. Consequently, companies are said to be caving in and paying up on small-value complaints of up to a few hundred pounds rather than incur costs that are generally around pounds 500 a time - even where the company claims it has acted correctly.

"It is cheaper to succumb to blackmail than be vindicated," says Brian Cochrane, a consultant on regulatory matters for financial advisers. "It is cheaper to pay out amounts of under pounds 500 than defend your position even when you have done nothing wrong. Consumers are being rewarded for being dishonest."

Mr Cochrane reports a case in Glasgow where a consumer said that unless he was paid pounds 400 by a financial adviser, he would take the matter to the ombudsman. The adviser paid up, Mr Cochrane reports in a recent issue of Financial Adviser, a specialist publication, even though both his firm and an insurance company connected with the case had previously rejected the complaint as being without substance.

The insurance ombudsman says the issue has also been raised by some insurers. "This blatant holding to ransom is relatively recent," says Graham Cox, a spokesman. "The official position of companies is that they will always come to the ombudsman, but we are sure some companies have paid up."

He says there is little risk to consumers in adopting such "brazen" tactics, and adds that insurers which make up the governing board of the ombudsman will be considering the problem at their next meeting, expected within weeks. One possibility would to be abolish the ombudsman's case fee altogether, so that companies are under no financial pressure to settle.

Mr Cochrane says smaller companies, such as firms of financial advisers, are under more financial pressure to settle consumer complaints before they reach the ombudsman. A spokeswoman for the building societies' ombudsman says it also has evidence of smaller societies caving in, while Mr Cox, of the insurance ombudsman, says: "Companies can only afford to have principles [and so let claims go to the ombudsman] if they have assets."

The ombudsmen do not advertise case fees for fear of encouraging consumers to use the figures in this way, although fees can often be gleaned from annual reports and accounts.

The building societies' ombudsman, for one, recalls an instance where a consumer said he "needed to know the figure for his negotiations with a society". The Consumers' Association, however, says it has no evidence that consumers are using knowledge of the costs of ombudsmen as bargaining chips with companies.

Indeed, a recent survey by the association found that a worryingly high proportion of people who make complaints against financial companies give up too easily. Most whose complaints are not resolved by companies to their satisfaction do not then take their complaint to an ombudsman and, particularly with financial advisers, do not complain at all, it found. This is despite the fact that taking a complaint to an ombudsman is wholly free to a consumer and in most cases does not affect rights to take further legal action if the person is unhappy with the outcome. Many people are not aware of the existence of ombudsman schemes and this in part reflects financial companies' failure to publicise the schemes properly, the association adds.

The Personal Investment Authority Ombudsman, which covers complaints about financial advisers, life insurers and personal pension plans, confirms that its fee is a fixed pounds 500 a case, while that of the building societies' ombudsman is believed to be similar. The insurance ombudsman, which covers policies other than life insurance, sets its fee, the same for all cases, annually according to its overall costs. Last year this was more than pounds 400.

The estate agents' ombudsman, which has noted a recent upsurge in complaints from disappointed buyers, particularly about gazumping, says agents that are members of his scheme are not under the same pressure from consumers because it does not charge a case fee, just an annual fee that is not related to the number of complaints received.

Sarah Joannides, the marketing manager of Home & Overseas, Britain's biggest travel insurer and a major fraud-watcher, says that with the average baggage claim being for pounds 150, the cost of going to the ombudsman is a potential gripe for her company. She has noted an increase in the number of dissatisfied consumers threatening to go to the ombudsman and to take their cases to newspapers, although not of consumers directly using the ombudsman's costs in their manoeuvring.

"This is an abuse of what the ombudsman is there for," she says. "The impact on costs for companies ends up back with consumers" in higher premiums.

However, as Mr Cochrane concedes in Financial Adviser: "The present system ensures it is in the financial interest of every consumer to take any complaint to the ombudsman as they have nothing to lose and everything to gain."