What it means
The word comes from Scandinavia, where the first ombudsman was set up to hear citizens' complaints about government. The idea spread to the private sector, and financial ombudsman services now exist in many countries.
Most cover a defined list of firms that must take part, and a customer usually has to complain to the firm first. The ombudsman looks at both sides, asks for documents and decides what is fair in the circumstances.
This means the decision can go beyond a strict reading of the contract, taking account of good practice and what the customer could reasonably have expected. Outcomes can include an apology, a correction of the record, a refund or a payment for the trouble caused.
For businesses, the ombudsman is part of the cost of doing business with consumers. Firms that attract many upheld complaints may face case fees, extra scrutiny from regulators and damage to their reputation.
A good complaints process inside the firm resolves most issues early, which is far cheaper than a formal case. Decisions are often binding on the firm if the customer accepts them, while the customer remains free to go to court if they do not.
There is usually a cap on the award, and the rules about time limits and eligibility differ between countries and schemes. A finance manager should check the rules that apply to their own sector.
Some ombudsmen also publish data about complaints, which lets managers see patterns by product or firm. That information is valuable because it shows where customers are being let down before problems become formal enforcement matters.
The ombudsman is not a regulator and does not usually fine firms or change the rules of the market. Its job is to resolve the individual case, although repeated patterns are often passed to the regulator, which can then act on the wider problem.
In practice
Real-world examples.
Example
A customer is told by her bank that a disputed card payment of $3,200 cannot be refunded. She complains to the bank, waits the required period without a satisfactory reply, and refers the case to the financial ombudsman. The ombudsman finds the bank did not investigate properly and orders the refund, together with a small payment of $150 for the inconvenience, and the bank records the case in its complaints log for review by senior management.
Example
A small insurer receives a surge of complaints after rejecting a number of travel claims for the same reason. The compliance officer reviews the wording of the policy and finds it unclear. The firm changes the wording and settles the open claims before more reach the ombudsman.
Example
A pension scheme member believes an error in his records reduced his retirement income by $150 a month. He brings the case to a pensions ombudsman, who can examine the records and direct the trustees to correct the benefit.
Case study
Seen in the real world.
Clearwater Credit is an illustrative, fictional lender that saw a steady rise in complaints about how it handled missed payments. The chief executive asked the finance director to quantify the cost.
She found that each case taken to the ombudsman cost the company around $1,800 in staff time and fees, and about half of the cases were decided in the customer's favour. Over a year this came to roughly $540,000, not counting refunds and the harm to the brand.
The company rewrote its collections procedures, introduced a standard script for hardship calls, and trained its staff to offer payment plans earlier. Complaints reaching the ombudsman fell by two thirds within a year. The illustrative lesson is that an ombudsman is a signal as well as a cost, and listening to it is cheaper than ignoring it.
Watch out
Common mistakes.
- Going to the ombudsman before complaining to the firm, when most schemes require the firm to have a chance to respond first.
- Assuming an ombudsman is part of the firm or the regulator, when the office is independent of both.
- Treating complaints as a legal matter only, when many are best resolved through clear communication, a genuine apology where one is due, and quick action by someone with authority to fix the problem.
Questions
People also ask.
Is using an ombudsman free?
In most schemes the service is free for the consumer, and the cost is paid through levies or case fees charged to the firms, which is one reason firms prefer to settle complaints early.
Can I still go to court after an ombudsman decision?
Usually yes, because the customer is normally free to reject the decision and sue, whereas the firm is bound if the customer accepts.
What kinds of disputes do financial ombudsmen handle?
They commonly cover banking, insurance, credit, pensions and investments, although the exact list depends on the country and the scheme.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related