Alternative Dispute Resolution in Financial Services Sector


Alternative Dispute Resolution (ADR) has recently become popular worldwide to resolve various conflicts outside of classic litigation. 

Alternative Dispute Resolution in Financial Services Sector

1. Litigation vs ADR

This method of dispute resolution offers parties a more cost-effective, time-efficient, and less adversarial way to settle their differences. One of the major advantages of ADR is that it provides parties with more control over the outcome of their dispute. In traditional litigation, a judge or jury makes the final decision, which may not always be satisfactory to all parties involved, even sometimes all parties being dissatisfied will appeal before the higher courts. In ADR, the parties could work together towards a mutually agreeable solution, fostering a sense of cooperation and understanding that is critical when the parties would prefer to continue their business or other kind of relationships.

2. Forms of ADR

ADR encompasses various approaches both traditional such as mediation, arbitration, and negotiation, as well as comparatively new such as collaborative law:

2.1. Arbitration comes to mind as the form of ADR closest to classic litigation.  The parties to a contract should agree in writing that an impartial arbitrator acts as a private judge and makes a binding decision on their dispute. Unlike other ADR outcomes, the arbitrator’s decision is final and legally enforceable, providing a level of certainty to the parties involved. Arbitration is often used in commercial disputes or cases where confidentiality is essential. In most countries the arbitration bodies are institutionalised as arbitration courts at the chambers of commerce and industry resolving both domestic and international disputes.

2.2. Mediation is a popular form of ADR, where a neutral third party, known as a mediator, helps facilitate communication between the parties to reach a settlement. The mediator does not impose a decision but rather assists the parties in clarifying their positions and demands and reaching a compromise. This process is particularly useful in situations where preserving relationships is important, such as family property disputes or workplace conflicts.  Depending on the jurisdiction, mediation may be mandatory in certain cases as a prerequisite for traditional litigation. For example, starting 1st of July 2024 the Bulgarian courts will oblige the parties to participate in mediation if the claim is related to co-owned properties, condominium, divorce, child support, shareholders’ rights, employment, etc.  In case an agreement is reached, it will be approved by the judge and have enforceability as a court decision.

2.3. Collaborative law is a newer approach to ADR that has spread rapidly since 1990 mostly in the USA, the UK and Australia.  The legal process involves each party having their legal representation (trained professionals including lawyers, divorce coaches, and financial professionals) working together to find a mutually beneficial solution. Collaborative law focuses on finding creative and sustainable solutions while avoiding the need for court intervention mostly with a view to keeping the future relations between the parties and their children as good as possible. While collaborative law started as a method for resolving divorce, cohabitation, and other family disputes, the cost efficiencies, in addition to other potential benefits, have led parties in other contexts to explore the use of collaborative law to resolve various kinds of disputes, including M&A transactions.

2.4. Negotiation is a more informal form of ADR, where the parties communicate directly with each other to settle their differences. Negotiation can be conducted with or without the assistance of legal representatives and can be a quick and cost-effective way to reach a resolution.  Usually, other forms of ADR are applied after negotiations have failed.

3. ADR in the Financial Sector

ADR is used in all kinds of civil and commercial relationships, including the financial services sector. Such sector provides financial services to people and corporations. This segment of the economy is made up of a variety of financial firms including banks, investment houses, lenders, finance companies, real estate brokers, and insurance companies.  

Although all forms of ADR can be applied for financial services disputes, a specific type of arbitration provides a specific means for consumers to resolve disputes with financial institutions – the Financial Ombudsman Service (FOS). The FOS is an independent and impartial body that helps individuals and small businesses settle complaints about financial products and services. This service is essential in ensuring fairness and accountability within the financial industry.  The structure (governmental body, not-for-profit organisation authorised by law, contractual external dispute resolution schemes) and name of the FOS in each jurisdiction vary – Financial Ombudsman of the Republic of Cyprus, Czech Financial Arbitrator, AMF Ombudsman in France, Office of the Arbiter for Financial Services in Malta, OMBUDSFIN in Belgium, Financial System Mediator in Armenia, Australian Financial Complaints Authority, etc. However, despite the structural differences the competency and powers of the FOS are quite similar across borders.

4. Advantages of the Financial Ombudsman Service

The FOS handles a wide range of complaints, including issues related to banking, insurance, investments, pensions, and loans. Consumers who have been unable to resolve their disputes directly with a financial institution can turn to the FOS for assistance. The service aims to provide a quick, fair, and accessible way to resolve complaints without the need for costly legal proceedings.

One of the key benefits of the FOS is that it is free for consumers and small businesses to use. This means that individuals who may not have the financial means to pursue legal action can still seek redress for any grievances they have with a financial provider. 

The process of lodging a complaint with the FOS is relatively straightforward. Consumers can submit their complaints online, over the phone, or by post. The FOS will then investigate the complaint, gather relevant information from both parties, and decide based on the evidence presented. The aim is to resolve disputes in a way that is fair and reasonable for all parties involved.

In cases where a financial institution is found to have acted unfairly or unreasonably, the FOS has the authority to require the institution to provide redress to the consumer. This could involve among others refunding fees or charges, correcting mistakes, or providing compensation for any losses incurred.  The dissatisfied party may be entitled to request a new decision from another panel of the FOS that may uphold, amend or revoke the initial one. The FOS decisions cannot be further appealed on their merits but like arbitration decisions can be brought to courts for competency and procedural compliance review. 

5. Implications

In summary, the Financial Ombudsman Service plays a crucial role in protecting consumer rights and promoting trust in the financial sector. By providing a free and accessible means for individuals to resolve disputes with financial institutions, the FOS helps ensure that consumers are treated fairly and that financial providers uphold high standards of service and conduct.

If negotiations are not successful, our Law Firm Mikov & Attorneys advises the aggrieved parties to submit complaints against investment firms before the respective FOS and request compensation for the suffered losses because of the illegal actions of the firms. We represent the clients within the proceedings and so far, have managed to complete such proceedings in favour of our clients in Malta, Australia, Cyprus, and the UK.

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