"Infamy! Infamy! They've all got it in for me!" cried Kenneth Williams as Julius Caesar in Carry On Cleo. Nowadays this could be the lament of a financial services professional or lawyer wilting under the blows of a regulator.

This sense of persecution is set to continue. The Government wants to make it even easier for consumers to obtain redress from professionals who make mistakes. Its method of choice is regulatory compensation.

Schemes like the Financial Ombudsman Service (FOS) resolve consumer complaints quickly and with the minimum of formality and expense to the applicant. With the power to award compensation up to £100k, the FOS can bypass the courts and, some would say, the law.

If growth is a measure of success, however, the FOS is exceptional. It employs 1,000 staff and 30 ombudsmen. Last year, it received 672,973 initial enquiries and complaints and delivered an 80% satisfaction rate for applicants. It has seen a four-fold increase in its workload over the past five years.

During the same period of time, the number of civil claims in the courts has fallen substantially. The advent of the Civil Procedure Rules contributed to that decline, but the growth of regulatory compensation must surely have accelerated it.

Government plans

The Government is intent on applying an FOS-type scheme to the legal services sector. In its draft Legal Services Bill, due to become law in early 2007, there are plans for a new super-regulator, the Legal Services Board (LSB). Operating under the LSB will be a one-stop shop for complaints against lawyers: the Office for Legal Complaints. It will pass on disciplinary matters to frontline regulators such as the Law Society. As for complainants seeking financial redress, these will be determined by a new legal services ombudsman scheme.

The new scheme is unlikely to grow to FOS proportions. In the year ending March 2006, the Law Society's Consumer Complaints Services resolved only 12,256 complaints, many fewer than the FOS' 199,000 resolved cases. And with a compensation limit of only £20k (subject to review), the new scheme will start with much less financial clout.

This may change, however. In submissions to the Parliamentary Joint Committee overseeing the Legal Services Bill, consumer group Which? made the strong point that one of the aims of the reforms is to allow consumers to purchase both legal and financial services from the same provider (known as 'Alternative Business Structures') and that it would be unfair if the maximum limit of consumer redress were different according to the type of product being sold.

This is one of a number of reasons to suggest that the Legal Services Bill will drive regulatory convergence between the financial and legal services sectors.

Even if the legal services ombudsman scheme starts with a compensation limit of only £20k, consumers are over-whelmingly likely to prefer it to pursuit of a negligence claim through the courts. There will be no costs risk to the complainant, save in cases of improper or unreasonable behaviour. Lawyers' fees can be avoided, as the new scheme will help the complainant in the presentation of his or her case.

Even better, a determination by the ombudsman will not bind the respondent unless the complainant accepts it. This means that a complainant could attempt to use the scheme as a costs-free dry run for a later negligence claim in the courts.

Welcome finality

This is not to suggest that the advantages of the new scheme will all be one-sided. Its speed and efficiency may reduce a respondent's expenditure on legal costs in defending the complaint. Lawyers' professional indemnity insurers would welcome that. Also, recent case law in the area of employment law – Fraser v HLMAD, [June 2006], Court of Appeal – suggests that the acceptance of an ombudsman's award of compensation will stop a complainant from seeking further redress through the courts. Finality of that sort is always welcome.

The new model

The new legal services ombudsman scheme will be closely modelled on the FOS. This led chief financial ombudsman Walter Merricks to suggest that it could operate the new scheme "under a separate brand".

A complaint under the new scheme must be "determined by reference to what is, in the opinion of the ombudsman… fair and reasonable in all the circumstances of the case". An identical form of words underpins a determination by the FOS. This "fair and reasonable" jurisdiction has come in for criticism.

In particular, a legal theorist would argue it is a bad rule on the grounds that it is unclear and subjective and therefore incapable of predictable application.

The case of IFG Financial Services v FOS [2005] is a good example. The complainants wanted to invest in medium-risk funds but their money was incorrectly placed in a high-risk fund. Unfortunately, and unforeseeably, the fund was dishonestly managed with the result that the complainants lost their money. The ombudsman determined that they could recover all their losses. The respondents sought judicial review. It was accepted in court by the FOS that, as a matter of law, the losses resulting from the fund manager's fraud were irrecoverable. However, the FOS successfully argued that the scheme rules only provided that the ombudsman should take into account relevant law, but need not follow it, if that would not produce a "fair and reasonable" outcome.

Consequences of poor advice

Given the breadth of the ombudsman's decision-making powers, the result in IFG cannot be faulted. What is less acceptable is the implicit reasoning; namely that a respondent should bear the risk of all consequences of poor advice, not just those that fell within the scope of its duty. On an identical issue, and using the very words "fair and reasonable", Lord Hoffman in Banque Bruxelles v Eagle Star [1997] came to the opposite conclusion. It would appear that the ombudsman knows better.

Sometimes, instead of declining to apply clear law to a particular case, the FOS elevates one fact-sensitive court decision to the status of a rule. This is what happened with Needler Financial Services v Taber [2001]. The court held that the claimant, who had been mis-sold a pension, did not have to bring into account on the assessment of damages the 'windfall' benefit that accrued as a result of the demutualisation of his pension provider. This resulted in Financial Services Authority (FSA) guidance that sought to exclude all windfall benefits (as defined) from calculations of compensation due to a customer that had been mis-sold a product. This guidance has been consistently adopted by the FOS. In this way, an ombudsman scheme can create its own case law.

Needler illustrates another trend behind the growth in regulatory compensation: the regulatory rule-maker and the compensator can cooperate with a view to increasing each other's powers. For example, the FSA's high-level principle for Business 6 states that a firm must pay due regard to the interests of its customers and treat them fairly. There is no reason why this should not apply to complainants. This means that when the FOS recommends that the respondent should pay more compensation than the £100k limit, that recommendation could be enforced by the FSA as a matter of 'conduct'.

The march of regulatory compensation is set to continue. These days, an ombudsman may have better job security than a judge.

Graham Reid is an employed barrister at Reynolds Porter Chamberlain.