The banking ombudsman scheme is one of several private sector schemes to appear in recent years.

Broadly speaking, it provides an attractive alternative to the traditional, adversarial court system.

The service offered is a free one and the ombudsman resolves disputes either by conciliation or by making an independent decision.It is, above all, independence which distinguishes the scheme (and others accredited by the UK Ombudsman Association) from those which are not recognised.In the banking ombudsman scheme, independence is achieved by a tripartite structure.

First, there is a company limited by guarantee of which the members are the member banks of the scheme.

The members elect the board of the company.

The board approves the ombudsman's terms of reference and raises funds from member banks to enable the scheme to function.Secondly, there is an eight-member council, with a majority of five distinguished independent members of whom one is the chairman.

The function of the council is to appoint the ombudsman and to safeguard his or her independence.

It also obtains the necessary funds from the board to enable the ombudsman to run his or her office and work effectively.Finally, there is the ombudsman with a team of 20 other lawyers, nine non-legal assistants, a resident banking adviser and 18 back-up staff.The ombudsman is responsible for all individual decisions and does not discuss them with the council or the board, although he or she reports in general terms to the council.The scheme covers all of the main UK retail banks.

Over 99% of people with current or deposit accounts, or with bank plastic cards, can bring their complaints to the ombudsman.

Sole traders, partners and companies with an annual turnover of less than £1 million are also covered.

Moreover, the complainant does not necessarily have to be a customer of the bank against which he or she complains.

A guarantor of a loan, for example, can use the scheme even though not a customer.By the terms of reference, the ombudsman's decisions are required to be fair in all the circumstances.

Thus, for a bank to become liable to pay compensation, there must have been some breach of duty or maladministration which caused some loss, damage or inconvenience.In deciding what is fair in all the circumstances the ombudsman has regard to principles of law and to good banking practice.

He or she may also deem any maladministration or other inequitable treatment to be a breach of duty.

Compensation for inconvenience may be awarded, but it must have been more than trivial: the complainant must demonstrate that it caused real 'botheration', distress, anxiety or embarrassment.Compensation is awarded on a basis which is similar to, but somewhat wider than, in the courts.

Costs, however, are never awarded against an unsuccessful complainant.

Also, because the service provided is a free one, they are only occasionally awarded to a successful complainant.The maximum compensation which the ombudsman can award is £100,000.

In 1993, the largest amount awarded was £81,700 and the smallest was £5.

Awards are binding on member banks but, if the complainant is dissatisfied with the decision, he or she remains at liberty to pursue the matter through the ordinary courts in the usual way.The procedures whereby the ombudsman arrives at his or her decision are informal and inquisitorial.

However, they comply with natural justice.

In particular, both parties have the opportunity to put their own case, to learn what the other side's case is and to answer it.

Submissions are received from both parties in writing.

Usually, when a complaint is fully investigated, each party sees all the other party's papers, except those which have been supplied in confidence because, for example, disclosure might assist potential fraudsters.All complaints received are carefully screened.

During this process, ineligible complaints are rejected, for example those brought by large companies.

Also, to avoid wasting time, a complaint will usually be rejected at the outset unless it appears to disclose some breach of duty on the part of the bank and some resultant loss, damage or inconvenience to the complainant.Most initial complaints received have not been considered previously by the bank at senior level.

To encourage settlements, it is therefore required, as part of the screening process, that deadlock should have been reached at senior level.Frequently, a letter from the ombudsman confirming that the complaint is eligible, but sending the complainant back to reach deadlock, results in a satisfactory settlement being reached.

Moreover, whenever there is a suitable opportunity, the ombudsman intervenes pro-actively in the hope of helping the parties to reach a fair settlement.

Only if, after six weeks, the bank is unable to settle or resolve an eligible complaint, will it usually be considered ripe for full investigation by the ombudsman.Almost all complaints are dealt with on paper and without an oral hearing.

When a complaint is admitted for full investigation, the ombudsman sends a copy of both it and the supporting papers to the bank.

The ombudsman also requires detailed interrogatories to be completed as well as requesting all the relevant papers, records, and statements from bank employees.

Under the scheme the bank is compelled to supply the documents.

The ombudsman cannot, however, compel evidence from third parties - he or she has no power to issue subpoenas.

Occasionally, therefore, a complaint involving a third party is rejected because it is more suitable for resolution by a court.Once all the papers have been obtained, a detailed investigation follows with further questions being put to both parties.

Submissions are sought from each and if there is any possibility of conciliation, it is explored.Once the investigation has been completed, a preliminary decision is made and sent to both parties.

It contains a summary of the facts and reasons for the decision.

In most cases, it is accepted and that is an end of the matter.In a minority of cases one party (usually the complainant) exercises the right, which both have, to go to the final stage of a formal recommendation.

Both parties are then supplied with copies of all the papers which have not previously been seen (except those received in confidence).

Both can make further submissions and both may be asked further questions before the final formal recommendation is issued.

It is a detailed decision with reasons.Whatever the final outcome may be, the complainant retains the right to reject it and to seek redress through the courts.

The bank, however, is bound if the complainant accepts a decision made in his or her favour by the ombudsman.

In practice, complainants who have been unsuccessful rarely issue court proceedings, knowing that if they do so, they are likely to have to pay for the same result they have already obtained free of charge.In the year to 30 September 1993, apart from many thousands of telephone enquiries, the ombudsman received 10,231 initial complaints in writing.

The largest proportion of these related to charges and interest (17.7%), followed by lending (14.1%).As a result of screening and by emphasising conciliation, only about 10% of all initial complaints required full investigation.

Of those which did, the largest proportion (20%), related to cash machines.

However, the number of cash machine complaints is decreasing now that cardholders are only liable for the first £50 where there have been unauthorised withdrawals, unless the bank can prove gross negligence.Of those complaints which were fully investigated, 36.4% were decided in favour of the complainant.

Usually the amount awarded was between £100 and £10,000 with the average amount being £1352.The banking ombudsman scheme enables those not poor enough to qualify for legal aid or rich enough to afford the risk of litigation to pursue a dispute with their bank.

The scheme also has advantages for banks which want neither dissatisfied customers nor expensive litigation.Because the ombudsman uses inquisitorial techniques, usually neither the complainant nor the bank is represented, though they can be.

As well as being cheaper for the bank, a customer (even if unsuccessful), who has had his or her complaint investigated is thus more likely to remain a customer than if litigation had been involved.Another important advantage of the scheme is that it is specialised in a way that most courts cannot be.

The ombudsman's team has not only some knowledge of the questions which need to be asked but also (and perhaps more important) it has some experience of how to evaluate the answers it receives.The scheme has a wide relevance for solicitors.

All too frequently, a client will be advised that on the merits a proposed action against his or her bank should succeed.

The client will also be told that, even if successful, he or she is likely to be out of pocket and, if unsuccessful, liable for both sides' costs.In such a situation, what better solution than to refer the client to the ombudsman? The client does not have to be sent away frustrated at being unable to pursue a valid claim, and the solicitor does not have to accept the burden of unprofitable litigation.Once a solicitor has referred a client to the ombudsman, the solicitor usually drops out of the matter.

He or she can, however, remain in it and continue to represent the client if desired.

Some do, but only on the clear understanding that any costs subsequently incurred will usually not be awarded under the scheme, even if the claim is successful.Costs incurred prior to the matter being referred to the ombudsman will usually not be awarded either.

Occasionally they may be - for example, when the bank's conduct made it reasonably necessary to employ a solicitor before the complaint was brought to the ombudsman.The ombudsman is, however, unable to interfere in commercial decisions about lending.

If, for example, a bank decides not to grant a loan it would generally be inappropriate for the ombudsman to interfere.

There is one exception - when there has been maladministration in making the lending decision.

For example, if the decision has been made on grounds of race or gender or for some other improper reaso n.The ombudsman will not interfere either with the amount of a bank's charges where, for instance, the charges have been properly levied in accordance with a published tariff.

Of course, as with a solicitor's charges, if time charged has not been spent as claimed, or if an item has in some other respect been improperly charged, that is a different matter.