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Initial @
Complaint and
Mediation
Scheme:
the way
forward
Summary of issues and options
appraisal
2nd April 2014
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Introduction @
Purpose of this paper
This paper is intended as a briefing document for senior management which:
+ Oul
ies risks and issues arising with the scheme as currently constituted
Describes the objectives of the scheme;
Outlines key principles on which the scheme should be founded;
Presents and appraises a number of options for the future management of the scheme; and
Makes recommendations for a way forward.
It is intended that once agreed, the issues explored in this paper will be developed further, and presented to the Board for decision at its
meeting on [date].
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Background and Context &
Outline of current position
The Initial Complaint Review and Mediation Scheme (the Scheme) was established in August 2013 to resolve complaints and issues
about the Horizon financial system to the satisfaction of most or ali stakeholders.
+ The performance of the scheme has not met expectations. Out of an original 147 applications, 139 are still in the Scheme at various
stages.
There is an increasing expectation gap. Estimated claims are thought to be in the region of £100M, Applying the settlement policy,
financial liability is estimated at £6M.
The scheme is resource intensive. There are currently 22 Post Office staff supporting the process, supplemented by extemal legal and
consultancy support.
There are concems in relation to the role of Second Sight and the quality of their work.
Stakeholder management continues to be challenging and politically sensitive.
Key Challenges
* Confirming whether the Horizon system is fit for purpose is fundamental to establishing the extent of legal liability and in shaping the
‘Scheme's overall response. The current assumption, and the basis on which decisions are being made, is that there are no systemic
issues with the Horizon system
With the clear intention to do the right thing, the Scheme was originally designed as a vehicle for engagement with PSMRSs. In practice
the Scheme has become a legalistic, adversarial alternative to the court process.
The Scheme is a mediation scheme, and as presently constituted does not provide alternative dispute mechanisms where mediati
unlikely to resclve any dispute because of the amount being claimed and /or the complexity of the factual and legal issues involved.
There is @ recognised need to introduce a structured process and framework based on key principles, and to confirm the role and remit
of both the Working Group and its members.
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Risks and Issues
Five key risks have been identified, and these are summarised in the table below:
Risks identified
Financial liability arising from
claims settlement
If legal liability exists a financial claim in settlement may be
agreed during mediation
Likely number and value of successful claims appear to be
low.
Ex-gratia payments could be offered to expedite resolution of
claims regardless of legal position
Mitigation! approach to quantification
* Review claims against framework and
identify the range of potential liability
+ Apply average value to determine
estimated lability
Cost of administering the scheme
Under scheme rules, POL have agreed to meet costs
incurred by PSMRs:
Up to £1,500 plus VAT for claim investigation
up to £750 plus VAT for a half day mediation
Up to £1,250 plus VAT for a full day mediation
Liability estimated at £415k
Costs incurred by Second Sight in region of £500k to date
No agreed contract or terms of reference
No pattern of instruction or direction for their work
Risk of increased costs without achievement of desired
‘outcomes
Risk of dispute where quality of work under question
Lack of clarity in respect of role and remit resuiting in a lack
of impartiality
‘Agree rules to establish eligibility for
contribution towards costs
Agree terms of reference
Clarify role and responsibilities
Agree QA and approval process in
terms of contract to support payment of
fees
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Risks and Issues
Risks identified
PR and reputational risk
associated with non-settlement
Issues arising
Establishment of scheme has set expectations of a financial
settlement
Views expressed publicly by Second Sight and other
stakeholders, often with litle evidence to support position,
raises expectations of applicants.
Low risk of litigation if SPMR not satisfied with outcome of
mediation - scale and merits of claim will drive decision
making in this regard.
Low risk of class action
Mi
ig
Clarity around process
Transparency in relation to decision
making
Consistency of approach
approach to quantification
PR and reputational risk
associated with settlement
The reaction of stakeholders, including non-applicants and
‘SPMIRs to the payment of compensation to SPMRs where
there is no legai liabilty to do so.
‘The effects of such payments on the criminal convictions
secured to date and sought in the future.
These risks are potentially more significant than non-
settlement
Clarity around process
‘Transparency in relation to decision
making
Consistency of approach
Settlement through mediation will
ot be achieved within appropriate
and reasonable financial
parameters due to professional
advisers seeking to recoup their
costs within the settlement
mandate.
‘Adversarial approach being adopted by professional advisers
driving up costs for what was intended to bea light touch
mediation scheme.
Upward pressure on settlement value will increase financial
liability
‘Time and cost to manage caseload likely to increase.
Explore potential to cap level of costs
which would be applicable in any
settlement.
Negotiate cost settlement outside
mitigation process.
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Risks and Issues
Risks identified
Settlement through mediation wil
not be achieved within appropriate
and reasonable financial
parameters due to professional
advisers seeking to recoup their
costs within the settlement
mandate.
Issues arising
‘Adversarial approach being adopted by professional advisers
driving up costs for what was intended to be a light touch
mediation scheme.
Upward pressure on settlement value will increase financial
liability
Time and cost to manage caseload likely to increase.
‘Mitigation / approach to quantification
+ Explore potential to cap level of costs
which would be applicable in any
settlement.
+ Negotiate cost settlement outside
mitigation process.
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Scheme Objectives and Core Principles &
‘Advice from legal advisers has identified @ requirement for improved clarity in respect of the Scheme’s overall objectives.
In response, the following core principles have been identified and it is proposed thet any future changes to the operation of the scheme
be consistent with these principles. The table below presents these principles, and outlines what adherence to these principles will mean
in practice.
Core Principle ‘What that means in practice:
Transparency * Clarifying eligibility under the scheme for claimants subject to criminal convictions or civil judgements
* Establishing an independent view of Horizon system and whether itis fit for purpose
+ Open about process and timescales
* Audit trail to support decision making
+ Full disclosure of legal decisions
Consistency * The standard terms and conditions of contract, and associated risk allocation apply to all applicants
+ Ensuring equality of treatment of PSMRs
Faimess * Doing the Right Thing
* Ensuring decisions made reflect the business model run by the PSMR
+ Commit to seeking the right answer in each and every case
+ Ensuring that no PSMR is out of pocket by being part of the scheme
+ Protect our public reputation as a fair and just organisation.
+ Admit to mistakes and highlight the changes being put in place
Efficiency + Finish the scheme within an objectively reasonable timescale (1 year)
* Close down the scheme as soon as possible
+ Minimise time to deal with each claim
* Simpify process, minimising management effort
+ Minimising the cost of running the scheme
Effectiveness + Minimising cost of compensation
+. Minimising legal exposure
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Alternative options for the future of the Scheme
Options for consideration
The following options have been identified for the future of the Scheme, and are described in more detail within the subjective analysis
below:
1
N
enNeare
Maintain current position (base case for appraisal)
Restructure scheme ~ assess all applicants and settle based on value based judgements
Restructure scheme — assess all applicants and settle based on eligibility framework
Close scheme making no settlement
Close scheme making arbitrary settlement to all applicants
Replace Second Sight
Formalise Second Sight appointment and provide clarity in relation to scope and remit
Second Sight to retain role on Working Group only
Key attributes of any future Restructured Scheme
Two options have been identified which will involve restructuring the existing scheme. Regardiess of format, any Restructured scheme
should have the following attributes:
Acclearly defined, structured process and decision framework based on key principles
Clarity in respect of the role and remit of the Working Group
Clarity in respect of eligibility under the scheme for claimants subject to criminal convictions or civil judgements
An independent view of Horizon system and whether itis fit for purpose;
‘An agreed approach for the application of thematic issues identified by Second Sight;
Established criteria for payment of “standard” compensation irrespective of the legal merit of claims where it can be demonstrated that
applicants had not been investigated fairly.
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Subjective Analysis
A subjective analysis of each option, providing a detailed description of each proposal, and outlining pros, cons and any risks identified is
presented below.
1. Maintain Current Positio
This option maintains the scheme as currently constituted
+ Maintains current commitments to applicants
+ Diligent investigation process
Slow — expected case progression has moved from 3
months to 12 months.
Expensive to operate — and increasing due to case
progression challenges
Lack of clarity in respect of roles and responsibly of
working group
No formal defined process or decision framework
Reputational risks
Financial labilties
‘Operating risk — inabilty to deliver the
process as defined and secure a
reasonable outcome for all parties
2. Restructure scheme ~ assess all applicants and settle based on value based
judgements
Claim criteria and corresponding values to be defined. All applicants to be thoroughly assessed, Assessment reports referred to Working Group who
will consider merits and recommend settlement based on report and application of criteria. Chair of Working Group would be able to veto. Decisions
and influencing factors would be documented.
Pro
“+ Improved transparency and accountability
+ Consistency of approach
+ Easier to administer
cons
Working Group as currently consttuted is not
appropriate for this role. Governance arrangements
would need to be revised
Defined financial settlements may increase financial I
Risks
Risk that every PSMR not part of the
scheme will apply for similar value of
compensation
May trigger legal action
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Subjective Analysis
3. Restructure scheme — assess all applicants and settle based on eligibility
framework
Eligibility criteria and decision framework defined. All applicants to be thoroughly assessed, and applied to against eligibility framework. Settlement
value agreed on a case by case basis. Adopt Ombudsman policy of using an independent assessor, or a Review and Scrutiny Panel with the power
to call in and review cases and provide oversight of process. Working Group to de disbanded. Mediation approach to be discontinued.
Pros
‘Minimise operating costs
Improve settement time
‘Minimise settlement costs by introducing the abiity to
negotiate
Faitness and transparency maintained through
scrutiny role
Cons
Significant departure from current position which will
require significant stakeholder management and
‘communication to applicants
Removing the opportunity for dialogue through
mediator, which may be more adversarial, and resutt
in addition legal costs for applicants
Risks
PR and reputational risk ~ may be
considered to be more aggressive and
adversarial
Financial lability wil be difficult to
quantify as they are determined on a
case by case basis.
4. Close scheme making no
Announce closure of the Scheme and invite applicant
Pros
Quick and simple
Limits operating costs and financial liabilities in the
short term
Court system is a more appropriate forum for these
cases to be discussed.
settlement -
s to pursue cases through legal routes.
Cons
No fair or transparent
Does not fullt current commitment to Minister
Likely to significantly damage relationships with
PSMR community
PR nightmare
Impacts negatively on strategy to be a trusted
financial services provider
+ Damaged relationship with Working Group chair.
Risks
Risk of court proceedings
(On-going financial liability
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Subjective Analysis @
5 Close scheme making arbitrary settlement to all applicants
Announce closure of the Scheme and make full and final settlements with all applicants except those with criminal convictions.
+ Quick and simple + May be perceived that Post Office is admitting fault. I + Risk of court proceedings
+ Limits operating costs and financial liabilities in the I + Not transparent due to the limited investigation
short term carried out
Difficult to rationalise decision to external parties
Impacts negatively on strategy to be a trusted
financial services provider
+ Damaged relationship with Working Group chair
6 Replace Second Sight
Replace Second Sight as forensic accountant due to capability and capacity issues.
+ Able to re-scope work and focus attention on defined I + Loss of continuity + Impacts on relationships stakeholders
deliverables I + Management time in scoping work and engaging new I + Second Sight may become hostile and
+ Ensure adequate resources to deliver within agreed supplier ‘support and coach applicants
timescales
Ensure appropriate qualifications and experience
Abily to restore impartial to the role
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Subjective Analysis
7 Formalise Second Sight appointment and provide clarity in relation to
scope and remit
Renegotiate the terms of Second Sight’s contract, defining scope, of work terms of reference, quality standards and acceptance criteria. Payment to
be based on the delivery of agreed outputs.
Pros
Clarity of role and remit
‘More appropriate contractual relationship
Ally to manage their input more effectively
Abily to withhold payment should qualty continue to
cons
‘+ Re-negotiations will eequire significant management
effort
+ Relationships with PSMRs may worsen
Risks
Change in role may be negatively
viewed by stakeholders
‘Second Sight may be unwilling to accept
alternative terms of reference and
oo be angssue, ie. A
Contractual arrangements.
s) ry t;
8—Second Sight to retain +
i World G
ole-on Working Group only
Second Sight’s role will be limited to attending the Working Group, and providing advice on application of thematic criteria. They will have no remit to
validate work carried out as part of the assessment process.
Pros
No involvement in casework process, addressing the
concemns identified in relation to capacity and
capability
No requirement to produce reports or other
deliverables, addressing concerns in relation to quality
of work to date
Maintaining involvement with scheme to ensure
knowledge and experience to date is not lost.
Honours Minister's commitment to the House to
‘maintain their involvement.
Providing a mechanism to ensure faimess in the
application of application of thematic criteria,
Con
+ No abilty to manage them in the working group
environment
+ May become a hostile expert witness in the future,
Risks
May walk away and this may de-
stablise the working group
May attempt to de-stabilise stakeholders
around the scheme.
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Options Appraisal
Appraisal Approach
‘Amatrix has been developed to enable each option to be assessed in relation to alignment with scheme objectives, estimated financial
‘exposure and ease of implementation. Consideration is also given to the relative merits of each options arising from the subjective
analysis. A weighting will be agreed to refiect the relative importance of each criteria. The outcome of the appraisal is presented in the
table below.
‘Option Description
Maintain current position (base case for appraisal)
Ease of
Implementation
Estimated
Financial
Exposure
Subjective
Assessment
Alignment with
Core Principles
Restructure scheme — assess all applicants and settle based on value
based judgements
Restructure scheme — assess all applicants and settle based on eligibility
framework
Close scheme making no settlement
Close scheme making arbitrary settlement to all applicants
Replace Second Sight
Formalise Second Sight appointment and provide clarity in relation to
scope and remit
‘Second Sight to retain role on Working Group only
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The Way Forward &
Conclusions
The Scheme is both politically sensitive and contentious and has been, and will continue to be subject to a high level of stakeholder
interest. Any decision taken will have its challenges, and it must be recognised that significant stakeholder engagement is essential to
‘ensure buy-in for the proposed approach.
‘The way forward proposed must be in the best interests of the business, first and foremost. However if the key principles of the scheme
are followed, the ability to take difficult decisions and to engage effectively with stakeholders will be improved significantly, as faimess and
doing the right thing are at the core of the process.
Recommendations
Itis recommended that a report be presented to the Board for approval which will:
+ Recommend Second Sight be replaced as forensic accountants to the Scheme.
+ Confirm the objectives of the scheme and key principles on which the scheme is founded
+ Recommend that the scheme is restructured based on a
Next Steps
+ Commission independent review of Horizon system and share findings with all key stakeholders
+ Commence engagement with key stakeholders
+ Develop scheme operating framework and de:
n making processes.
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