The Financial Ombudsman Service (FOS) has issued a discussion paper on how it should be funded going forward.
Currently, the FOS receives funding from levies and case fees. When it was funded in 2001, the split was 50:50 between the two but, over time – and especially with the impact of PPI claims – this has now shifted to 44% from levies and 56% from case fees.
The levy is collected from two groups: those within the compulsory jurisdiction, which is made up of all firms regulated by the FCA and is charged and collected by the regulator; and firms within the voluntary jurisdiction, which companies can join directly, and is charged and collected by the FOS.
In 2022/23, the levy for the two groups totalled £106m ($133m, €124m) and £700,000, respectively.
The Ombudsman believes, however, that the current model needs to be changed to become “more resilient to cope with unpredictable volumes of complaints”.
Feedback to a previous consultation highlighted views within industry on how the FOS should go about changing the way it is funded. These include:
- A ‘polluter pays’ model;
- Differentiated fees according to the size of businesses; the stage at which the complaint was resolved; the complexity of the case or the type of product in question; and
- Charging professional representatives – from claims management companies – to avoid case fees being “weaponised” against companies to force them to settle.
Dismissals
The FOS said that, moving forward, it would like the compulsory jurisdiction levy to be used to pay for its fixed overheads such as IT, property and other support functions, rather than cover a proportion of its income.
Whereas for the voluntary jurisdiction one, it proposed to introduce a fixed fee to reduce the “administrative cost” of calculating the “generally small amounts of levy for each business individually”.
As for the views of the industry, the Ombudsman dismissed the proposal of charging professional representatives as “there is a risk that a fee to a professional representative could become a barrier to legitimate complaints because it is passed on to the consumer”, which would go against the premise that the FOS should be free to use by the public.
On the ‘polluter pays’ front, the service is worried that such a model would be perceived as if its upholding of complaints could be financially motivated, so it dismissed it as well.
Potential reforms
Since its inception, the Ombudsman has had a flat case fee structure – £750 per case. But this might change going forward as the service seemed on board with working on a potential differentiation of fees.
This is because it believes the model would allow the FOS to “more easily recover the costs of dealing with a case based on how many stages in our casework it needs to go through, or how complex the case is”.
The problem, however, lays on what kind of differentiation should be applied, and whether that should be based on the product being complained about, the stage at which the complaint is closed or case type – as some are easier to deal with than others.
But the FOS did admit that, while this could be the way forward, there are “practical implications and risks” if it was to shift to this approach, including:
- Greater administrative work for the Ombudsman and financial businesses;
- The need for more detailed invoiced and case reconciliation which may increase fee disputes;
- The need to adapt its current IT systems to allow more detailed reporting; and
- Changing the way the FOS published its data.
Nausicaa Delfas, interim chief executive and chief ombudsman of the FOS, said: “As part of our commitment to change and improve to deliver a better service for our customers, we are today inviting views on proposals to change our funding model.
“This is to ensure that the Financial Ombudsman Service’s funding is sustainable for the future, is more transparent in its management of fixed costs and more closely reflects the actual costs of resolving over 150,000 diverse complaints each year.”
The Ombudsman’s discussion paper will be open for responses until 5 August 2022.
