Significant changes have been proposed to the way the Financial Ombudsman Service (FOS) is funded. At present, 85% of the FOS’s funding comes from case fees and 15% from the general levy on authorised firms; however, the new plan is to change this so that the Service is funded 50/50 by case fees and the levy.

Currently, firms have 25 ‘free’ cases per year, so they only pay the case fee on their 26th and subsequent cases in any financial year. This means that 90% of firms never pay any case fees. The FOS is proposing to reduce the number of free cases to 10 per year, but the consultation paper says that 82% of firms will still pay no case fees. The case fee has been frozen at £550 per complaint in recent years and the FOS says that this figure is unlikely to change much in the near future.

The FOS says these changes are necessary as the Service adapts to a post-PPI world. Payment protection insurance has dominated its workload in recent years, but with the Financial Conduct Authority PPI claims deadline having passed, it would be expected that by 2021 the FOS would be handling very few complaints about this type of insurance.

Despite the assurances given by the FOS, trade association the Personal Investment Management & Financial Advice Association (PIMFA) has said that it is extremely concerned by the proposed changes. The Association says the proposed new funding model will mean that firms which generate only a small number of complaints will end up subsidising firms which account for the majority of complaints. It adds that it would support retaining the current 25 free cases per firm per year.

PIMFA’s consultation response also expresses the hope that the FOS will make it easier to obtain sector specific complaints data. It also calls on the Service to state the percentage of ombudsman decisions where the ombudsman departs from relevant legislation in finding against a firm. The response makes reference to “a widespread perception amongst some stakeholders that FOS is above the law.”

The Association then requests more data on the proportion of cases which FOS has been unable to close within one or two years of receipt and floats the interesting idea that the Service could re-locate from its current London office to another part of the UK in order to reduce its costs.

Ian Cornwall, Director of Regulation at PIMFA, said:

“We strongly disagree that FOS’s levy and case fee income should be rebalanced to 50:50 split. No financial analysis was provided in the consultation paper explaining how this decision was reached. The new proposal is unreasonable and will penalise firms with a low level of complaints and provides little incentive for firms receiving a high volume of complaints to modify their behaviour and/or improve their complaint handling. FOS should rework its proposal so that the costs recovered by means of a levy are as low as possible. Further work is needed to address this issue.”

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