29 November 2019
By Peter Wallwork, CSA CEO
Existing funding models for the Financial Ombudsman are not as flawed as they are painted.
The Financial Ombudsman Service (FOS) recently launched a consultation on future funding that pre-supposes the current funding model is flawed and isn’t working. In our opinion, however, the current model - where firms that generate the larger number of complaints account for a commensurately higher proportion of the funding – is not only fair but also consistent with the funding principles that FOS has adopted.
The consultation argues, not unreasonably, that the current system is to a degree risk-based. That is partly true. Our members are notionally included in the consumer credit grouping but while complaints within the consumer credit space have risen overall, this is not the case for the majority of our members. The lack of granularity in the existing system, however, can result in perverse outcomes, with ‘non-polluters’ (as they are called) paying a disproportionate amount for a service their customers seldom have cause to use.
We understand why FOS is seeking a more financially ‘convenient’ funding mechanism, but this ‘convenience’ must be aligned with scrupulous fairness to those expected to foot the bill. Through the arguments being advanced, we perceive no valid basis for the proposed changes being made. Indeed, we would go further, and say that the changes being suggested are entirely at odds with the funding principles espoused by the Service.
Disregarding PPI or something similar in the future, we would expect use of the Service to decline over time. A smaller service would necessarily have a much-reduced cost. However, complaint volumes are inherently difficult to predict as they can be driven by a far wider range of factors than simply poor practice. Other factors might include ill-informed media or social comment that can mislead consumers into believing that there are grounds for complaint when there are none. Paradoxically, this in turn can lead to an escalation in further complaints when a consumer does not receive redress to which they believe, often incorrectly, they are entitled!
Media, both traditional and social, can galvanise consumers to raise legitimate concerns. But they can also be used to generate complaints that are both vexatious and mischievous, and to this end even the existing model can already be unfair for those member firms that find themselves unwitting victims of such complaints
Levy and fee
The specific proposal that the levy and case fee income should be rebalanced to be a 50:50 split is especially troubling. To describe it as ‘rebalancing’ is, in our view, grossly misleading. What is in fact being proposed is a transfer of risk to our members that is wholly unacceptable.
Those that generate the highest levels of complaints – the ‘polluters’ – should be those that fund the lion’s share of the service provided. The only way in which this could change is if FOS dramatically refines the way that future complaint volumes and costs are allocated, and this requires significantly more data and analysis than is currently available. And given that FOS has ruled out a move to a more granular level of risk-analysis, we cannot see that it is remotely possible for the proposal to achieve an outcome aligned with the principles, or indeed which is fair at a more fundamental level.
Many of our larger members have a relatively light footprint when it comes to complaints referred to FOS, but in the new proposals they could find themselves penalised heavily and paying more than three times the amounts they are contributing currently. They would have to absorb extraordinary costs that are nigh-on impossible to justify.
FOS advances a number of arguments as regards why its funding model should change. It points, for example, to the increasing complexity of what it does and the industry it serves, but this should have been accounted for in its original thinking, and some of this complexity is as a result of its own actions. It points to the work it does that cannot be charged for, but this again holds little water for there is little, if anything, that FOS does that is not in some way ‘chargeable’ – whether directly through case fees or in consequence of the existing levy.
While there will inevitably be a risk that FOS will need to seek additional funding intra-year due to the number of complaints escalating far beyond expectation, it is difficult to see this as a persuasive argument. As the consultation states, FOS has been fully operational since 2001 and it has had responsibility for most of its current remit for many of those years, so the risk of being sufficiently ‘surprised’ in those areas to merit additional intra-year funding is small.
Rather than supporting the proposal for change, we believe these arguments actually undermine FOS’ case. Furthermore, the arguments to which they relate become less credible still having regard to the scale of the reserve held by the service which should be more than sufficient to deal with any ‘unexpected’ spike in complaints. We are not, for the avoidance of doubt, suggesting that firms should not collectively contribute to the running of FOS. We are, however, stating firmly that increasing that contribution beyond the current 15% level does not appear to have any justification.
Another point with which we fundamentally disagree is the proposal to reduce the number of ‘free’ case reviews available.
This proposal will necessarily have a negative effect on firms which are currently above the proposed 10 free cases but below the current 25. Firms in this position will experience a rise of between £550 and £8,250 annually depending on the number of complaints generated. As with the wider proposal in relation to the levy, it is unclear why this is necessary without more detailed and granular information as to costs incurred.
There is, of course, a wider concern that the case fee is currently set at a level that is higher than necessary. For example, a member of staff with a gross income of £46,800 would have to work for some 22 hours solidly for their hourly rate to equate to £550 worth of work. It is acknowledged that there will be some reductions to accommodate wider overhead, but for even the most complex of complaints this seems somewhat high. The free cases are arguably already subsidised to a degree, so reducing the level of non-chargeable complaints would be a concern.
More fundamentally, it seems premature to be proposing such a change at a time when the Service use will dramatically change, and the size of the organisation will correspondingly reduce significantly. Based on the information provided in the consultation, it would seem far more appropriate to maintain the current approach and then revisit the issue of a future funding structure after the 2020/2021 complaint volumes and the start of the Service reductions are better understood. At present, we see little justification for these proposals beyond increasing fixed revenue generation to reduce Service provision income. This may be preferable to FOS in funding future operations, but it will shift cost from polluters to levy payers without any rational justification.
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