"It is perverse that the recommended funding model will benefit firms with poorer customer service at the expense of those with a far better record of fair treatment."
The Building Societies Association has published a critical response to the Financial Ombudsman Service's new funding proposals, saying that "perversely the proposed funding model would see greater cost falling on firms with fewer complaints".
The BSA says the proposals will see costs for firms with fewer complaints soar, whilst firms with substantial volumes will see what they pay drop by around £70m a year because of complaints made against them.
At present the Service is 85% funded by the fees paid by firms for each complaint that is elevated to them (£251 million) and 15% funded by a levy which is paid by all firms based on their market presence (£45 million). The levy has already increased by 87% in the last year, up from £24 million in 2018/19.
The new funding proposal is to split the costs 50/50 between case fees and the ‘all-firm’ levy.
The FOS forecasts that its total income will average just over £200m over the next four financial years. If the 50/50 split is applied, this would mean case fees of around £100m a year paid by firms subject to complaints, about £70m a year lower than if the current 15/85 split was applied. This £70 million would instead be paid by all levy paying firms regardless of the number of complaints FOS received relating to them.
In its response the BSA has suggested a number of alternatives which may help the Financial Ombudsman Service’s funding situation, without resorting to this structural change. Suggestions include taking the case fee upfront rather than at complaint resolution. In addition, around 30% of the total costs for this Ombudsman are paid to contractors taken on to handle high complaint volumes. After the PPI tail, the Service should be able to reduce its costs by flexing contractor numbers down.
Robin Fieth, chief executive of the BSA, said: “I recognise the desire of the Financial Ombudsman Service for more stable funding in a post-PPI world, however there is a fundamental mismatch between this and the reality of their operational peaks and troughs. It is perverse that the recommended funding model will benefit firms with poorer customer service at the expense of those with a far better record of fair treatment. This is counter to the principles outlined in the July 2018 independent report into the Service.
“The BSA is a strong supporter of the Service, which has navigated the troubled waters of mass claims well. However, we see this proposal as a serious misstep and we urge them to drop it.”