New funding structure for Financial Services Ombudsman penalises firms with fewer complaints

The BSA takes issue with the new funding proposals put forward by the Financial Ombudsman Service.  The new funding model runs counter to the 'polluter pays' model and would see firms with fewer complaints paying more as those with the most complaints pay c£70m a year less.   

In its response to the Financial Ombudsman Service’s (the Service) Our Future Funding consultation, the BSA urges ‘the Service’ to reconsider its funding proposals which will see costs for firms with fewer complaints soar, whilst firms with substantial volumes will see what they pay because of complaints made against them drop by c£70m a year¹.

At present the Service is 85% funded by the fees paid by firms for each complaint that is elevated to them (£251 million²) and 15% funded by a levy which is paid by all firms based on their market presence (£45 million³). 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 result of the new structure will be that firms which generate fewer complaints, whether due to size or behaviour, will heavily subsidise firms which account for the majority of complaints to this ombudsman.

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.  

Commenting BSA Chief Executive Robin Fieth 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 Service4

“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.”


Press contacts:
Hilary McVitty, tel: 0207 520 5926 email: hilary.mcvitty@bsa.org.uk

Notes to Editors:

  1. The BSA’s full response to the Financial Ombudsman Service consultation can be found here
  2. The Financial Ombudsman Service consultation  - Our Future Funding
  3. ¹ The FOS forecasts that its total income will average just over £200m over the four financial years after this one [Source: Chart, Page 12, Our Future Funding document]. 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.
  4. ²Figure of £250.7 million quoted on page 11 of the Our Future Funding document - total fees in relation to consumer complaints.
  5. ³Figure of £44.5 million – compulsory Jurisdiction Levy also on page 11 of the Our Future Funding Document.
  6. 4 In July 2018 Richard Lloyd published an independent report commissioned by the Service in which he said that the principles for funding should be fair; be broadly proportionate – that is, the cost to firms broadly relates to the workload they generate for the Service and create no perverse behavioural incentives.
  7. This consultation, conducted over the peak summer holiday period, provides 6 weeks for comments, even though the 50/50 proposal was absent from the Service’s previous, far more detailed, consultation in its Strategic Plans and Budget paper (Our Funding chapter) published on 17 December 2018.