RegulationFeb 13 2019

Fos future difficult to predict

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Fos future difficult to predict

Planning the Financial Ombudsman Service’s future is impossible.

Unlike a conventional business, it cannot shut its doors, expand or limit its clients.

The volume, timing and types of its activities is entirely at the mercy of a strange combination of financial services companies, the public, the FCA and claims management companies.

Since its 2001 creation, the Fos had dealt with two complaint handling bulges – mortgage endowments and payment protection insurance –the extent of each of which was completely unpredictable.

Against that background, the excitement generated by Financial Conduct Authority chairman Charles Randell’s comment about a “fundamental” change to the ombudsman’s “funding arrangements” has to be tempered by an appreciation that the Fos’s caseload may not change predictably in the future.

The 15 per cent increase in investments and pensions should worry financial advisers.

As Mr Randell pointed out, 2019/20 is much too early to alter anything. The deadline for complaining to companies about PPI occurs in August this year. Last-minute cases could be clogging the ombudsman until 2021.

Although the Fos is reporting lowering PPI case numbers, companies are reporting a different picture to the FCA. This could reflect a last highly unpredictable growth spurt. 

Fos budget consultation

The Fos’s consultation on its budget, published on December 17, begins by comparing actual outcomes to the year’s budgeted figures. In pure accounting terms, the numbers are not bad with the deficit slightly lower than expected.

Behind this are more disconcerting figures, notably a reserve-funded deficit of about £58m and 20 per cent new caseload growth. The Fos expects new cases to increase from 339,967 to 407,000 this year and 460,000 next.

A 172 per cent increase in 2018/19 in short-term lending cases to 25 per cent of the PPI total and growth everywhere else is driving the highest new caseload in five years. Bad lending cases are far more difficult to do than PPI.

Assessments of irresponsible lending depend hugely on subjective view of debt generally. There is no regulatory or legal guidance on compensation or liability here. The FCA needs to help with the burst of IT failures in banking cases and payment frauds.

The 15 per cent increase in investments and pensions should worry financial advisers. Moreover, the ombudsman looks, from its cases closed figures, as though it is actually building a backlog. 

In the 2019/20 figures, most of the predicted difference is accounted for by a spike of 20 per cent of normal annual PPI caseflow and short-term lending remaining where it is. Essentially, the Fos expects 13 per cent more cases but to resolve 34 per cent more. Most of this is necessary just to avoid a backlog building-up.

CMC and small business cases only account for 2,900 of next year’s expected work.

Some of the promised additional resource for SME cases appears primarily designed to keep the Treasury Committee quiet, such as: four new casehandling teams, more mediation, a specialist professional practice group, an external panel to develop the Fos’s approach, more legal and actuarial support, three lines of quality assurance and enhanced analytic tools. 

There are further similar costs associated with CMCs here to avoid conflicts of interest. The maintenance of a Coventry office for that, used for PPI since 2017, while reducing the London-centric nature of the organisation could just run up costs.

The problems revealed in the Channel 4 programme Dispatches, and the report by Richard Lloyd that followed, have created further capital costs. Many of the issues are typical products of running a mass claims operation within a dispute resolution framework.

A botched reorganisation, staff morale issues, quality assurance concerns and a need to increase staff education to cope with less mechanical issues have all needed fixing – at a price.

The Fos has added 60 pieces of guidance for staff to its Discovery tool, but, contrary to the approach by Lord David Hunt – who reviewed the Fos 12 years ago – has not made this publicly available for proper external scrutiny.

The ombudsman has also been developing a new case-handling tool to improve access to progress information about cases.

Key points

  • The FCA chairman recently said there needed to be a big change in the Fos's funding arrangements.
  • There is a reserve-funded deficit of £58m.
  • It is hard to predict how the Fos's caseload might change in the future.

Looking forward

The Fos’s ‘three horizons’ begin with the period up to April taken up with implementing the Lloyd recommendations and staying afloat. Horizon two covers the next two PPI years, changing funding model and making strategy decisions to be delivered in horizon three, up to 2025.

Horizon two could be derailed either by a new complaints category, such as payday loans, or a sudden drop in cases and revenue. Both could happen if companies start failing as a result. 

The Fos preparing for the post-PPI era by developing its plan to fund all this by increasing the compulsory jurisdiction levy from £20m to £45m is significant. The total amount is divided by industry blocks based on the case-handling staff expected to be needed to resolve cases arising from the sector concerned.

Each block’s levy is then divided among businesses in that sector using a tariff rate reflecting each business’ activities scale – 56 per cent of companies in a fixed tariff-based block should see no change. 

The Fos will not be extending the eight group-account arrangements it has with large companies. They essentially pay case fees in advance on an assumption that their caseloads will remain broadly static.

Group account customers receive 125 free cases – there are more than five companies in each group. Calculating group fees requires high levels of algebra, which does not encourage transparency.

Things are due to change again around 2021 when PPI starts to leave the building.

At that point, the current 85 per cent case fee/15 per cent levy approach that favours small advisers may not be sustainable if one expects Fos to carry on performing non-case-handling functions (outreach, pre-case resolution work, technical support) with fewer cases coming in.

Removing case fees takes away much of the incentive for proper complaint handling and penalises advisers against payday lenders.

A model proposed by Fos and based on the Lloyd report has a 45 per cent case fee, 15 per cent levy and 40 per cent risk-based levy. Companies in ‘dodgier’ areas and big institutions would pick up most of the tab on this basis.

The problem is deciding who and how risk should be identified.

Advisers take significant amounts of time at Fos even though they have relatively few cases because their complaints tend to be technical, pensions-related, involve substantial sums, and produce proportionately very high-levels of ombudsman referral.

The vast majority of advisers currently do not pay a case fee. The Fos in its budget consultation thinks that the adviser community is low-risk and that payday loans are a much higher risk category. 

The other option: a 50/50 split between a standard and a risk-based levy produces no incentive to reduce costs by proper case handling.

Fos budgeting will always be unfair to someone. It is vital that a growing hole in the Fos’s reserves is repaired to cope with a highly unpredictable future.

When advisers complain about the ombudsman, they have to realise that many of the technical weaknesses of the organisation are due to under-resourcing. With ever more uncertainty about complaint volumes, that problem will not disappear.

Adam Samuel is a compliance consultant