Financial Ombudsman Service  

Trade body blasts 'moral hazard' of Fos proposals

Trade body blasts 'moral hazard' of Fos proposals

The Building Societies Association has heavily criticised proposed changes to the financial ombudsman's funding structure, warning the plans would penalise firms which attract fewer complaints. 

In a funding consultation published last month the Financial Ombudsman Service proposed a funding model with a 50:50 split between case fees and the industry's levy, a move from its current funding split of 85 per cent coming from case fees and 15 per cent from the levy. 

The service said reducing its reliance on income from case fees would help it manage the increasing number of more complex cases and even out the workload.

The Fos anticipated the changes would see its case fee remain around its current level of £550 and also set out proposals to reduce the number of free cases for which a company pays no fee when a complaint is made against it, suggesting the allowance should be cut from 25 to 10 for smaller firms and 125 to 50 for larger "group account" firms.

But in response to the consultation, which closes tomorrow (August 13), the BSA warned the proposals will see costs for companies with fewer complaints "soar" whilst those with larger volumes will see their costs fall. 

The BSA said: "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."

The trade group warned a move to a 50:50 funding split would create a "moral hazard" by providing a "financial shield to future large-scale 'polluters' at the expense of firms that had treated their customers fairly."

It added: "It is important to maintain a position where those firms receiving the large majority of complaints should take the major share of the service’s funding costs through the case fee – otherwise, moral hazard arises.

"Firms responsible for the largest number of complaints, and usually most upholds, would appear to be financially sheltered by the proposed significantly reduced reliance on case fees – which firms that had treated their customers fairly would subsidise and ultimately [be] paid for by their own customers." 

The trade group also called on the Fos to scrap its plans to reduce the number of free cases available to firms, stating this allowance was important to smaller firms who benefitted from free cases as a result of their size. 

The BSA said: "They contribute to the levy, of course, so this is by no means a ‘free ride’. However, like all firms, they are increasingly subject to ‘speculative’, ill thought-out, and sometimes large-scale, claims by some claims management companies, solicitors and representative bodies."

In its consultation the ombudsman predicted many of the smallest firms it covers were "very unlikely" to have more than 10 cases referred to the service each year, with some having never reached the 25‑case threshold.

The service estimated the changes would see 280 more companies pay a case fee under the new threshold of 10 cases, which is expected to generate additional income of around £4.5m.