Does the FOS’ new funding proposal bring us closer to creating a fair FOS?

Currently, the ratio is 85% case fees and 15% levy. FOS would like to shift this to 50/50.

The consultation period closed on 13 August 2019. The consultation for plans and budget opens in December 2019, with implementation proposed in April 2020.

Dispatches documentary findings

What set the hare running initially on the changes was the Channel 4 Dispatches documentary on the FOS aired in March 2018. The frustration about the speed at which the FOS resolves disputes and the quality of its casework perhaps came as no surprise, but Dispatches shone a light on a serious (and alarming) lack of specialist knowledge and training from adjudicators. Staff admitted to feeling under prepared for complex cases and having to Google products they were unfamiliar with.

It also, concerningly (and perhaps surprisingly), exposed what it perceived as a bias towards financial institutions, against consumers.

The Review

Richard Lloyd, chairman of the Money and Mental Health Policy Institute, was subsequently commissioned to undertake an independent review of the FOS.

In his report, published in July 2018, Mr Lloyd largely vindicated the FOS. He disagreed that the FOS was institutionally biased. Indeed, in his summary, he found that the FOS provides an “effective and essential service”.

However, he found flaws in the way the FOS was funded, and called for it and the Financial Conduct Authority to consult on a new levy structure. He said “The present funding regime – a mix of case fees and levy with the greater proportion of funding coming from case fees – neither supports planning as well as it might nor places sufficient emphasis on preventative work.“  

Businesses, including insurers, value the preventative work the FOS undertakes. This helps businesses, the financial services industry and regulators learn from the complaints the FOS sees and stop complaints from coming to the FOS in the first place. He considered that businesses would welcome more of this, including better trend and data analysis.

He therefore recommended:

“consulting on a levy funding structure for the FOS based on the risk that firms bring to the market through their unfair treatment of consumers as presented by complaints that are not resolved before they reach the FOS. This would more strongly incentivise firms to change their behaviour and remove any perception that case fees inappropriately influence decision making at the FOS. As well as providing for a greater degree of stability to the FOS and firms to enable more effective resource planning, a levy-based funding arrangement would also facilitate an extension of the FOS’ preventative work”.

The future

The FOS has struggled to grapple with spikes in claims for certain products. PPI is a case in point. At its peak in 2013, it had 500,000 complaints in one year. It is fair to say it was not envisaged that the FOS would have to deal with so many.

Since 2013/14, the FOS has introduced a “group-account fee” arrangement, which has involved the largest financial business groups paying an annual fee (charged quarterly) based on assumptions about the proportion of likely FOS work. An upfront “supplementary” case fee for new PPI complaints also helped the FOS scale up to respond to demand. The FOS sees these extra levies as “risk-based” but this is not how they are perceived by the IFA market.

The FOS currently receives a total income of £297 million.

Once the mass PPI claims have worked through its system, the revenue that FOS receives currently is not going to be sufficient to cover the assumed cost base. It sees itself moving forward as a smaller organisation. By 2022/23, it predicts it will reduce its case volumes to 185,000. However, it is unclear whether its budget allows for clearing the backlog of PPI cases that remains. Will implementation be too early?

Criticism

In October 2018 Nicky Morgan MP criticised the FOS’ case review, arguing that there was “too much emphasis on process” and not enough focus on quality. She noted that it was also concerning that cases are tested against the “Wednesbury reasonableness test”, that is, that the ombudsman’s decision would have to be considered irrational as well as unreasonable. This, she noted, is an extremely high bar to appeal. Decisions can be poor (and indeed wrong in law, which creates uncertainty and inconsistency) without necessarily being Wednesbury unreasonable.

Commentators continue to criticise the FOS’ failure to invest in training staff, for example in complex fraud cases, as well as its reluctance to call for external experts’ assistance where complex issues are involved. Its tendency to muddle through is damaging its reputation.

However, the key criticism of this consultation is that the suggested levy is not properly risk-based. The FOS perceives the levy as risk-based, arguing that the levy is linked to the volume of complaints the FOS expects them to generate, and those that generate more complaints pay more in case fees.

However the FOS metric is unsophisticated. Much of the assumption by the FOS is based on the size of the firm. It would be fairer to have a system where the “polluter” pays, for example a levy calculated by reference to the complaints per thousand customers.

Firms that have successfully countered speculative, ill-thought out and large scale claims by claims management companies may, despite their clean record at defending those claims, continue to subsidise the levies of those with poor records, creating what the Building Societies Association describes as a “moral hazard”. The BSA suggested requiring CMCs to pay case fees in an effort to “concentrate the minds of the less scrupulous claims firms”.

Further concerns are that the FOS has underestimated or underplayed the likely future operational peaks and troughs, and failed to say whether any change to the funding would be triggered by a “new PPI”.

We will follow the proposed consultation on plans and budget closely and update you in the new year.