Our views on the Financial Ombudsman Service budget consultation
Commentary | 29/01/21
The Financial Ombudsman Service (FOS) has been consulting on its plans and budget for the coming year. As the consultation closes, we wanted to share our thoughts. We feel the proposals will place increasing pressure on lenders and create an environment in which borrowers do not receive the best outcomes.
It is no secret that many firms in the non-bank lending sector have struggled with the FOS and its approach to handling affordability complaints. We are now seeing rising numbers of complaints across consumer credit.
While another essay could be written on the impact of interpretation and then re-interpretation of affordability principles, the most pressing demand is around the financial consequences of increased FOS fees. The proposals would see funding grow and place greater demand on firms.
What will surprise many is that in a process that should be impartial and fair handed in its approach, the lender always pays the fee for the case to be considered by the FOS. Win or lose they currently pay £650 per case, with a proposal that this would increase to £750.
With the lender always picking up the cost, this opens up opportunities for abuse by claims management companies (CMCs). These commercial organisations can submit cases to the FOS for free and, if they win, they take a significant share of any compensation owed to the customer.
The threat of a case fee can be weaponised, used as a threat. Agree to the demand or face an automatic case fee.
Customers can be used as pawns in a CMC’s strategy to submit as many claims as possible. Review by the FCA found that many of these are submitted without individuals’ knowledge, often as many as 1 in 4 customers saying they have never heard of the CMCs.
The FOS has also shown itself to be keen to apply case fees for just about anything submitted. This includes cases where the FOS decided that they did not have the jurisdiction to consider the matter but still sought to apply the case fee – it is difficult to think of another organisation that charges to tell you it can’t do something.
In another twist, the FOS has come up with the idea of charging the proposed higher fee for the thousands of cases in the system that will not be decided until the new financial year. While most cases are cleared within the year, there are a considerable number that cross over. Indeed many that have been in the queue for years. Last year that meant the FOS received an additional £1.1 million in fees.
The story told by the financial report is something that we believe needs more attention before we head down the path of funding increases.
While information is scant, we can see a reliance on contractors to help deliver on a falling caseload. The costs of using contractors mean that this is considerably more expensive. Our rough calculation is that each contractor will cost nearly twice as much as a full-time staff member. Meanwhile, non-staff overheads seem high for such a small organisation.
The FOS needs to be more accountable for its spending. There has been a planning process that delivers the answer the FOS wants just ahead of the implementation of new fees for some time now.
It should never be forgotten that this is a mediation facility funded by financial services firms. The justification for increasing the case fee is weak at best. It would be better for the FOS to achieve efficiencies in other areas and for external review of its operating model.