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Financial Ombudsman Service – Levy increases and free case decreases
With the new financial year fast approaching, firms should be factoring in the potential real-terms increases resulting from the proposed reduction in free cases decided by the Financial Ombudsman Service (FOS). In December 2021, the Ombudsman published its budget consultation for 2022/23, which highlighted an increased cost base and the need to raise an additional £21m. The FOS has been considering increases for some time, and plans have been put on hold during the upheaval caused by the pandemic. The Ombudsman’s proposals for the next year will see free cases reduced to pre-PPI levels. These changes have been mooted for 1 April 2022, but that date is yet to be confirmed.
Between 2015 and 2022, the Ombudsman did not charge a standalone fee for ‘chargeable’ cases until the 26th case. A case becomes chargeable when the helpline passes a case on to an adjudicator for further investigation. The case is then considered to be chargeable, whatever the outcome.
To raise the additional monies needed, the FOS will reduce free cases from 25 to 3, with group firms’ free cases reducing from 50 to 15. The Ombudsman calculates that around seven in ten firms will pay no case fees; during 2020/21 this stood at nine in ten, meaning that about 850 more firms will be looking at paying case fees in 2022 when compared to 2021. Although free cases for groups will reduce to 15 – which at first glance seems to favour larger group firms – the Ombudsman states that the allowance is lower than the total of all the free cases that the firms making up the groups would otherwise get individually.
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The FOS experienced a significant increase in cases submitted over the past year – well beyond its own forecasts. This has led to a queue of cases yet to be completed and longer waiting times for affected customers. Although the Ombudsman has said that it is working towards reducing the backlog, it does not foresee a reduction in future cases either, which means that it will need to ensure that it has enough resources to deal with increased volume at a time when PPI revenues are disappearing.
The final plans will be published “before April 2022”, which does not give firms very much time before the changes are due to be implemented. The compulsory jurisdiction levy will also increase in order to fund half of the required additional costs, although the exact distribution of the increases across the bands has not yet been decided, and is usually considered by the FCA in April. The case fee increased from £650 to £750 in 2021/22, but the FOS are planning to keep this fee unchanged in 2022/23.
The voluntary jurisdiction – which covers businesses that volunteer to join the scheme – will also have free cases reduced to 3, which again is in line with pre-PPI limits. The levy for voluntary jurisdiction firms should not change as the FOS has proposed that the levy will remain the same as in 2021/22. Case fees for VJ firms will remain at £750.
The Ombudsman has come under increased scrutiny recently, with the Treasury Committee hearing evidence around the Body’s financial stability. The Government has long been concerned with the FOS’ budget and backlog, with a discrepancy between the case fee and the costs incurred in completing the average case, amounting to over £300 in 2021. The current budget has placated the government somewhat with an expression of confidence that the FOS will be able to get its finances back on track, but this comes at a cost to firms.
The FOS’ chief executive has admitted that the FOS cannot be financially sustainable without a new funding model, and this model aims to “encourage constructive behaviour by financial businesses”. Further plans are therefore in the works for 2023/24 and the levy increase and free case reduction is the first step towards that new model.
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