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Funding the Financial Ombudsman Service

30 November 2000, FSA/PN/146/2000

Proposals for the funding of the Financial Ombudsman Service were published for consultation today by the Financial Services Authority (FSA) and the Financial Ombudsman Service.

Download a copy of CP74

The proposed approach is governed by the fundamental objectives set out in earlier consultation papers (CP4 and CP33).The aim is to have arrangements which are fair, efficient and simple to administer; which provide the Financial Ombudsman Service with certainty and flexibility in budget planning and financial management; and which encourage firms to resolve complaints at an early stage, without deterring them from using the Financial Ombudsman Service, where appropriate.

The proposals build on general agreement following earlier consultation that:

the Financial Ombudsman Service should be funded by a combination of a "general levy" paid by all firms under the ombudsman service's jurisdiction and a "user pays" element (ie case fees) paid by firms for individual complaints;
for the first year of the Financial Ombudsman Service's operation, the proposal to raise 50% of the operating costs through a general levy and 50% through case fees was a reasonable starting point but that the aim should be to increase the "user pays" element in the light of experience; and
allocation of the general levy should be related to the budgeted costs of handling complaints in each industry sector, to reflect the way that different sectors generate different levels of complaints.

Taking this as a starting point, the proposals have been developed in the light of the FSA's proposals for its own arrangements for raising fees after the Financial Services and Markets Act has come into force (at "N2"), and in close consultation with an Industry Funding Group set up by the FSA and the Financial Ombudsman Service.

The key proposals on funding the Financial Ombudsman Service are as follows:

for levy purposes, firms should be grouped according to activity into a number of 'industry-blocks' which have been closely aligned with the proposed FSA fee-blocks;
an agreed portion of the Financial Ombudsman Service's budget (50% in the first year) should be allocated between those industry-blocks broadly on the basis of the number of complaints each sector is expected to generate;
firms will then be levied in line with the amount of business which they conduct in each industry-block;
the remaining portion of the Financial Ombudsman Service's annual budget should be raised from case fees, paid by individual firms at a flat rate per case closed by the ombudsman service;
the costs of setting up the Financial Ombudsman Service should be recovered over the first 3 full financial years after N2, by way of a supplementary levy on all firms which are covered by the Financial Ombudsman Service.

Commenting on the arrangements, the FSA's Chief Operating Officer, Paul Boyle, said:

The proposals take account of the FSA's own fee proposals but they reflect the different nature of the activities of the Ombudsman Service. We are keen to get the views of the industry and consumers on the proposals.

Ian Marshall, Chief Operating Officer of the Financial Ombudsman Service, said:

I believe that these proposals provide a sound basis for the funding of the service and one which we will be able to refine in the light of experience. The input of the Industry Funding Group has been an invaluable help in devising proposals which are as fair as possible to each sector.

notes for editors

The operating budget for the Financial Ombudsman Service for 2000-2001 is £22.7 million.
As part of the regulatory reform under the Financial Services and Markets Act, the eight existing complaints-handling and ombudsman schemes which currently cover the financial sector will be brought together to form the Financial Ombudsman Service - the existing schemes are: The Personal Investment Authority Ombudsman Bureau; The Insurance Ombudsman Bureau; The Office of the Banking Ombudsman; The Office of the Building Societies Ombudsman; The Office of the Investment Ombudsman; The SFA Complaints Bureau; The FSA Complaints Unit; and The Personal Insurance Arbitration Service.
Significant progress has been made to bring the existing dispute resolution schemes together in advance of the implementation of the Financial Services and Markets Act and the establishment of the new single Ombudsman scheme, The Financial Ombudsman Service, is now well advanced. The new company which is to operate the Service had been set up, with Andreas Whittam Smith as its Chairman and Walter Merricks has been appointed as the Chief Ombudsman.
The Financial Ombudsman Service assumed day-to-day responsibility at the beginning of April 2000 under Service Level Agreements for running the existing complaints schemes which it is due to replace at N2 (the Financial Ombudsman Service did not assume responsibility for the Personal Arbitration Service which is run by the Chartered Institute of Arbitrators as there are no staff to transfer to the Financial Ombudsman Service). However, each of the existing schemes will retain its separate legal identity and Terms of Reference until N2.
The staff of these schemes transferred onto Financial Ombudsman Service contracts on 1 April 2000 and moved into the Financial Ombudsman Service's new single premises at South Quay, Docklands at the end of April/beginning of May 2000.
Work on the new rules and procedures which will govern the handling of consumer complaints under the new system of financial services regulation is also well advanced. Consultation period for CP49, "Complaints handling arrangements: Feedback statement on CP33 and draft rules" which sought views on the draft complaints handling rules for firms and the Financial Ombudsman Service closed on 31 August 2000. We received just over 100 responses. A response paper and rules in "final" form will be published shortly.
The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.
The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.

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