Insights ¦ Evolving our funding model

Key Take Aways

1. The Financial Ombudsman Service is evolving its funding model to better reflect case workload, aligning with principles of fairness, simplicity, and sustainability.
2. The consultation proposes further differentiation of case fees based on case stage and outcome, moving beyond the existing flat fee structure introduced with professional representatives.
3. Differentiation by case stage aims to incentivise early resolution, with lower fees at initial stages and higher fees for cases requiring full investigation.
4. Differentiation by case outcome would charge higher fees for upheld complaints, consistent with the ‘polluter pays’ principle, but raises potential bias concerns.
5. The organisation plans to modernise billing processes, including moving to quarterly in advance billing for 95% of firms, to support case fee differentiation.
6. A move from free cases to a fixed monetary allowance per organisation each year is proposed, simplifying administration and ensuring fairness across firms and representatives.
7. The consultation underscores the need to reduce administrative costs and improve cash flow predictability for respondent businesses and professional representatives.
8. The organisation aims to set case fees at revenue-neutral levels, ensuring overall income remains aligned with ongoing operational costs.
9. Risks associated with proposed differentiation include potential behavioural incentives for early settlement and perceptions of bias based on case outcomes.
10. The organisation recognises the importance of oversight and governance controls to prevent systemic bias and ensure fairness during implementation.
11. The proposals set a clear timeline aiming for change implementation from the 2027/28 financial year, with extensive stakeholder engagement before finalisation.
12. The consultation invites extensive feedback on differentiated case fees and billing reforms, emphasising transparency and ongoing evaluation.

Key Statistics

• Around 200,000 disputes are resolved annually by the Financial Ombudsman Service.
• In 2024/25, approximately 70% of businesses to which complaints were referred paid no case fees.
• The maximum individual case fee currently charged is £650, with fees for firms ranging from around £45 to over £1 million annually.
• Seven out of every ten firms did not pay any case fees in 2024/25.
• The proposed monetary allowance to replace free cases is suggested at £2,000 annually for firms and professionals.
• Around 95% of firms and professional representatives currently billed monthly would move to quarterly in advance billing.
• The threshold for switching to quarterly billing in advance is proposed at an expected average of 25 cases annually.
• The consultation period closes on 8 October 2025.

Key Discussion Points

• The organisation’s plan to differentiate case fees by case stage to encourage early dispute resolution.
• The potential for fee differentiation to incentivise firms towards settlement or early resolution behaviours.
• The risk that differentiation by case outcome could introduce bias or perceptions thereof, and whether oversight mechanisms are sufficient.
• The benefit of simplifying billing processes via moving from free case allowances to a fixed monetary credit system.
• The advantages of transitioning to quarterly in advance billing, including administrative efficiencies and improved cash flow management.
• Concerns regarding the impact of new billing models on smaller firms and professional representatives.
• The proposed threshold of 25 cases per organisation for billing quarterly in advance, and whether it is appropriate.
• The potential risks of over or under recovery of costs under the new differentiated fee models and mitigation strategies.
• The importance of maintaining transparency and stakeholder confidence throughout the implementation process.
• The organisation’s commitment to ensuring that the new funding model remains fair, transparent, and aligned with core principles over time.
• The effect of proposed reforms on parties that do not pay case fees, emphasising minimal impact and service improvements.
• The need for ongoing evaluation of the new fee structures and billing processes, with transparent communication of outcomes.

Document Description

This article is a consultation paper from the Financial Ombudsman Service outlining proposals to modernise and differentiate its funding model. It discusses plans to introduce case fee differentiation based on case stage and outcome, and reforms to billing processes including moving to quarterly in advance billing and replacing free case allowances with fixed monetary credits. The document invites stakeholder feedback with the goal of implementing these changes from April 2027, aimed at creating a fairer, simpler, and more sustainable funding approach aligned with regulatory developments and evolving service demands.