Insights ¦ Evolving our funding model

Key Take Aways

• The Financial Ombudsman Service is proactively evolving its funding model to better reflect case complexity, demand forecasting, and industry workload distribution, with a focus on fairness and simplicity.
• A significant shift is proposed towards differentiation of case fees based on either case stage or case outcome, aiming to align costs with effort and minimise cross-subsidisation.
• The organisation has already introduced charges for professional representatives, with proposals to extend differentiated fees to all cases based on case outcome, potentially incentivising early resolution and fair behaviour.
• A move from flat case fees to a system incorporating quarterly billing in advance is on the table, aimed at reducing administrative burdens, streamlining cashflow, and supporting future fee differentiation.
• The consultation highlights the importance of modelling risks, including potential impacts on firm behaviour (such as early settlement bias) and income variability, with plans for ongoing governance checks.
• The organisation aims to maintain a revenue-neutral approach in implementing changes, setting case fee levels to achieve the same overall income while introducing more granularity.
• Proposed billing modifications include moving from a 12-month dispute window on case fees to a six-month limit, reducing uncertainty and administrative complexity.
• The consultation encourages stakeholder feedback on two key differentiation options: by case stage (early vs late resolution) and by case outcome (upheld vs not upheld), with a view to possible implementation for 2027/28.
• Digitalisation and process modernisation are central to the plan, with the intention to develop simpler permutations in billing logic from over 5,000 to a manageable framework.
• The organisation remains committed to its core principles: simplicity, transparency, fairness, and cost recovery, whilst adapting to industry and technological developments.
• Stakeholders’ feedback will inform subsequent rule changes, with a timeline targeting final decision-making by early 2026 for implementation from April 2026.
• The holistic approach aims to underpin confidence in financial services, ensuring the organisation remains efficient, sustainable, and aligned with market and regulatory changes.

Key Statistics

• The current flat case fee is £650 per case, with most businesses (70%) not paying any case fees annually due to receiving fewer than three cases.
• The organisation handles approximately 200,000 disputes annually involving diverse financial service providers.
• The proposed monetary allowance as an alternative to free cases is set at £2,000, which would equivalently cover about three to four cases at current fee levels.
• Eight firms participate in a group fee arrangement, paying quarterly based on forecasts, with potential end-of-year adjustments.
• In 2024/25, over 5,000 permutations of billing logic were identified, demonstrating the complexity of current fee systems.
• Around 95% of firms that receive complaints would shift to quarterly billing if forecast thresholds of 25 cases are met.
• A reduction in dispute query period from 12 months to six months is proposed, aligning dispute resolution timelines with billing cycle improvements.
• Eight in ten businesses paying case fees currently do not face any fees at all, highlighting the structure’s utilisation.
• The proposed plans aim to lower administration costs, with an anticipated annual saving of approximately £2 million across the eight group fee firms.
• Cost efficiency considerations have led to a focus on digital and process improvements, supporting fee model modernisation.
• The overall aim is to balance firm contribution with case complexity, with a focus on transparency and simplicity.
• Stakeholder responses are due by 8 October 2025, with subsequent consultations planned in November 2025.

Key Discussion Points

• The merit of differentiating case fees by case stage, where earlier closures would attract lower fees, and the associated risks such as early settlement bias.
• The potential for perceiving or actual bias when fees are linked to case outcome, and strategies to mitigate this concern.
• The feasibility and fairness of implementing both case stage and case outcome differentiation concurrently.
• The implications of switching from a flat fee to a monetary allowance, including transparency, administrative simplicity, and fairness.
• The advantages of moving towards quarterly billing in advance for respondent businesses and professional representatives, including cashflow predictability and reduced administration.
• The risk of income variability due to forecast accuracy in quarterly billing, and governance mechanisms to address deviations.
• The proposal to cap disputes over case fees at six months, aiming to reduce uncertainty and improve process clarity.
• How differentiation might influence firm behaviour and whether safeguards are sufficient to prevent unintended incentives.
• The organisation’s commitment to maintaining revenue neutrality whilst introducing more granular fee structures.
• The impact of process modernisation on billing permutations, aiming for a simplified and scalable system.
• Stakeholder feedback as a critical component influencing future rule changes and implementation timelines.
• The importance of digital tools and data-driven governance to support a fair, transparent, and efficient funding model.

Document Description

This article provides a comprehensive overview of the Financial Ombudsman Service’s consultation on future funding and case fee models, aiming to modernise and simplify its financial sustainability framework. It discusses proposals for differentiated fees based on case stage and outcome, introduces plans for billing in advance through quarterly invoicing, and seeks stakeholder feedback to shape future rules. The document underscores a strategic shift towards transparency, fairness, and operational efficiency, with a focus on aligning costs to the workload generated by financial services firms. It also emphasises the organisation’s commitment to maintaining its core principles amid evolving industry and regulatory landscapes.