Insights ¦ Evolving our funding model

Key Take Aways

1. The Financial Ombudsman Service is proposing to further differentiate case fees, primarily based on case stage, to better align funding with the work involved and ensure fairness across industry sectors.
2. Differentiation by case stage aims to incentivise early dispute resolution, encouraging firms to resolve complaints swiftly and minimise formal intervention.
3. The proposed tiered fees for stages include proactive settlement, before a view is issued, and after the view, with discounts applied to earlier stages reflecting lower effort.
4. There is support for fee differentiation by outcome, where cases upheld in favour of consumers attract higher fees, aligning with a ‘polluter pays’ principle.
5. Risks identified with stage-based differentiation include potential behaviour shifting towards settling early to lower costs, and possible impacts on consumer fairness if some firms accelerate resolutions prematurely.
6. Concerns about outcome-based differentiation include perceived or actual bias, although mitigations like governance checks aim to address these issues.
7. The proposed billing reforms include moving from free case allowances to a monetary, individualised allowance of £2,000 per respondent firm or professional representative per annum to simplify processes.
8. Expanding quarterly billing in advance is proposed for firms handling 25 or more cases annually, aimed at reducing administrative burden and increasing cashflow predictability.
9. The new quarterly billing model would involve forecasts, monthly statements, and a six-month dispute window, shifting payment timing from case closure to proactive estimates.
10. The consultation anticipates minimal impact on complainants, charities, and trusts, but expects firms will be encouraged to resolve cases earlier, with transparency improvements.
11. Implementation of these proposals aims for potential roll-out by April 2026, with consultation feedback influencing final rule adjustments.
12. The overarching goal is to develop a flexible, transparent, and sustainable funding model that incentivises positive behaviour and ensures the organisation’s long-term viability.

Key Statistics

• In 2024/25, approximately 70% of businesses whose customers referred complaints paid no case fees.
• Most firms are currently billed either monthly or quarterly, with a handful in a group fee arrangement; the group fee involves adjustments if case resolution volumes deviate by more than 5%.
• Currently, most firms and professional representatives are expected to have three free cases at a value of £650 each before incurring fees.
• The proposed monetary allowance for firms and professionals is set at £2,000 for the year, roughly equivalent to three to four full-value cases depending on circumstances.
• About 95% of firms that handle 25 or more cases annually would transition to quarterly billing in advance under the new model.
• The trigger threshold for quarterly billing is proposed at 25 cases annually, simplifying forecasts and fee calculations.
• Changes include a realignment of dispute period for case fee queries from 12 months to six months post-invoice.

Key Discussion Points

• The merits and risks of differentiating case fees based on case stage, including its impact on early resolution incentives and potential bias.
• The implications of outcome-based fee differentiation, particularly concern over systemic bias and maintaining impartiality.
• The feasibility of combining stage and outcome differentiation, and the complexity added by a dual approach.
• The move from free case allowances to a fixed monetary quota, and whether £2,000 per year is appropriate, fair, and easy to administer.
• The advantages of moving to quarterly billing in advance, especially in reducing administrative burden and improving cashflow for firms and the service.
• How the proposed threshold of 25 cases per annum as a trigger for quarterly billing balances convenience and equity.
• The potential effect of these funding reforms on behavioural incentives for firms, especially regarding early resolution and complaint handling quality.
• The risk mitigation strategies around possible revenue shortfalls if case volume forecasts are lower than actuals.
• The impact of reducing dispute window for fee queries from 12 to six months, aiming for more timely resolution of billing issues.
• The organisational benefits of simplifying billing logic, reducing permutations from over 5,000 to more manageable processes.
• The overall goal of creating a sustainable, transparent, and fair funding model, supporting confidence in the organisation and the financial services sector.
• The importance of stakeholder feedback in shaping future implementations, ensuring the model adapts effectively to industry needs.

Document Description

This article is a comprehensive consultation paper from the Financial Ombudsman Service, outlining proposed changes to its funding model. It explores increased case fee differentiation schemes—by case stage and outcome—and introduces initiatives to simplify billing processes. The document details the rationale behind shifting from flat fees to tiered and outcome-based fees, as well as moving from free case allowances to monetary credits and quarterly billing in advance. It seeks stakeholder feedback on these proposals, aiming to enhance operational efficiency, fairness, and transparency while supporting a sustainable long-term organisational model. The article emphasises the importance of incentivising early dispute resolution and fair conduct among financial firms.