The BSA welcomes the opportunity to respond to the FOS’s annual consultation on its plans and budget. 

The BSA response is set out below -

The Building Societies Association (BSA) represents all 43 UK building societies, as well as six credit unions. Building societies have total assets of nearly £430 billion and, together with their subsidiaries, hold residential mortgages over £335 billion, 23% of the total outstanding in the UK.

They hold over £295 billion of retail deposits, accounting for 18% of all such deposits in the UK. Building societies account for 39% of all cash ISA balances. They employ approximately 42,500 full and part time staff and operate through approximately 1,470 branches.

The BSA welcomes the opportunity to respond to the FOS’s annual consultation on its plans and budget. While we remain supportive of its stated strategic priorities and the need to invest in a change programme, we also remain concerned at the continued path to a fundamental change in how the service is funded.

Summary

• The BSA remains supportive of the FCA’s key strategic objectives.
• We recognise the need to fund a change programme to improve efficiency at the FOS, but want assurances that the significant £10 million levy fee increase will be reversed once the programme has been funded.
• The proposal to reduce the number of free cases from 25 to 3 has the potential to disproportionately impact smaller financial firms. This measure must be kept under review to ensure the FOS’s calculations regarding its impact are accurate. The measure should be reversed if it is found to disproportionately impact smaller firms.
• We support the proposal to not increase the case fee this year.

• We remain concerned about the move toward a 50/50 ratio split between case fees and the levy. While acknowledging that it is the FCA’s role to reform the levy, we continue to urge the FOS to proactively engage with the FCA in relation to altering the current construct of the FCA’s fee blocks.

Without that parallel reform of the fee blocks, we consider that continuing towards a 50:50 split:

 

- Represents a serious departure from the FOS’s own funding principles.

- Would require building societies, and other firms, to subsidise the poor behaviour of others.

- Reduces the incentive on firms generating complaints to amend/adopt practices to ensure that less cases are referred to the FOS.

These outcomes are in the interests neither of consumers nor of the financial services sector as a whole.

 

 

1. What are your views on trends we may see in our casework, and future complaint volumes we are expecting to receive for:

a) Banking and credit, insurance, investments and pensions

b) Fraud and scams

c) PPI

d) Complaints from SMEs and about CMCs

e) Funeral plans

Response: We agree with the trends the FOS predicts it will see in the coming year and note we highlighted many of these same trends in our response to the previous consultation. In particular, we remain concerned about the potential increase in frauds and scams related to authorised push payments and the potential for complaints arising from the FCA’s new Consumer Duty requirements. There is also a significant risk the FOS will receive a substantial number of templated and speculative complaints from CMCs about mortgage SVRs depending on the outcome of the FOS’s current ring-fence on this issue (including its determination on jurisdiction).

CMCs

We agree that, with the end of PPI, the FOS will continue to see a heavy decline in complaints about CMCs handling of such matters. However, our members continue to receive speculative Data Subject Access requests submitted by CMC and legal firms which handle claims management work. These are in relation to mortgage lending, and many are founded on questionable, complex and unsubstantiated legal arguments. We expect this trend to continue and this will undoubtedly lead to an increase in complaints reaching the FOS about CMCs handling of non-PPI matters.

We also remain concerned about the proliferation of legal firms advertising themselves to consumers as CMCs while retaining their corporate structure as an SRA or Bar Council registered entity. We believe this makes it more difficult for consumers dissatisfied with their services to make a complaint, as these firms are not under FOS’ jurisdiction. Regulation of these firms needs to be consistent with other CMCs so that all CMC users have the same right to refer a complaint against a CMC to the FOS.

 

2. What is your perspective on complaint volumes from Covid‑19, including the impact of the end of government support schemes?

Response: Last year, we predicted that there would be an increase in Covid-19 related complaints associated with areas of vulnerability, such as financial hardship. We note this is reflected in the FOS’s own figures which show an increase in volume of complaints over the last year.

We agree that factors such as the end of the furlough and business support schemes will contribute to the number of complaints reaching the FOS this year. However, in reality these complaints might be better described as financial hardship related rather than purely down to the pandemic. As the year progresses, financial hardship will continue to be a factor driving many complaints, but we expect the underlying cause to shift from Covid-19 to energy price rises and the cost of living increase.

 

3. Are there any other issues or trends you think we should take into account as we plan for 2022/23?

Response: Financial hardship as a result of energy prices rises and the expected cost of living increase over the next year may well feed through to more complaints which ultimately reach the FOS. It is too early at this stage to assess the impact with any accuracy, but the FOS should remain alert to a potential sudden increase in financial hardship related complaints this year.

 

4. Do you have any suggestions for how we can further improve our efficiency, and how you could work with us on this?

Response: We have commented in previous responses supporting the FOS overall plans to improve efficiency. Then as now, we particularly welcome the emphasis on improving and enhancing the digital offering.

Further investment by the FOS into systems which allow our members to exchange information digitally will be welcomed. Currently complaints investigation necessitates the disclosure of information in paper form, which is neither responsible nor wholly necessary. A digital portal for the disclosure of correspondence and supporting documentation would help the efficiency on the movement and availability of documentation.

Clearly, the drive for improvement and greater efficiency comes at a significant cost. Our views on the FOS’s proposal to raise the funds needed for its change programme are set out in our response to question 6 below. However, we would highlight here that it is important the FOS demonstrate how it will ring fence this additional funding to ensure that it is spent on improvements. In addition, we seek assurances that once the change programme is funded, the increase to the levy and other related measures will be reversed.

We await sight of the FOS’s planned approach to wider implications cases, and welcome the fact that a more formal process is to be put in place. The effectiveness of this will very much depend on collaboration and information sharing (within the bounds of what is possible) and we would encourage the FOS to continue to engage proactively with Trade Bodies and firms.

Early and proactive engagement with industry is also vital with regard to ring-fenced issues. There is a perception that FOS’s approach to ring-fenced issues tend to be developed in silos over a long period of time before being imposed on industry with little or no prior consultation. This creates backbook risks. If FOS want to increase efficiency and prevent perceived unfairness at source, proper engagement with firms at the outset of FOS reviewing its approach to a particular issue or theme is crucial.

5. How can we improve sharing insight to prevent complaints and unfairness arising?

Response: We welcome the FOS’s ambition to step up its engagement and insight sharing. However, beyond stating that resolving cases quicker will lead to faster sharing of insights with stakeholders, the consultation is very light on detail about how this will be achieved. We would hope that the considerable investment in new digital systems at the FOS will help to identify trends and share information with stakeholders in a timelier manner. As a trade association, we will continue to liaise closely with the FOS and our members on upcoming complaint trends and share information where appropriate and helpful.

 

6. Do you think our draft budget for 2022/23 seems reasonable, given the changes required at the Financial Ombudsman Service?

Response:

Case fee/Levy ratio

With regard to the increase of the compulsory jurisdiction levy, we note that the split of case fee and levy is expected to be 56:44 and that the FOS maintains the view that a split of approximately 50:50 represents a good balance.

In our responses to the FOS’s consultations on its 2020/21 and 2021/22 budgets, we pointed out what our members perceive as the inherent unfairness of the current structure in light of the fees/levy proportion of FOS funding.

The changes to FOS funding arrangements that were implemented for 2020/21 meant that the FOS raised 30% of its income from the compulsory jurisdiction levy as opposed to 15% in 2019/20 and previous years. The levy for 2020/21 was raised to £83.9 million, up from £38 million in 2019/ 2020, itself an increase of 82% over the previous year. In 2021/22 the levy increased to £97.3 million and the proposed levy for 2022/23 is £106 million (An increase of approximately £10 million which we note is primarily to fund the FOS’s change programme).

Taken as a whole, these changes have a huge impact on building societies. We remain opposed to the continued move to a 50:50 split without a corresponding shift in the structure of the FCA fee blocks. Absent that, the move will lead, and is leading, to unfairness towards those firms that are treating their customers well and generating lower numbers of complaints. It will have a disproportionate effect on those firms, which will be in the unacceptable position of subsidising firms that are generating larger numbers of complaints, and is entirely at odds with the principle of “polluter pays”. As far as building societies are concerned, it is neither a proportionate nor a reasonable approach in the context of the mutual sector, which strives to put the interests of members first. Subsidising poor behaviour in other firms has a direct impact on our members’ ability to provide value and benefit their own members.

We remain of the view that either:

• Building societies and other firms with low propensity to create complaints to FOS should be decoupled from their current funding block and a more proportionate tariff applied to them, reflecting their lower risks and complexity and/or
• A review of the levy should restructure that particular block into smaller blocks based on a combination of firms’ size and the risk created by the levels of business they generate for FOS, with differentiated tariffs to reflect the scale of each group of firms’ business activities and the complaints risk they pose.

We strongly urge the FOS to engage with the FCA to encourage a fundamental reassessment and restructure of the compulsory jurisdiction levy for FOS.

CMCs

Expanding on the “polluter pays” point set out above, where CMCs are submitting and escalating unfounded complaints which they haven’t properly investigated, or investigated at all (e.g. the mortgage ‘overcharging’ complaints many societies have seen over the past couple of years), it’s actually the CMC that is the “polluter”. FOS should therefore consider how that could be reflected and this CMC conduct disincentivised. For instance, through a general increase in fees recouped from CMCs or the imposition of a case fee on CMCs on individual matters where FOS decide the CMC’s conduct is unreasonable or the complaint is found to be totally without merit (acknowledging the latter suggestion would require rule changes).

Levy increase and the FOS change programme

We understand the need for change and improvement at the FOS and that this will require additional resources. The FOS is proposing to raise the additional cash needed for its change programme through a reduction of its reserves from 6 to 3 months, a reduction of the number of free cases from 25 to 3 (and 50 to 15 for group firms), and a £10 million increase in the levy. We touch on the first two measures elsewhere in this response. With regard to the £10 million increase to the levy, we seek assurances that this would be a one off increase and that the levy would reduce the following year. We also seek assurances that the money will in fact be spent on the FOS’s change programme and not subsidise other areas of the service. More information on how the FOS proposes to monitor the spending of the £10 million increase and ring fence it for the change programme would be welcome.

Case fees and free cases

After several large increases in the case fee over the last few years, we welcome the proposal to not increase the case fee this year and leave it at £750.

We are concerned about the proposal to reduce the number of free cases for non-group firms from 25 to 3. This is a significant reduction. We do note however, that the FOS states it is mindful of the impact on smaller financial firms and that even after the proposed reduction in free cases around 69% of firms will still not pay a case fee. Should this proposal go ahead, we believe it should be monitored annually to ensure the impact on smaller financial firms is minimal and that the FOS’s estimate is accurate. Should the impact on smaller financial firms be greater than anticipated, the number of free cases should be increased.

 

7. Do you have any views on our plans to reduce our reserves from six to three months’ operating cost?

Response: We understand the argument for reducing reserves from six to three months and support the proposal that the additional funding this would free up should contribute to the FOS change programme.

 

8. What would you like us to include in the 2023/24 funding consultation we are planning to publish in the first quarter of 2022/23? (See page 25 for what we are currently planning and how it differs from this consultation).

Response: The main focus of the 2023/24 funding consultation should be on the FOS’s change programme and related funding measures. Feedback on how the change programme is progressing and whether or not the funding assumptions made this year are correct.

We would also want assurances that the proposed levy fee is reduced to take account of the one off nature of funding the change programme. In addition, the FOS should report back on current proposed measures, such as reducing the number of free cases from 25 to 3, to ensure they have not disproportionately impacted smaller financial firms. If the evidence is that they have and the FOS’s estimates were incorrect, the measures should be reversed.

 

9. What are your views on our proposal to raise funds through the VJ levy and to leave the tariff rate for each industry block unchanged?

Response: No further comment.

 

10. Do you have any comments on our proposal above in relation to the VJ levy for funeral plan providers and intermediaries who apply to become VJ participants?

Response: Although a number of building societies have relationships with funeral plan providers, we do not think it is appropriate for us to comment on this proposal.

 

11. Do you have any comments specifically about our proposal to apply the same case fee rules to funeral plan providers and intermediaries that will become subject to the compulsory jurisdiction (CJ) and/or VJ from July 2022?

Response: Although a number of building societies have relationships with funeral plan providers, we do not think it is appropriate for us to comment on this proposal.