FOS funding proposals could see broker cost burden triple

The cost to the broker market of funding the Financial Ombudsman Service (FOS) could more than triple under proposals put forward for discussion this week.

The FSA and the FOS released a paper outlining a number of options for future funding of the FOS, which resolve disputes between consumers and financial service firms.

At present, the FOS is funded by a combination of case fees and an annual fee levied on all firms. Firms are not charged a fee for the first two cases each year.

But this could be swept away and replaced with a system that relies solely on case fees, annual fees or a new model based on a combination of the two. One option would be to allow as many as 24 free cases combined with an annual levy.

Analysis by the FSA and FOS reveals a wide disparity between the cost burden on the brokers sector of each option. A funding mechanism based on 24 free cases and an annual fee could cost insurance brokers overall more than three times as much as the current arrangements - £3.9m against £1.2m.

The cheapest option would be to recover all costs through case fees only, which would slash the overall cost burden on brokers by three quarters to £310,000.

Funding based on annual fees only or case fees only would be controversial.

Case fees are payable even if a case is won by the firm, which some companies resent. Others argue that a model based on annual fees alone penalises companies which do not use the FOS.

Chief ombudsman Walter Merricks said: "The way in which the costs of the ombudsman service are divided among financial firms is a subject close to the heart of many in the industry.

"We now look forward to hearing more ideas and feedback on other possible funding options as part of a broader debate on how firms should pay for the ombudsman service."

Biba regulation and compliance manager Steve White said he was reviewing the paper. "The current system works quite well. The starting point is, if it ain't broke don't fix it."

The closing date for responses is 31 July 2006. A consultation paper will be published in autumn 2007.