Update:

Financial Ombudsman Service (FOS): Charging claims management companies (CMCs) and other professional representatives Policy Statement.

The full FOS Policy Statement can be viewed here

The FOS have published their policy statement on the Charging claims management companies (CMCs) and other professional representatives. We have summarised the changes being implemented below.

The new rules will come into force on 1 April 2025

• Annual free case provision has been increased from 3 to 10 per financial year.
• CMCs will now be charged where the complaint was referred to the FOS on or after 1 April 2025 after their free case provision has been used.
• The maximum charge for each complaint a CMC refers to the FOS will be £250 – based on a differential case fee charging mechanism detailed below. This will encourage the CMCs to investigate the case and the merit of the complaint before the complaint is brought to the FOS.
• Proposal for a £75 minimum case fee for all cases, regardless of the outcome of the complaint.
• Consumers will continue to be able to access the service directly and for free – people who also act as a representative for a complainant, such as friends or family and those providing services pro bono.
• A person defined in regulation 3 (Services and Markets Act 2000 (Ombudsman Scheme) (Fees) Regulations 2024 (SI 2024/1264) can make complaints on behalf of someone else (FEES instrument – Annex 2)

Group Charging of respondent firms and any late payment

• If payment is not made on time by CMC’s then a late payment charge will be applied to their outstanding balance which will be a charge of up to 25% of the unpaid amount

The FOS have also committed to delivering the following by the end of 2024/25 financial year:

• New online portal for respondent firms, which will allow firms to self-serve on individual cases that are with the FOS and access tailored data and insight across the firm’s whole case load.
• A new online journey for complainants which will provide the information FOS require to consider each complaint and to help manage consumers expectations.

FOS consultation – Charging Claims Management Companies and other Professional Representatives

The Financial Ombudsman Service (FOS) has published a consultation on charging claims management companies (CMCs) and other professional representatives (PRs).

Over the last two years, 20% of cases referred to the FOS have been brought by commercial CMCs and PRs at no cost to them for submitting these complaints. Of these cases fewer than 25% result in a different outcome for the complainant than they had already been offered by the respondent firm.

The FOS have highlighted these companies can send in significant volumes of cases with little prospect of being upheld or which are poorly presented. CMCs and PRs are also taking a significant proportion of the awards (compensation) otherwise due to their clients. In addition, despite profiting from it, the current funding model means that CMCs and other PRs do not contribute to the FOS’s costs that are collected through the FCA’s levies and case fee’s. At present, these costs fall solely on the respondent firms like credit unions.

Respondent firms, including ABCUL, have highlighted to the FOS the unfairness involved in them being liable to pay significant sums in fees and the risk that the fees could cause firms to go out of business due to the financial pressure of having to process so many cases all at once and pay the FOS fees.

CMCs and other PRs can derive economic benefit from these cases, with some receiving a 30%-40% portion of any compensation that has been awarded to complainants. For example, FCA regulated CMCs can currently obtain up to 30% of redress attained, with a maximum charge of £10,000.

In addition to this the credit union sector and other financial service providers have been receiving a large volume of affordability complaints from CMCs and PRs, which is resulting in a drain of the credit unions resources and having an impact on some credit unions economic viability.

The FOS are seeking feedback on the following proposals to implement a new fee level and a charging procedure for CMCs and PRs.

A short summary of the proposals are below, and more detail can be found following this information:

• Introduction of a £250 fee for CMC’s and other PRs – reduces to £75 if the complaint is upheld.
• If a case is upheld in favour of the responding firm the £250 will be charged to the CMC or PR from that £175 will be paid to reduce the responding firms fee from £650 to £475
• Group charging of respondent firms will be amended to calculate a notional charge based on the £650 fee and those at £475 fee. With a 5% tolerance between the notional charge and quarterly charges to the group firm.
• Late payment of case fees would be amended from the current £250 ‘administration fee’ to a charge of ‘up to 25% of the outstanding debt’. Percentage being applied would be dependent on the amount of cost/effort undertaken.

Case Fee for CMCs and PRs

The FOS propose to introduce a £250 fee for CMCs and other PRs, reducing to £75 for cases where the complaint is upheld, with the objective of ensuring that the FOS case arrangement allocates an element of the costs of resolving cases to CMCs and other PRs who can derive benefit from their service.

They FOS are also proposing that where the £250 has been paid they will reduce the fee for the respondent firm by £175.

An additional proposal being made is that CMCs and PRs will have three free cases per financial year (the same number as respondent firms), this figure has been based on analysis showing the vast majority of CMCs and PRs do not refer more than three cases across the financial year. This should result in only commercial entities working at scale in the complaints ecosystem would incur fees according to the proposal.

The rationale behind the £250 fee amount has been broken down by the FOS as follows:

• £75 per case – ‘front-end’ costs such as taking calls and enquiries
• £175 per case – additional cost of scaling up to deal with the high demand (those cases which do not yield a favourable outcome for consumers)
• Marginal cost per case for 2023/24 was £710. Therefore, recovering a maximum of £250 represents a contribution towards this.

Question 1- Do you consider a case fee level of £250 payable by CMCs and other professional representatives to be fair and appropriate? If no, please state what fee level you believe would be fair with clear evidence to support this.

Charging mechanism for professional representatives in scope

To enhance proportionality of our casework costs, we are proposing this differential case fee arrangement, whereby the amount charged to both the respondent firm and a CMC or PR is contingent on the outcome of the case.

The FOS propose the case fee arrangement would work as follows:

• Complaints submitted by consumers, not-for-profit advice services, charities and informal representatives (such as friends and family) would attract no case fee aside from the one chargeable to the respondent firm.
• A £250 maximum case fee would be charged to the CMC or other professional representative referring a case to us that exceeds the three free cases per financial year threshold.
• If the FOS reach an outcome on the case that is in favour of the CMC or other professional representative’s client compared to the one reached by the respondent firm at final response stage, they FOS will provide reimbursement of £175 to the CMC/PR. As per the FOSs normal process regarding credits and-or refunds, no interest would be applied to this sum.
• Therefore, cases resulting in a favourable outcome for the CMCs or PRs will attract a £75 fee. In such cases, the £650 case fee is still payable by the respondent firm, in keeping with the polluter pays principle.
• If the FOS do not reach an outcome on the case that is in favour of the CMC or PR compared to the one reached by the respondent firm at final response stage (and so the £250 fee is payable by the CMC or PR), the current £650 case fee payable by the respondent firm will be reduced by £175 to £475. This is to ensure no perverse incentive and is pursuant to their obligations not to have a vested interest in any outcome reached on a case.
• The FOS will provide comparable billing an exceptionality provisions for fees from respondent firms and CMCs/PRs in line with their established approach.

This means that a £75 fee will always be charged, after the three free cases per financial year have been used, which will be invested into the service the FOS provide as well as outreach and awareness raising, as well as the administrative costs of the proposed fee regime.

The proposal in practice:

Question 2 – What is your view on the proposed fee charging mechanism, where the £250 maximum fee level for CMCs and PRs is reduced by £175 where the case outcome reached is in favour of the complainant?

Question 3 – What is your view on the FOS retaining £75 from the CMCs and PRs in any event? Do you think this should be higher or lower? Please give clear reasons and evidence.

Question 4 – What is your view on the case fee to CMCs and PRs being chargeable when they refer the case to the FOS? Do you think there is another stage in their process where charging a fee would be appropriate? What is your evidence for this?

Group Charging of Respondent Firms

The introduction of the charge will impact some of the respondent firms that are part of the FOS group fee arrangement, this is result in the group fee arrangements being amended.

This proposal only impacts eight group firms that have a group fee arrangement in place. None of which are credit unions.

The FOSs current process involves forecasting the number of resolved cases for a group firm for the coming year using the methodology set out in FEES Rules, with an adjustment at the end of the financial year based on a tolerance of 5% between actual volume resolved and that forecasted. The FOS have considered making adjustments to the current methodology but believe that it would be overly complex, so their recommendation is as follows:

• No change to current FEES methodology for the quarterly charge to a group firm
• At the end of the year, FOS will calculate the notional charge that the group firm would have incurred based on the actual number of chargeable cases closed that would have been subject to the £650 fee and those subject to the £475 fee.
• The year0end true up would be based on a 5% tolerance between this notional charge and the quarterly charges to the group.

The group would then get the benefit of the cases brought by CMC/PRs where the case was found in the firm’s favour, resulting in the lower charge than the current methodology.

Question 5 – Do you agree with the FOSs proposal to group charging of respondent firms? If not, what alternative method would you suggest?

Late Payment of Case Fes

Currently the FEES Rules set out the additional charges that the FOS would impose on firms for late payment as a ‘administrative fee’ of £250 plus interest. With the proposal to charge CMCs and PRs and differential case fees according to the FOS proposals in the consultation, they are stating that the £250 fee could be considered excessive for low value debt.

They FOS are therefore proposing amending the rules to remove the £250 fee an replacing it with a charge of ‘up to 25% of the outstanding debt’ The percentage applied would be dependent on the amount of cost/effort that the FOS have undertaken in chasing the debt.

FOS example provided:

For a £75 debt, the administrative fee might be 25% (£18.75, which may equate to up to an hour of effort by a Credit Controller). But if the debt is much higher, £10,000, then the FOS may only charge 2% (£200, which may represent the number of hours of the Credit Controllers effort, plus costs of debt recovery firms if employed).

Question 6 – Do you support the proposed method for late payment of case fees? If not, what alternative solution would you propose?

As with the FOS current fee arrangements for respondent firms where there may be exceptional cases where they must consider the fairness of a case fee. The FOS are proposing that this is also applied to individual cases where the payment of any representative fee would be inequitable, so will have discretion to reduce or remit all of the case fee in question.

Supporting all consumers

In the FOS 2024/25 Plans and Budget, they outlined their aim to improve the experience all complainants receive when they approach the FOS to resolve a dispute. To deliver fairness and quality outcomes in a matter of weeks. While they acknowledge that some complainants believe they need professional representation, that is a personal choice. The FOS believe that their service and the improvement within this proposal and in their Plan and Budget will demonstrate that anyone who contacts the FOS will receive a fair and impartial service that is tailored to their needs where possible.

Question 7 – What further measures could the FOS implement to improve their service, accessibility, and public awareness for all customers? Please provide any supporting evidence. 

Implementation of the proposals

The FOS have consulted on the appropriate implementation time for the new proposals, to reflect on the impact they could have on operating models and cashflows for CMCs and PRs. The proposed implementation and effective date is 1 October 2024, should the enabling legislation be finalised in Government. Subject to Parliamentary approval, the FOS would look to enact the proposals contained in the consultation on that date (subject to the outcome of the consultation).

Question 8 – Do you feel this is an appropriate timescale for implementation if they proceed with the proposals detailed in the consultation?

ABCULs Views – ABCUL strongly support the implementation of a case fee for all eligible CMCs and PRs. The credit union sector has seen an increasing volume of affordability claims being received by CMCs and PRs within the past five months. We do feel the £250 case fee is low considering the amount of time and resource that is placed on the responding firms and the FOS to resolve the complaints, and a higher case fee would reflect this. As part of this we would support the case fee being increased to reflect the work undertaken by credit union staff who are having to respond to the high volumes of cases being received, most of which are in bulk. We would like to propose the case fee being raised and would appreciate if members would be willing to provide us with an average cost to your credit union in relation to staff time and resources for an average case. ABCUL strongly oppose the case fee being reduced by £175 where the case outcome reached in favour of the complainant, we do not feel £175 reflects the time and resource that are spend by credit unions who are having to respond and manage these cases. We suggest that for these cases the CMCs or PRs should be held accountable for the costs associated with the time and resource used by the FOS, as the respondent firms do not receive any assistance with the costs they have incurred during the process but are then penalised when they have been found to not have caused any consumer harm. As respondents are liable for a fee no matter what the outcome of the case, albeit a reduced fee if the case is found in favour of the complainant under these proposals. We do not feel this is justified and cases where the outcome is not found in favour of the complainant and that respondent firms should not be liable to pay £475 for a case where their side has been upheld.

This consultation window will close on the 4 July 2024, all responses should be submitted by emailing consultations@financial-ombudsman.org.uk

We would strongly encourage all our member credit unions to please send your feedback to the Advocacy team on Advocacy@abcul.org  by close of business on 28 June 2024, and to also urge you to submit your own response to the consultation, as the more voices involved the louder the noise and bigger the impact we can have on a fee being chargeable to CMCs and PRs.