Understanding the FOS fee proposal
The Financial Ombudsman Service (FOS) has recently proposed changes regarding the charging of fees to Claims Management Companies (CMCs) and other professional representatives. These changes are aimed at ensuring that the costs of resolving disputes are fairly distributed and to prevent the abuse of the system by entities submitting high volumes of claims without merit.
Summary of the FOS Fee Proposal
1. Introduction of Fees:
- A £250 fee for each case submitted by CMCs and professional representatives.
- The fee is reduced to £75 if the case is resolved in favour of the complainant.
- The first three cases per financial year are exempt from the fee.
- Charities, family members, and advisory organisations are exempt from these fees.
2. Rationale:
- The FOS deals with a large volume of cases, many of which are brought by CMCs and professional representatives.
- These entities often submit cases with little merit, increasing the operational burden and costs for the FOS.
- By introducing fees, the FOS aims to ensure that only well-founded cases are submitted, thereby improving efficiency and fairness in the dispute resolution process.
3. Expected Outcomes:
- Reduced frivolous claims, allowing the FOS to focus on genuine cases.
- Encourage CMCs and professional representatives to perform due diligence before submitting cases.
- Ensure that the cost of the FOS’s services is more equitably shared.
Sentinel Legal's Response
As a claimant-focused law firm specialising in motor finance mis-selling claims, Sentinel Legal strongly opposes these proposed changes. Our detailed response outlines the significant negative impacts these fees will have on consumers' access to justice and the overall fairness of the financial dispute resolution system.
Key Points of Our Opposition
1. Restricting Access to Justice:
- The introduction of fees will create a financial barrier for consumers seeking redress through professional representation.
- Many consumers rely on the expertise of law firms and CMCs to navigate the complexities of financial disputes, particularly in cases of motor finance mis-selling.
- Without professional assistance, many consumers may be unable to effectively pursue their claims, leading to a significant reduction in access to justice.
2. Economic Viability:
- The proposed fees are economically non viable for law firms and CMCs that operate on thin margins, particularly in consumer protection cases.
- The costs involved in preparing and submitting cases are already substantial, and additional fees will deter firms from taking on meritorious but potentially costly cases.
3. Imbalance of Power:
- The proposals favour financial firms by reducing the volume of claims they need to address, thereby lowering their operational costs.
- This creates an imbalance of power where consumers, already at a disadvantage, will find it even harder to challenge large financial institutions.
- The principle of “polluter pays” is undermined as the burden of costs shifts from the financial firms (polluters) to the consumers and their representatives.
4. Complex and Obstructive Processes:
- Our experience shows that financial firms often employ obstructive tactics, such as providing contradictory information or refusing to settle valid claims.
- Professional representatives play a crucial role in overcoming these barriers and ensuring fair outcomes for consumers.
- The proposed fees would discourage professional representation, leaving consumers to navigate these challenges alone.
5. Economic Non-Sense of Frivolous Claims:
- It is economically non-sensible for claimant representatives to submit frivolous claims due to the high costs involved in case preparation.
- Professional representatives already bear significant costs in procuring clients, training staff, and maintaining operations.
- Introducing fees would further discourage the submission of non-meritorious claims, contrary to the FOS’s assumptions.
6. Impact on Vulnerable Consumers:
- Vulnerable consumers, such as those with poor health, life events, low resilience to cope with financial or emotional shocks, and low numeracy and literacy capabilities, rely heavily on professional assistance to seek redress.
- Fees would disproportionately affect these consumers, making it harder for them to achieve justice and fair compensation.
The Impact on Motor Finance Claims
During the PPI scandal, 32.4 million complaints were submitted, resulting in £38 billion in redress paid out. Annually, 10% of these complaints were escalated to the FOS. If we assume a similar escalation rate for motor finance claims, the financial burden on law firms and CMCs would be significant, given the proposed £250 fee per case.
Potential Costs for Motor Finance Claims
To illustrate the potential financial impact, consider the annual motor finance contracts issued:
- 2009: 964,000 contracts
- 2010: 1,049,000 contracts
- 2011: 1,206,000 contracts
- 2012: 1,448,000 contracts
- 2013: 1,657,000 contracts
- 2014: 1,904,000 contracts
- 2015: 2,084,000 contracts
- 2016: 2,165,000 contracts
- 2017: 2,270,000 contracts
- 2018: 2,222,000 contracts
- 2019: 2,298,000 contracts
- 2020: 1,885,000 contracts
Assuming 75% of these contracts are viable for a complaint and 10% of those are escalated to the FOS annually, we can calculate the potential costs:
For example, using the 2020 data:
- 75% of 1,885,000 contracts = 1,413,750 viable contracts.
- 10% of 1,413,750 = 141,375 complaints escalated to the FOS annually.
At £250 per case, the annual cashflow cost for law firms and CMCs would be:
141,375 x £250 = £35,343,750
Even if all these complaints were upheld by the FOS, the professional firms would still need to pay the reduced fee of £75 per successful case, resulting in:
141,375 × £75 = £10,603,125
Conclusion
Sentinel Legal urges the FOS to reconsider its proposal to introduce fees for CMCs and professional representatives. The proposed changes will have a detrimental impact on consumers' access to justice, create an imbalance of power in favour of financial firms, and undermine the principle of fair dispute resolution. We advocate for a system that ensures financial firms, rather than consumers or their representatives, bear the costs of resolving disputes arising from their practices.
By maintaining a no-fee policy for professional representatives, the FOS can continue to provide a fair and accessible service for all consumers, particularly those who are most vulnerable.
Critical Questions for FOS
If the £250 fee is implemented, how will the FOS ensure they adhere to their strategic goals of:
1. Being Accessible and Easy to Use:
- The introduction of a £250 fee arguably makes the service less accessible. How will the FOS maintain accessibility for all consumers, particularly those who are vulnerable?
2. Providing Value for Money:
- FOS complaints can currently take years to reach a decision. What will complainants receive as value for money for the £250 fee, and how will this be monitored?
- If we are paying for a service, who do we complain to when deadlines are missed or the service is less than satisfactory?
3. Professional Expertise:
- What access to professional expertise will professional firms now have in return for the £250 fee?
Sentinel Legal believes these questions must be addressed to ensure that the proposed fee structure does not undermine the accessibility, efficiency, and fairness of the FOS.
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