FOS warns PPI review may exhaust reserves

10 January 2011 12:34 pm | By Natalie Holt

The Financial Ombudsman Service will call on the FSA to increase the industry levy after warning its reserves would be exhausted within six weeks if firms decided to stop co-operating on payment protection insurance complaints.

In its consultation on its annual plan and budget for 2011/2012, published today, FOS chief ombudsman and chief executive Natalie Ceeney (pictured) says the £500 case fee and the total levy paid by the financial services industry will be frozen.

But the ombudsman also reveals it plans to ask the FSA to set a levy that covers both the total levy for 2010/2011 and any necessary boost needed to its reserves as a result of the British Bankers’ Association judicial review.

A FOS spokeswoman says the FOS will recommend to the FSA that the additional levy be attributed to the fee block that generates most of the FOS’ workload. For PPI, this would be the banks and other PPI providers.

She says: “We are trying to get an idea of the workload we are likely to receive. The FSA generally apportion the levy on where the workload is coming from. That is what we are recommending in this case.”

Case fees provide 80 per cent of the ombudsman’s funding, with the remaining 20 per cent provided by the industry levy.

The BBA launched a judicial review of the FSA’s complaint handling measures for PPI in October.

The trade body requested a judicial review of the measures, and some decisions made by the FOS, from the High Court.

In its consultation on its annual plan and budget for 2011/2012, the FOS says the review adds “significant uncertainty” to its plans and forecasts.

The FOS says: “We may not know the final outcome of this legal action much before the end of the 2011/2012 financial year. This means we could face some extreme, but far from implausible, operational and financial scenarios which might result in our incurring substantially increased costs with far lower income.

“For example, if financial businesses were to decide to suspend cooperation on PPI cases as a result of the legal action, our loss of income from case fees in just one month could lead to an operating monthly deficit of up to £4m. This would exhaust our reserves within six weeks.”

The ombudsman says this could cost the FOS between £10m and £30m, well in excess of its £14m reserves for the 2010/2011 financial year.

The FSA’s levies consultation paper is expected in February 2011.

In response to the BBA’s request for a judicial review in October, the FSA urged banks to continue processing PPI complaints.

But Lloyds Banking Group decided to stop handling PPI complaints and instead seek clarity from the FSA and the FOS over the review.

The latest complaints data from the FOS shows that between January 1 and June 30, 2010 the FOS dealt with 22,420 complaints relating to Lloyds. Some 12,750 cases related to Lloyds TSB Bank, with 8,474 cases concerning general insurance policies, including PPI, sold by the bank.

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