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FOS proposes major reform as costs soar

Advisers asked for views as cost is set to rise to 4.6m

The Financial Ombudsman Service is proposing two altern- ative funding systems – an entirely levy-based system or a pay when guilty system – as it predicts a 4.6m rise in costs to firms for 2006/07.

It is asking firms whether they would prefer a new model to replace the unpopular funding system which combines a levy with charging per case whether firms are guilty or innocent over and above the first two free cases.

It is also asking IFAs and life offices for their views on introducing a provider cross-subsidy.

The FOS says the levy for a typical three-partner firm will increase by 40 per cent from 75 to 105 if the funding system stays the same.

With 75 per cent of funds coming from case fees and 25 per cent from the levy, imposing a 100 per cent levy would mean advisers paying more. Experts predict that the current fee for the average three-partner firm would rise by up to 20.

But commentators have voiced concerns that removing the polluter pays principle could cause spiralling levies in subsequent years as advisers dump more cases onto the ombudsman as a cheaper way of complaint handling.

An alternative is to charge only guilty firms a case fee and exempt innocent firms. With around one in four complaints against IFAs upheld, advisers found guilty of misselling could pay case fees of over 1,000.

This could also mean a complicated scaled funding sys- tem for cases upheld in part.

Both main proposals would also involve scrapping the rule of two free cases which curren- tly protects 95 per cent of firms from having to pay a case fee.

The FOS has also raised the possibility of providers subsidising IFA-related costs and is seeking feedback from the industry.

FOS spokesman David Cresswell says: “Advisers have to engage in the debate and come up with a consensus on the best way forward. There is no point going forward with the lesser of evils. If we are going to change the way that FOS is funded, it has to be a better system.”

Aifa deputy director gen- eral Fay Goddard says: “IFAs cannot continue to pay time and time again to prove their innocence.”

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