By Nick Baxter
7th December 2015

The 2016-2017 Legal Ombudsman [LeO] Claims Management Company fees consultation has been released. Although, actually it is not much of a consultation! Frankly, it’s more of a final demand, which makes the contents all the more unsatisfactory and odd. Those who operate in various sectors of financial services are used to being, and expect, to be consulted on matters such as this. The Financial Conduct Authority [FCA] always consults on such matters. The Financial Ombudsman Service [FOS] always consults on such matters. Also the Claims Management Regulator [CMR] consults on such matters, as they are now in respect of their 2016 fees.

Are fees and costs justified as complaints projection is much lower?

Worse than the lack of consultation, is the level of the second year increase in fees despite the fact that the first year complaint predictions were vastly over estimated. To be clear, the original LeO fees framework predication was based on investigating 3,000 complaints a year. However, the first LeO update, based on the first six months of accepting CMC complaints shows that only 648 complaints were accepted for investigation by the scheme. Maybe with some increased publicity (although LeO and product providers have already spent significant sums promoting the service) that figure will increase slightly in the second six month period, but it still looks like the total annual cases investigated will only be around half of the figure on which the prediction which determined the original fees was based.

The fees levied should be open to proper scrutiny!

Let’s be clear, any level of complaints or dissatisfied customers, is of a concern and where the complaint is valid and there has been consumer detriment, the consumer complaint should be thoroughly investigated and the consumer compensated as is appropriate. However, the cost of any redress scheme should be open to proper scrutiny and provide value for money. It may be a simple and crude calculation, but the 2016-2017 LeO fee demand shows LeO intend to “recover from fees around £2.3m” and that would suggest a cost of over £2,000 per investigated case including the case fee of £400. This appears to be a rather a large sledgehammer to crack the nut. It is not, therefore, surprising that there are those who are starting to question whether the scheme is providing value for money.

Do case fees ensure the “polluter pays”?

It is a recognised Ombudsman (in all Ombudsman schemes) belief that case fees support what has become known as the “polluter pays”. This theory is widely accepted as it is thought that firms which provide poor service or do not handle complaints well, should not be cross-subsidised by other firms and the case fee provides an incentive for poorly performing firms to improve. But it is not the case that the “polluter pays” if the costs of a scheme are unfairly weighted against large firms despite the fact that it is those large firms who are most likely to employ qualified and professional staff. Staff and processes at well run professional firms often include legal executives, ex independent financial advisers and qualified mortgage brokers, compliance teams, compliance systems and training departments. PFCA members undertake to undergo independent compliance Audits on an annual basis. As such, they already ‘pay’ by taking on additional costs that less professional firms often avoid.

Large firms are punished – £30,000 per case!

The question is, are such large professional firms punished under the LeO scheme? I think they are. By way of an example, one large CMC firm I know will pay a capped LeO fee in 2016-2017 of £59,950 (a 49% increase on its 2015-2016 fee) and they have had 2 complaints investigated – a cost of over £30,000 per case when including the £400 case fee. So the principal that the “polluter pays” does not really work in practice under LeO.

Fair and equitable ways to fund the service must be considered

Let’s be clear, CMC customers need an independent third party Ombudsman type service to act as an umpire between the customer who continues to feel they have been wronged after the CMC has exhausted their internal complaints procedures and found against the consumer. There needs to be an Ombudsman scheme that can step in and arbitrate. Let’s also be clear that the CMC industry respects LeO and the way they go about their business. In a very short space of time, LeO has built a strong working relationship with many CMCs and has provided the industry with robust good practice guidance. But it is also important that an open debate/consultation is undertaken to consider fair and equitable ways to fund the service. In future a consultation rather than a demand would help to further foster a good working relationship between the LeO and CMCs.