The Financial Ombudsman Service is to summon the FSA to elevate the industry levy if firms stop co-operating with PPI complaints.
The FOS says this could cost the ombudsman up to £30m, well in excess of its £14m reserves for the 2010/2011 financial year.
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 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 plans to reduce its unit cost to below £600 next year, involving a cost-saving exercise to cut its cost base by around 10%.
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.
The FOS 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.”
The FSA’s levies consultation paper is expected in February 2011.