The Legal Ombudsman’s (LeO) budget is set to rise for the first time since its creation – by £1m – with claims management companies not paying the case fees they have been charged the key cause and more expected to follow as they continue to go out of business.
It has also warned that once its jurisdiction over claims management companies (CMCs) is moved to the Financial Conduct Authority in 2019, LeO will cost more for the lawyers who fund it.
The budget, which has only gone down for the past seven years, is set to be £14.63m in 2017/18, exactly £1m more than in 2016/17.
Lawyers and CMCs fund their respective jurisdictions, although there are some common overheads. Within the overall figure, the cost of the legal jurisdiction will only increase marginally – because of extra costs in the ‘Modernising LeO’ programme that includes investment in new IT – with most of the extra money down to bad debt contingency in LeO’s CMC work.
At the moment, a lawyer or CMC has to pay a £400 case fee if LeO upholds a complaint, but it is waived if an ombudsman agrees that the way the lawyer or firm dealt with the complaint, and the remedy they offered, was reasonable.
In papers before last month’s meeting of the Legal Services Board, LeO said: “We have experienced a significant proportion of unrecoverable case fees in our CMC jurisdiction. Bad debt mainly arises where the firm has gone out of business by the time the complaint is brought to us or by the time it has been resolved.
“This has been a particular area of concern in 2015/16 and 2016/17 with the collapse of major firms in the sector leading to both an increase in case fees issued and immediately being classified as unrecoverable.
“We are forecasting for a number of large firms to go into liquidation in 2017/18 following the market trend, reflecting our current pipeline of cases and intelligence from the Claims Management Regulator. CMC bad debt expenses are expected to increase significantly.”
LeO said that it was not making a bad debt provision but a bad debt expense arising from writing off case fees. This reflects the fact that its rules require LeO to charge a case fee in all cases where it is chargeable, even when it is highly unlikely that LeO will be able to recover the fee, for example when a large CMC provider with multiple cases against it goes into administration.
“It is very important to explain that although the bad debt expense has increased, the case fee income for CMCs has increased by a corresponding amount; if bad debt fell, income would fall by a corresponding amount. This means that while there has been an increase in the expense, the net impact is neutral.
“We have recently concluded a call for evidence on potential changes in the scheme rules, which includes the possibility of enabling the ombudsman to waive case fees where there was little prospect of recovery. We expect to commence a consultation on changes to the scheme rules which would confirm our ability to waive case fees where there is little prospect of recovery.”
LeO is projecting that, with bad debt set to fall in following years, its overall budget would decrease significantly too.
The minutes of the LSB meeting recorded that Steve Green, then the chairman of LeO oversight body the Office of Legal Complaints, told members that the transfer of the CMC jurisdiction may lead to an increase in what lawyers pay, “as some of the overheads would no longer be shared and could not be eliminated”.
Equally, Mr Green noted that the legal jurisdiction had benefited from sharing overheads since CMCs had come within LeO’s scope.