Creating a funding model for the future Innovate Finance response to the FOS Discussion Paper
About Innovate Finance
Innovate Finance is the independent industry body that represents and advances the global FinTech community in the UK. Innovate Finance’s mission is to accelerate the UK's leading role in the financial services sector by directly supporting the next generation of technology-led innovators.
The UK FinTech sector encompasses businesses from seed-stage start-ups to global financial institutions, illustrating the change that is occurring across the financial services industry. Since its inception in the era following the Global Financial Crisis of 2008, FinTech has been synonymous with delivering transparency, innovation and inclusivity to financial services. As well as creating new businesses and new jobs, it has fundamentally changed the way in which consumers and businesses access finance.
Introduction
Innovate Finance welcomes the opportunity to respond to the Financial Ombudsman Service’s (FOS) Discussion Paper on creating a funding model for the future. Our members recognise that fair and effective forms of alternative dispute resolution in the financial services sector are necessary and extremely important for ensuring good consumer outcomes. Our members are also broadly supportive of the key funding principles articulated by the FOS. With this in mind, the future funding model needs to ensure that the ombudsman can evolve over time, as appropriate, and ensure that there are no unintended consequences for small and innovative businesses.
In preparing this response, we have engaged with a diverse cross-section of our membership base, including start-up and scale-up banks and buy-now, pay-later (BNPL) providers.
Our response to the Discussion Paper has been structured in terms of broad themes. We would be pleased to discuss our response with colleagues from the FOS and / or facilitate discussions with our members and the wider FinTech community.
- Cost benefit analysis including impacts on start-up and scale-up firms
We note that the FOS has not shared its cost benefit analysis underpinning its proposals.
Our members would welcome the opportunity to review the cost benefit analysis, particularly the projected impacts on start-up and scale-up firms. This will have read across to wider competition considerations in the retail financial services market.
To the extent that FOS colleagues would find it helpful, Innovate Finance would be pleased to facilitate roundtables with our members and the wider FinTech ecosystem regarding quantitative and qualitative impacts flowing from the proposals (compared with the counterfactual).
- Desired ratio of income received from levies and case fees
Innovate Finance would welcome clarity from the FOS as to its desired ratio of income received from levies and case fees. We note that the trajectory and intended outcome was to reach a 50:50 split between levies and case fees, but this was not achievable over previous years owing to a range of factors, including the disruption caused by the pandemic. Innovate Finance considers that a 50:50 ratio would lead to unintended outcomes with firms ‘subsidising’ the poor behaviour of others.
The Financial Conduct Authority’s (FCA) Policy Statement (PS 21/7) noted, with reference to the FOS general levy (compulsory jurisdiction), that there was strong disagreement on the part of respondents to any increase in the levy. Respondents to the FCA’s consultation considered any increase to be disproportionate, and a move away from the ‘polluter pays’ principle.
Further, current FCA industry fee-block groupings are not designed to reflect any sophisticated risk-based differentiation, and the groupings do not effectively disincentivize behaviour resulting in poor consumer outcomes. Many of our members find that their innovative products and services do not fit neatly within the current fee-block arrangements as set out by the FCA, and Innovate Finance supports a move to a risk-based differentiation.
We note that the FOS decided against introducing a ‘differentiated’ levy, following consultation, with the rationale that the FCA industry fee blocks include somewhat of a ‘risk-based element’; however, our members do not consider that risk-based differentiation goes far enough. We would welcome any clarification from the FOS and FCA as to whether they would be willing to revisit this issue, particularly given the tie-in with the ‘polluter pays’ principle1.
Additionally, notwithstanding the FCA fee-block thresholds, the pace at which fees are increasing poses a significant barrier to entry for firms considering the UK as a place to business, and impacts the financial resilience of existing start-up and scale-up firms.
In light of this, we would recommend that the FOS and the FCA work together to undertake a holistic review of the approach to levies and fee-blocks.
- Case Fees
Case fees are ‘weaponised’ by some complainants and their representatives
Some of our members have flagged occasions where complainants have used the £750 case fee as a ‘bargaining chip’ to secure a higher settlement than may otherwise have been the case. A complainant may reject a fair sum of money offered by a firm to resolve an issue, and the complainant or their Claims Management Company (CMC) representative will then push for a higher sum to settle – knowing that the firm will face the £750 case fee if the matter is taken to the FOS2.
A common challenge faced by the financial services industry is that CMCs often target specific industry verticals and claim types – we have seen this play out in recent years with the significant uptick in Payment Protection Insurance (PPI) claims brought by CMCs, for example. While we appreciate that there have been regulatory interventions in the CMCs market, our members are concerned nonetheless about the potential for CMCs to latch onto firms that are soon to be brought within the FOS’ jurisdiction. For example, with the significant media interest in BNPL firms, there is a risk of a distorted and disproportionate escalation of complaints if CMCs apply the same practices to the sector as they did to PPI claims, which will ultimately impact consumers and damage their confidence in the system.
We would urge the FOS to ensure that any changes to the case fee structure do not inadvertently incentivise such behaviours on the part of complainants and CMCs.
Differentiated case fee model
There is broad support – in principle – amongst our members for the introduction of a differentiated case fee structure that takes into consideration the complexity of the case and the original sum of money involved.
As the FOS recognises in the Discussion Paper, this differentiated case fee model would have to be simple for firms to understand and implement.
We would welcome further details to be provided by the FOS on its proposed criteria for assessing the complexity of a particular case to better allow firms to evaluate the potential impact of moving away from the current structure.
Charging an initial fee at conversion
Our members did not reach a consensus view on whether the introduction of an initial fee at conversion, with an outstanding fee payable on closure, could be beneficial. There were two main viewpoints.
Some members were concerned that introducing fees on conversion, with an outstanding fee payable on closure, would introduce additional operational and cost overheads. If this proposal were to be introduced, the FOS would need to closely monitor the impact of this charging arrangement to ensure that operational and other associated costs do not become disproportionate.
Other members were of the view – noting the FOS’ c. £15m in bad debt and lost income in 2021/22 – that responsible firms were left to pick up the burden of bad debt through increases in the base contribution levy in the following years. These firms were supportive of the proposals to introduce an initial fee at conversion with an outstanding fee payable on closure.
- Bespoke approach for BNPL
Our members that provide BNPL products and services largely fall outside the scope of the FOS’ jurisdiction, and these firms are extremely supportive of being brought within the FOS’ jurisdiction. Our members recognise the role the FOS can play in delivering fair and effective forms of alternative dispute resolution.
Based on anonymised and aggregated data points from our members who provide BNPL products and services, the average value of consumer transactions is less than £65. In light of this, there will clearly be cases where the costs and other resources associated with and applied to each case could be significantly (and disproportionately) more than the value of a customer’s loan.
Given the short life-cycle and low-value nature of BNPL transactions, our members consider that there is a compelling and urgent need to explore the creation of a bespoke, proportionate approach to managing BNPL complaints that reflects the unique nature of the product and low-values associated with these complaints.
To this end, Innovate Finance would be pleased to facilitate roundtable discussions and workshops with our members, if the FOS team would find this helpful.
Additionally, we recommend that the FOS engages with the Australian Financial Complaints Authority (AFCA) that has developed a flexible, alternative solution to address the specific challenges described above. We would be pleased to connect the FOS team with the relevant AFCA counterparts, if this would be useful.
[ENDS]
1 Evidence which points to firms repeatedly delivering poor consumer outcomes and unsatisfactory handling of complainants’ claims, which would increase the uptake of FOS services by complainants, should translate to these firms paying a higher percentage contribution to the relevant levy pools.
2 Our members recognise that spurious or vexatious claims are dismissed by the FOS with no case fees becoming payable by the firm.
