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 are able to access ﬁnance.

Introduction

Innovate Finance welcomes the opportunity to respond to the Financial Ombudsman Service’s (FOS) Consultation Paper on its 2023/24 Plans and Budget. 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 2023/24 Plans and Budget must ensure that the Ombudsman can evolve over time, as appropriate, and ensure that there are no unintended consequences for small and innovative businesses.

Innovate Finance and our members have welcomed the open and constructive dialogue with FOS colleagues over previous months, and we look forward to building on this engagement. This engagement has primarily had a focus on better understanding the FOS’s approach to ﬁrms and sectors that are not currently within scope of the FOS jurisdiction. We note that the FOS feedback statement, which followed its earlier discussion paper on future funding, and the consultation paper do not provide any detail as to the current thinking about how the FOS may approach these sectors. We would therefore urge the FOS to provide advance sight of its approach to sectors currently outside of the scope of its jurisdiction and continue to engage with industry, so as to mitigate the risk of any unintended consequences for FinTechs operating in the UK.

In preparing this high-level response, we have engaged with a cross-section of our membership base including start-up and scale-up banks and buy-now, pay-later (BNPL) providers. Our response focuses solely on questions four and ﬁve regarding budget proposals.

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.

Consultation questions and responses

Question 4: Do you agree with our funding proposals? Question 5: Do you support our proposed budget for 2023/24?

No cost beneﬁt analysis considering the impacts on new market entrants and existing start-up and scale-up FinTech ﬁrms

In our response to the earlier discussion paper on the future funding model for the FOS, we noted that the FOS did not publish a cost beneﬁt analysis supporting the proposed changes to its funding. In light of this, we recommended that the FOS publish the quantitative and qualitative impacts ﬂowing from its proposals – particularly the impacts for new market entrants and existing start-up and scale-up FinTechs operating in the UK – alongside the forthcoming consultation paper.

It is disappointing therefore to note that no cost beneﬁt analysis has been shared which supports the rationale for proposals in the consultation paper on the 2023/24 Plans and Budget.

Our members remain concerned about the impact of the FOS’s proposals on start-up and scale-up ﬁrms, particularly ﬁrms that are yet to be brought within the FOS jurisdiction and are oﬀering innovative products and services in a safe and responsible way for the beneﬁt of consumers and businesses. This includes ﬁrms oﬀering BNPL products and services who are concerned that – without a proportionate and bespoke model applied by the FOS (see further below) – the proposed FOS funding model and ‘weaponisation’ of case fees by some complainants and their representatives threatens the ﬁnancial resiliency of ﬁrms.

Bespoke approach for BNPL is required

Our members that provide BNPL products and services largely fall outside the scope of the FOS’s jurisdiction, and these ﬁrms are extremely supportive of being brought within the FOS’s jurisdiction and the wider UK regulatory perimeter. Our members recognise the role that 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, we shared in response to the earlier discussion paper that the average value of consumer transactions is less than £65. In light of this, we ﬂagged that there clearly will 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, we would reiterate 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.

While Innovate Finance and our members that oﬀer BNPL products and services welcome the recent open and constructive dialogue with FOS colleagues, we would urge the FOS to give the BNPL sector early sight of its thinking around the approach it will take to the sector.

We note that, as of our last engagement with the FOS in November 2022, the FOS had not yet considered the approaches of other jurisdictions in relation to BNPL. In our response to the discussion paper, we recommended that the FOS should engage with the Australian Financial Complaints Authority (AFCA). The AFCA 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.

Future funding beyond 2023/24

We note that the FOS trailed in its feedback statement that some proposals raised in the discussion paper will be consulted on at a later date, outside of the scope of the consultation on its 2023/24 Plans and Budget. To assist with FOS engagement planning with industry, and the shaping of forthcoming consultations, we oﬀer the following reﬂections from members in light of the direction of travel set out in the feedback statement.

Desired ratio of income from levies and case fees

In our response to the discussion paper, we called for greater clarity from the FOS as to its desired ratio of income received from levies and case fees. We welcome that the FOS signalled in its feedback statement the intention to consult on its approach in the coming year, and we echo our previous comments that the ‘polluter pays’ principle¹ should be central to the thinking around FOS levies and case fees.

As previously stated, our members are of the view that current Financial Conduct Authority (FCA) industry fee-block groupings (which decide the levy costs of individual ﬁrms) are not designed to reﬂect any sophisticated risk-based diﬀerentiation, and the groupings do not eﬀectively disincentivise 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.

In its feedback statement, the FOS acknowledged the concerns raised regarding FCA industry fee blocks and stated that they are a matter for the FCA to address, noting that FOS had shared.

feedback with FCA colleagues. While we recognise that it is not within the FOS’s gift to review FCA fee blocks, our members consider that both the FOS and FCA are in a position to work together to undertake a holistic review of the approach to levies and fee-blocks. Therefore, we would urge greater collaboration between the FOS and the FCA to address our members’ concerns.

Case fees are ‘weaponised’ by some complainants and their representatives

The FOS feedback statement alluded to our members’ experience of complainants and Claims Management Companies (CMCs) using the £750 case fee as a ‘bargaining chip’ to secure a higher settlement than may otherwise have been the case.

A common challenge faced by the ﬁnancial services industry is that CMCs often target speciﬁc industry verticals and claim types. We cited Payment Protection Insurance (PPI) claims brought by CMCs, by way of example, in our response to the earlier discussion paper.

With this previous CMC behaviour in mind, and notwithstanding the regulatory interventions in the CMC market, our members remain concerned by the potential for CMCs to latch on to ﬁrms that are soon to be brought within the FOS jurisdiction and wider UK regulatory perimeter. 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 note the FOS’s constructive challenge to industry, in relation to the lack of substantive data points that supports the ﬁnancial services sector’s assertions regarding CMC activity, and we will continue to share evidence with the FOS to support our viewpoint. In the context of BNPL, our members are extrapolating from past trends, such as PPI cases.

In considering increases to the case fee in line with inﬂation amongst other changes, we would urge the FOS to ensure that any future changes to the case fee structure do not inadvertently incentivise problematic behaviours on the part of complainants and CMCs.

Diﬀerentiated case fee model

As noted in our earlier response to the discussion paper, 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.

We welcome that the FOS is open to considering a move to a diﬀerentiated case fee model and will be undertaking modelling over the next twelve months to support the proposed approach. We would urge the FOS to engage with a diverse set of stakeholders across industry as it reﬁnes its approach to a diﬀerentiated model, and we would recommend that the FOS pilots its approach to get real-time industry feedback before formally implementing the new approach.

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, which are set out below for ease of reference.

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 scale of bad debt and lost income for the FOS 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.

Despite the lack of consensus, our members welcome that the FOS intends to review the viability of charging an initial fee at conversion for the 2024/25 budget cycle. We would encourage the FOS to engage with a wide range of stakeholders to ‘stress test’ proposals and ensure there are no unintended consequences for FinTechs.

[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.