The Financial Ombudsman Service (FOS) is currently consulting on its plans and budget for the new financial year. Though this happens every year, the proposals included this time could make a big difference to the alternative lending market in the future.
The consultation includes plans to reduce the fees and levies paid by firms and consults on whether the FOS should charge professional representatives, including Claims Management Companies (CMCs), to access the system.
Taking the case fee first, we welcome any reduction in the fee and levies firms pay. The current case fee stands at £750 (from your 4th case onwards) for any complaint taken to the FOS, regardless of the outcome. In recent times, there have been year-on-year increases, which have been particularly painful for small firms. Anything that can reduce the regulatory burden on firms will ultimately help these firms to continue to trade and protect access to credit.
We also welcome the plan to charge CMCs. The CCTA has campaigned for this as CMCs have been a significant problem in some areas of the consumer credit market. While the FCA has identified areas of concern when it comes to behaviours.
For too long, these companies have been able to access a system where they stand to gain financially, without any incentive to work in the consumer’s best interests. They currently bear none of the costs. This has led to claims of poor quality submitted repeatedly because there is nothing to lose. It has been about quantity over quality.
We have also seen these companies weaponizing the case fee, threatening to drop large batches of complaints to overload firms if they don’t settle on an earlier group of cases.
And for the consumers, using a CMC does not lead to a better outcome. The FOS’ own figures show that cases brought by these firms have a much lower uphold rate than when the customer brings directly. Their use does not lead to a higher success rate.
We believe the introduction of a fee will encourage CMCs to submit a higher-quality claim and ultimately remove bad actors. The incentive to have a business model based around mass claims is gone.
We believe that there is considerable support for the FOS to exercise its power. The UK Parliament debated and included this within recent legislation with CMCs in mind. In all those discussions, the need for these changes came from concerns about the role of professional representatives expressed to members of Parliament by their constituents.
In our discussions with consumer groups, there has also been agreement that individuals should go direct rather than use CMCs.
We encourage you to respond to the consultation if you share our views. We have seen CMCs look for opportunities to exploit different areas of the consumer credit market, and this is likely to continue and move to other markets if the system is not reformed.
More support for the proposals will mean the FOS takes them more seriously.