Ombudsman response to FC change in selling T&Cs

Hi, I have attached a copy of my appeal to the FO. Sorry it is so long and congratulations if you get to the end of it. I wondered if anyone had anything they wanted me to add before the 6th Feb?

The FO have responded as follows:

I'm sorry I didn't respond to you earlier. I wanted to first take the time to review your response to my assessment.



I've now had the time to do this and I'm sorry to say that my opinion remains unchanged.



Therefore, and as per your request, I'll now arrange for your complaint to be referred to an ombudsman to make a final decision.If the ombudsman’s conclusions are different to mine, they will explain why and let you reply before they give you their decision.

We should already have all the information the ombudsman needs to reach a decision. But if we need anything more from you, we will let you know.



What you need to do now



If you have any further points or information you want the ombudsman to consider, please send these to me by 6 February 2020.





Appeal
Further to your response to my complaint Re Funding Circle’s unilateral variation of terms & conditions I would like to appeal your decision. I have given my reasons below.



1) FC Financially disadvantaged investors.



As you say Section 16 entitles them to change the T&Cs for various reasons, only two of which are relevant to this case



FO “I think I need to start by clarifying that Funding Circle were entitled to amend their terms and conditions, and this is explained in section 16 ‘Amendments’.”


16. Amendments

16.1. We may make changes to these Investor Terms and Conditions from time to time

without your consent for any of the following reasons:

• to make changes which benefit you or do not disadvantage you;

• to change our existing products or services because of changes to technology,

systems, processes or our business policies or procedures;



I have been disadvantaged financially by the new fee.


It is a change to business policies/ procedures:

• which benefits only those not selling and continuing to reinvest

• and future investors who were not investors at the time of the term change.


It is financially damaging to those trying to exit the business and the terms above do not allow for consumers to be disadvantaged.


There is no reason that this fee could not have simply been added to new T&Cs for new investments meaning that the new policy change would disadvantage no one.


The FCA guidelines also suggest to me that use of the term in this way is to broad.

FCA FG18 / 7: Fairness of variation terms in financial services consumer contracts under the Consumer Rights Act 2015

Factors 2 - 5: The scope of the variation term

44. Variation terms should not be wider than reasonably necessary to achieve a legitimate purpose. They should also not give a firm unreasonably wide discretion to make changes to the contract, both in relation to the reasons for a change and in relation to what changes can be made. Even if there is no intention to use a variation term to reduce benefits or to require a customer to accept unanticipated costs, if the term allows it to be used in this way, it may be too broad.



2) Transparency

There seems to be little in the way of transparency as to why they have penalised existing investors who wish to exit the business.


FC Email 30/10/2019 “This will help boost returns for investors that buy both new loan parts and
loan parts listed for sale on the secondary market. We hope this will attract new customers and funds to the platform. It also brings us in line with other lending platforms although, in our case, Funding Circle does not receive any fees from any loan part sale.”





The FCA guidelines suggest to me that use of Term 16 to support growth and bring them into line with other businesses is not acceptable.



FCA FG18 / 7: Fairness of variation terms in financial services consumer contracts under the Consumer Rights Act 2015

(d) To remain competitive

51. In our view, this reason is generally unlikely to be valid because remaining competitive is not part of the costs of providing the product. Nor is it otherwise directly connected to providing the product. Also, it is unlikely to provide an objective, clear and intelligible criterion for varying the terms. Such a term is likely to lack transparency as the consumer is unlikely to understand how a firm might change the contracts in the future to reflect what other firms are doing in the market. The consumer will not be able to make an informed decision about entering a contract allowing variation on this basis as the consumer is unlikely to be able to foresee the consequences of such a term.





3) FC gave no method of determining any future Transfer Fees.



FC have amended the contract after I, the lender, had become bound by it, where no method of determining the future cost was agreed.



“FC Terms & Conditions

10.5. There is no transfer fee when you decide to sell Loan Parts.

10.6. There is no guarantee that your Loan Parts will be transferred, nor any assurance as

to how long it may take to do so.”



How was 1.25% calculated and where in the original T&Cs was a future cost or method of determining the future cost mentioned? What was to stop it being 5% or 10% or whatever suits them?


The FCA guidelines also suggest to me that use of Term 16 in this way is unfair.


FG18 / 7: Fairness of variation terms in financial services consumer contracts under the Consumer Rights Act 2015



37.As noted above, Part 1 of Schedule 2 to the CRA contains an indicative and non-exhaustive list of terms that may be regarded as unfair. This list is known as the grey list and it covers the types of variation terms (or terms similar to variation terms) listed below.

Paragraph 14 - A term which has the object or effect of giving the trader the discretion to decide the price payable under the contract after the consumer has become bound by it, where no price or method of determining the price is agreed when the consumer becomes bound



I think if you believe the change to add fees is fair you should consider if it would still be fair if they had added a 10% fee.



4) Contracts were of a fixed duration for each loan part.



The contract I signed up to was up to 5 years in length, with a “no fee” resale market, terms which I would have expected to be fixed for the duration.


The FCA guidelines also suggest to me that use of Term 16 in this way is unfair.

FG18 / 7: Fairness of variation terms in financial services consumer contracts under the Consumer Rights Act 2015

Chapter 3: Variation terms in financial services consumer contracts

35. Firms might legitimately need to make changes to their contracts in certain circumstances. However, they should always consider whether a unilateral variation term is necessary or appropriate, taking into account the legitimate interests of both parties to a contract before including it. Such terms may not be appropriate in every consumer contract. This is particularly true for contracts that have a defined, short duration where the consumer’s expectation is that the terms of the contract are usually fixed.



5) Fairness



Existing investors would not have agreed to the Transfer Fee in individual contract negotiations.



FO “I’ve also considered whether the changes were applied fairly in your case.

Having considered the new terms, I can see that you still had the option to take back the loan parts at any time if you weren’t happy to sell them under the new terms. As a result of this you would’ve resumed being bound to the loan agreement – and term – you had previously accepted. So, I don’t think that there were no options available if you weren’t happy with the terms.”


Your comment “as a result of this you would’ve resumed being bound to the loan agreement – and term – you had previously accepted” is nonsensical. I don’t believe it is essentially fair to say that by simply not selling they are same T&Cs I signed up to.


The T&Cs I signed up to had a free from transfer fees secondary market which is no longer the case, I can’t go back to that or get that any other way.
I do not think that being able to not sell is in any way “freedom to exit”.


FO “If this hadn’t been an option, then I could’ve potentially agreed that it wouldn’t be fair to apply the new terms to loan parts already in the queue. But taking into account the above, I don’t think that Funding Circle have treated you unfairly.”


FC are penalising only those who were already trying to exit the business. How is that fair?

New investors can gain by it or at least breakeven on the fee if they sell and they would be aware of and have signed up to the new terms. How is that fair on existing investors trying to exit the business?


The FCA guidelines also suggest to me that use of Term 16 in this way is unfair.


FG18 / 7: Fairness of variation terms in financial services consumer contracts under the Consumer Rights Act 2015

The fairness test

20. The CJEU’s guidance also reflects the importance of the legitimate interests of both parties. It states that, when determining whether a significant imbalance in the rights and obligations of the parties under the contract arises ‘contrary to the requirement of good faith’, the court must assess whether the seller or supplier, dealing fairly and equitably with the consumer, could reasonably assume that the consumer would have agreed to such a term in individual contract negotiations.



6) Other matters to consider

FO “In addition, there is nothing to indicate that your remaining loan parts would’ve sold. And you’ve had the benefit of having your loan parts on the secondary market - which ultimately is an optional facility that peer-to-peer lenders don’t have to provide.”


They don’t have to have a Secondary Market, but they do have one and I signed up to the T&Cs associated with it.


They could have added to the original T&Cs that the Secondary Market may be subject to fees in the future, but they didn’t.


“I also note that you were still entitled to receive accrued interest while the loan parts were listed on the secondary market. So, you wouldn’t have lost out in this respect.”


This is an IFISA product which can only be switched to another IFISA provider via Funding Circle. FC do not offer any interest on uninvested balances. Drip-feeding small amounts into the cash holding account will either require an IFISA transfer form per cycle or suffering the lack of any interest at all whilst cash is accumulated for transfer.


FO “I appreciate that you made the decision to sell your loan parts specifically because no fees would apply. But you’ve pointed out that the current queues were over 130 days. And I think it’s reasonable to say that that the new terms would act as an incentive in order to give investors more chances to sell their loan parts – and quicker.”


If you refer here to the “incentive” for new investors to sign up with FC and buy the loans, the FCA comment above, I believe, establishes that that is not a reason to vary T&Cs.



“Quicker” based on what evidence? The new sales market is selling 1% of the original balance put up for sale approximately every 5-6 days. Taking into account a repayment of capital of approximately 4% a month it is likely that this could take approximately 65 cycles or 340 days. For many that would be on top of the over 100+ days that they had already been in the queue.


At 130 days under the old method this almost trebles the original time scale to exit the business.





FG18 / 7: Fairness of variation terms in financial services consumer contracts under the Consumer Rights Act 2015

52. In contracts of determinate duration, a statement that the terms may be varied ‘for any other reason’ is generally less likely to be valid than variation terms which are limited to specified reasons. This is because it would allow the firm to amend the terms for reasons that do not strike a fair balance between the legitimate interests of the firm and the consumer. For example, it would enable the firm to increase the price simply because it wanted to increase profits. Such terms are likely to lack the required transparency as the consumer will be unable to foresee how a firm might change the contract over the lifetime of the contract or what the consequences of the change might be.

However, we recognise that, depending on the circumstances, terms entitling the firm to vary for any reason may be justified in longer term contracts if, when the contract is made, the firm reasonably considers that it cannot foresee all the circumstances that could justify varying the term. In assessing the fairness of such a wide variation term all the circumstances bearing on the fairness of the term would have to be considered, including terms regarding notice, freedom to exit, practical barriers to termination and the information provided to the consumer about the variation term. Firms should carefully consider whether such a wide variation term strikes a fair balance between the legitimate interests of the firm and the consumer. Firms should also consider how they can satisfy themselves that the consumer has been treated fairly when making changes to contracts of determinate duration.



Summary

• Whilst the Transfer Fee itself does not go to FC they freely admitted in their initial email that they hope it will “attract new customers and funds to the platform” which in turn will increase their revenue whilst decreasing mine.

• Investors have been disadvantaged financially by the new fee and the terms above do not allow for consumers to be disadvantaged.

• Claiming it “brings us in line with other lending platforms” is not a legitimate reason to vary the contract.

• FC gave no method of determining any future Transfer Fees in the original contract.

• Original contract terms were expected to be fixed for the duration.

• Existing investors would not have agreed to the Transfer Fee in individual contract negotiations.

• FC are penalising only those who were already trying to exit the business.

• There is no freedom to exit or option to terminate.

• I do not think that being able to “not sell” is “freedom to exit”.

• Investors are very unlikely to agree to changes in terms which reduce their investment potential and increase their risk.

• FC cannot claim it did not foresee the possibility of a long sales queue because it already had a clause which could reset the sale queue after 120 days.

• The reasons for the mass exodus from FC are related to risk. Poor loan management, poor due diligence, poor recovery action, poor communication. This is all within their control and varying these terms will not change that.

• The new terms do not strike a fair balance overall between the legitimate interests of the firm and the legitimate interests of the consumer.







In light of the above, I can’t say that Funding Circle’s new terms were applied fairly. I would appreciate an Ombudsman ruling on this.