On 22 January 2018, the Financial Conduct Authority ("FCA") published a consultation paper ("CP18/03"), proposing that more small and medium sized enterprises ("SMEs") should be allowed to refer disputes to the Financial Ombudsman Service ("FOS"). While the consultation is not designed to cover all disputes involving SMEs, the proposals are nevertheless significant for many businesses.
CP18/03 comes at a time when regulated firms' treatment of SMEs is in sharp focus, including Parliamentary interest, following allegations that the Royal Bank of Scotland's Global Restructuring Group caused material financial distress to SMEs that was not easily remediable through the Court system.
The issues arising from lending banks' restructuring practices are also reference in CP18/03, with the FCA noting:
…complaints about the conduct of bank's turnaround divisions are already likely to fall within the Financial Ombudsman Service's…jurisdiction. Our proposals…would mean that more SMEs could refer such complaints to the Ombudsman…1
If implemented, the FCA's proposals will have wide-reaching implications across the financial services sector.
Current Regime
The FOS deals with complaints against FCA-authorised firms, and is only available once a claimant has exhausted a firm's internal complaints process.
The FOS operates two jurisdictions: compulsory; and voluntary. It can consider a complaint under the compulsory jurisdiction if it relates to an act or omission by a firm carrying on (among other things) regulated activities, lending money and ancillary banking services (DISP 2.32). The voluntary jurisdiction allows businesses to register with the FOS for certain types of complaint not otherwise covered by the compulsory jurisdiction.
The FOS's statutory remit is to resolve disputes "quickly and with minimum formality" with determinations based on what, in its opinion, is "fair and reasonable in all the circumstances of the case". It is also required to resolve disputes at no cost to the complainant, its operational costs being met by the industry through a levy and case fees paid by respondent firms.
The FOS can make financial awards against FCA-authorised firms. If a complaint is determined in favour of the complainant, the FOS can award what it considers to be fair compensation for the loss or damage suffered. It can also direct firm to take such steps in relation to the complainant as it considers just and appropriate (for example, it may direct payment of compensation for any distress suffered by the complainant). Although the FOS can recommend any amount of redress, its recommendations are only binding and enforceable up to its award limit (this is currently £150,000). Any amounts above this limit are voluntary and it is up to firms whether or not they pay the higher amount.
Under the existing regime, only individuals acting for purposes outside their trade, business or profession ("Consumers") and businesses with fewer than 10 people and annual turnover or balance sheet total of no more than €2 million ("Micro-enterprises") are eligible to refer complaints against financial services firms (Micro-enterprises have been able to do so since 2009).
FCA Consultation
"Small businesses"
The FCA is concerned that restricting eligibility to Consumers and Micro-enterprises means that many SMEs are forced to litigate in the Courts. This is an expensive and lengthy process. The FCA states:
Businesses gave us examples where simply starting proceedings for a medium-sized commercial insurance claim might cost about 5% of the claim's value. The court fee alone for starting a claim of over £10k is 5% and fees are only capped (at £10k) once the value of the claim goes over £200k…3
Therefore, there are, in the FCA's view, significant practical barriers to SMEs seeking redress through the Courts.
The FOS represents a significantly less onerous and financially risky option for Consumers and small businesses. As mentioned above, the service is free to complainants. Complaints are also generally resolved more quickly than in the Courts,
The FCA therefore proposes to amend DISP 2.7.3R to introduce a new category of eligible complainant: "small businesses". In order to qualify as a small business, each of the following three criteria must be met:
- Annual turnover of less than £6.5 million;
- Annual balance sheet total of less than £5 million; and
- Fewer than 50 employees.
Charities with income up to £6.5 million and trusts with net assets up to £5 million at the time they make a complaint to a firm would also become eligible complainants.
Exclusions
The FCA does not propose to change the rules and guidance currently set out in DISP 2.7.6R to 2.7.10G. This means that if a small business is authorised it will not be an eligible complainant if its complaint relates to regulated activities for which it also has permissions. Businesses will similarly be unable to claim if they are categorised under the Markets in Financial Instruments Directive (MiFID II) as professional clients or eligible counterparties. These client categories are reserved for more sophisticated market participants, for example banks and other financial institutions, pension funds and large corporate entities.
Even if a company satisfies the "small business" criteria, it may still be ineligible if it is part of a larger group and is therefore "likely to have access to greater resources than its size would suggest. As a result, it might not be appropriate for such a business to be able to refer complaints to the Ombudsman…" The FCA states in CP18/03 that each case will be judged on its own merits.
In other words, the FOS is there to protect the interests of more vulnerable customers.
Guarantors
Guarantors of non-corporate loans are currently able to refer their complaints to the FOS. However, personal guarantors of corporate loans who are involved in the business are generally not able to as they fall outside the definitions of both a Micro-enterprise and a Consumer.
The FCA proposes to introduce rules that will make such a guarantor a new category of eligible complainant. This will allow those who have provided a security or guarantee for a Micro-enterprise or small business to refer a complaint to the FOS whether or not they themselves are also a Micro-enterprise or a Consumer.
Compensation limit
The proposed changes will not affect the FOS' £150,000 compensation limit.
Qualifying small businesses will therefore have a decision to make. If their claim is less than £150,000, the FOS route is significantly less onerous than Court proceedings (in terms of both time and financial cost).
However, in cases where the claim exceeds £150,000 businesses need to exercise care. In the 2014 case of Clark v In Focus Asset Management [2014] EWCA Civ 118, the Court of Appeal held that complainants that accept a decision by the FOS are not entitled to "top up" that award by raising the same claims in later Court proceedings, even if they could have recovered more in those proceedings.
Timetable
The FCA proposes that the changes to DISP will come into effect on 1 December 2018. Small businesses will only be eligible in respect of complaints made to a firm, and guarantors in respect of guarantees or security given, on or after that date.
The consultation runs until 22 April 2018, with a policy statement expected in the Summer.
Footnotes
1 CP18/03, page 57 (available here)
3 CP18/03, page 9 (available here)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
