In November 2015, the Financial Conduct Authority (FCA) issued a discussion paper entitled ‘Our approach to SMEs as users of financial services’. We review the key issues raised and consider the likely outcomes.
The paper follows concerns raised by both the Treasury Select Committee and the Parliamentary Commission on Banking Standards about the ability of small and medium-sized enterprises (SMEs) to gain appropriate redress. Whilst the paper seeks comments on eight questions, the two which are likely to result in the most debate are:
- Whether the eligibility criteria for accessing the Financial Ombudsman Service (FOS) should be expanded to allow more SMEs to make complaints.
- Whether the award limit of £150,000 should be increased for some or all of the SME complainants.
It is no secret that the FOS is being stretched by the sheer volume of complaints. We suspect that many respondents to the discussion paper will argue that allowing SMEs greater access to the FOS will adversely limit the availability and quality of the service to those who most require the use of it – individual consumers.
Current rules only permit microenterprises (SMEs with fewer than 10 employees and below €2 million turnover) access to the FOS. The FCA says that, of around 5.4 million SMEs in the UK in 2015, over 4 million (76%) had no employees and around 1.1 million (20%) had less than 10 employees. In other words, based on the FCA’s own figures, 96% of the SMEs in the UK would, so long as their turnover was below €2 million, be able to access the FOS under the existing rules. That leaves only around 300,000 SMEs which might benefit from any reform of this area.
On a practical level, we consider it unlikely that the addition of a further 300,000 potential complainants will result in a significant increase in the volume of complaints.
An increase of the current cap from £150,000 is likely to have a much more significant impact, if approved, on the basis that larger turnover SMEs are likely to have claims that would exceed the current cap.
The FOS was set up to provide a quick dispute resolution service which focused on perceived fairness and did not require any proper interrogation of the facts and evidence or strict application of the law. However, there has to be a balance between a consumer’s right to access a quick, cost-free resolution service and a defendant’s ability to defend itself within the court environment, where there is a more rigorous investigation and the proper application of the law.
Given that the FCA accepts that the management and financial capabilities of SMEs increases with rising business turnover, there seems to be no proper basis on which to have a cap which is higher for SMEs than it is for consumers.
The discussion paper identifies a number of examples of poor outcomes and detriment experienced by SMEs. The majority of these arise from the higher profile mis-selling of banking products. Issues are also identified in the insurance context following the thematic reviews into conflicts of interest amongst general insurance intermediaries and the general insurance claims made by SMEs. To this end, the FCA is also considering the extent to which its rules should be more consistent across the products and services used by SMEs, the development of voluntary codes of practice and the issuing of guidance on dealing with SMEs.
Whilst it seems likely that the FCA will agree to expand the eligibility criteria of the FOS to include all SMEs, we do not see that there is any basis for there to be a differential between the cap for SMEs and the cap for consumers. However, given that the cap was last increased in 2011 from £100,000 to £150,000, the risk is that the FCA will simply choose to increase the cap across the board (although this is not something which is proposed in the discussion paper).
The deadline for responses to the FCA’s discussion paper is 18 March 2016.