The FCA yesterday released its policy statement (PS18/21) on SME access to the Financial Ombudsman Service (FOS), setting out its near-final rules for amending the compulsory jurisdiction to include new definitions for "small businesses" and "guarantors".
At the same time, it has released a new consultation paper (CP18/31) detailing proposals for increasing the FOS's award limit.
The policy statement
PS18/21 follows on from the FCA's consultation paper (CP18/3) released in January this year. It summarises the industries responses to that consultation and the FCA's comments on those, including where and how they have tweaked the proposals in CP18/3 to address specific concerns.
In summary, the policy statement confirms that:
- Access to the FOS will be extended to "small businesses" with an annual turnover of £6.5m or below and either fewer than 50 employees or an annual balance sheet below £5m;
- The final rules will only be implemented if the FCA is satisfied that the FOS can adequately address concerns around its resourcing and capabilities to deal with the expanded jurisdiction;
- The FOS will set up a ring-fenced unit to specialise in handling SME complaints;
- The final rules will be published before the end of 2018 with the intention they come into force on 1 April 2019;
- The new rules will only apply to acts or omissions by firms that take place after 1 April 2019.
Expansion of jurisdiction
The definition of "small business" has been slightly relaxed from that included in CP18/3, no longer requiring complainants to have fewer than 50 employees and an annual balance sheet under £5m. The FCA estimates that this new definition of eligible complainant under the DISP Rules will open up access to the FOS for around 210,000 additional SMEs.
Several industry responses to CP18/3 made comments regarding whether this expansion went far enough in terms of offering protection to small businesses. PS18/21 reiterates the FCA's support of a financial services tribunal (which is preferred by the All Party Parliamentary Group on Fair Business Banking (APPG)) for more complex and higher value complaints from SMEs and states that such a system would sit well with the expansion of the FOS's jurisdiction, together covering an appropriate cross-section of SME disputes. However, it notes that the FCA does not have the power to set up such a tribunal system, which would require legislative implementation.
The FOS's proposals
The policy statement includes the FOS's thoughts on how it intends to manage the complaints from eligible complainants. That includes setting up a ring-fenced, specialist unit to deal with SME complaints, supported by dedicated SME specialists and ombudsmen, as well as external advisors and a dedicated legal function.
Near-final rules and implementation date
The FCA has taken the view that by publishing near-final rules now, followed by final rules in December and implementation in April next year, it allows the FOS adequate time to prepare for the additional volume and complexity of complaints it expects to receive as a result of its expanded jurisdiction.
Mindful that one of the main themes in the responses to CP18/3 was concerns about whether the FOS had sufficient resource to cope, the FCA has set the timetable for implementation to allow it time to consider the FOS's draft business plan and budget for 2019-20. This timing also allows the FOS time to progress work towards meeting the recommendations that came out of Richard's Lloyd's recent independent review of it, which was prompted by the Channel 4 Dispatches programme aired in March 2018.
If the FCA is not satisfied that the FOS has adequately resourced and prepared to handle these new complaints, then it will delay publishing the final rules and the implementation date.
Finally, the FCA has taken the view that, given the proposed changes, the new rules should only apply to complaints concerns acts or omissions that occur from the implementation date, which is currently intended to be 1 April 2019.
Consultation on award limit
In parallel with the release of PS18/21, the FCA has also released a linked new consultation paper (CP18/31) on raising the award limit of the FOS from the current £150,000 to £350,000 from the date the extension of its jurisdiction would come into force. In the interim, the limit would be raised to £160,000. CP18/31 also proposes that the FCA regularly review the limit which would automatically be adjusted in line with inflation.
The consultation on CP18/31 is open to firms until 21 December 2018.
PS18/21 doesn't contain any huge surprises when read in conjunction with CP18/3. However, it comes at a time when the future handling of SME disputes is being widely debated, with the industry awaiting the publication of Simon Walker's UK Finance-commissioned report, the APPG continuing to put political pressure on the industry and Government to increase regulatory and legal protection for the SME industry and major remediation projects continuing to dominate the business banking landscape.
By pushing back the implementation date from the end of this year to April 2019, the FCA has given the FOS breathing space to upskill its employees and find an appropriate way of resourcing and managing its extended jurisdiction to ensure complaints are dealt with fairly and in a timely manner. It also allows firms to consider on a more informed basis how their own complaints functions may need to adapt.
One of the most interesting themes coming out of the policy statement is FCA's re-affirmed support for a financial services tribunal system for more complex or high value complaints outside of the FOS jurisdiction. There remains significant debate about the merits of such a system which if brought in would represent a significant change to the landscape for the resolution of claims and complaints by SME's.