Simon Walker CBE has today released his widely anticipated report on the complaints and alternative dispute resolution (ADR) landscape for the UK SMEs (the report).
The report, commissioned by UK Finance in March this year, follows a lengthy period of consultation with a variety of industry stakeholders as well as a detailed review and analysis of complaints data voluntarily provided by firms. It was supported by Professor Christopher Hodges, Professor of Justice Systems, from the University of Oxford and Professor Robert Blackburn, Director of the Small Business Research Centre at Kingston University.
The report’s key findings are as follows:
- While there has been a measurable drop off in the number of complaints since the financial crisis, reflective of the cultural change in the UK banking industry, there remains a level of distrust amongst SMEs towards banks;
- The prohibitive costs for an SME to pursue their claims through the courts where the Financial Ombudsman Services (FOS) does not have jurisdiction to hear them leaves a gap in access to dispute resolution for SMEs;
- The FCA’s intended expansion of the FOS’s jurisdiction to incorporate “small businesses” - a newly defined category of eligible complainant – together with its proposed increase in the FOS’s maximum award for financial compensation to £350,000 will go some way to filling that gap and is fully supported by Simon Walker, but an additional mechanism would be required for those complaints that fall outside the proposed extended jurisdiction for the FOS;
- A financial services tribunal system would require legislative change (which realistically would not be quickly achieved given Brexit's hold on parliamentary time); the costly involvement of legal representation; and be limited to a strictly legal-based assessment approach. An ombudsman-style mechanism would, in contrast, be quick to set up, cheap and efficient at resolving complaints and could deploy a more suitable "fair and reasonable" approach to assessment.
In response to the report’s findings, Mr Walker makes several recommendations, aimed at drawing a line under legacy issues still being faced by the UK banking sector and providing access to appropriate dispute resolution forums for SMEs. These are:
- Banks should agree a voluntary jurisdiction for a new branch of the FOS to consider future complaints brought by SMEs with turnovers of between £6.5m and £10m;
- Banks should also consider an additional voluntary jurisdiction to cater for legacy disputes brought by SMEs in the wake of the financial crisis (subject to the FOS's usual limitation periods). This would be restricted to disputes where the SME has already lodged a formal complaint and where external determination of that dispute has not been made;
- A process be agreed which provides an opportunity for representatives from the APPG on Fair Business Banking to present their stories from SMEs to senior management of the major UK Banks, who would then have the chance to (empathetically) respond "expressing regret and committing themselves to an era where those situations will not be repeated";
- Banks should address the contractual imbalance between Banks and SMEs including potentially prohibiting calling in debt on the basis of loan-to-value covenants where all payments have been kept up to date; and
- Banks should commit to not selling debt to institutions that are not signatories to the Lending Standard's Board or do not agree to maintain equivalent standards.
An ombudsman system rather than a tribunal
The APPG and others have long advocated the creation of a financial services tribunal system as the most appropriate way of resolving disputes that fall between the FOS and the courts. However, Mr Walker's view is that a tribunal system would have a number of key disadvantages. First, it would be costly for SMEs given its inevitable involvement of legal counsel. It therefore fails to address the imbalance in "legal firepower" that prevents the courts from being a suitable forum for many SMEs. Secondly, it would necessarily determine disputes in accordance with relevant legal principles. In Mr Walker's eyes, this would not be appropriate, as many valid disputes concern conduct within the terms of the contractual relationship between the parties but which is none the less unreasonable. Finally, the establishment of a tribunal system would not be quick, in particular given legislative change would be required at a time when Parliament is largely consumed by Brexit issues.
The report therefore favours an ombudsman-style approach, which would require no legal representation, be quick to set up and assess complaints on a "fair and reasonable" basis. Leveraging off the FOS's existing infrastructure and legal framework, but at the same time acknowledging the FOS's existing focus on individual consumers, the Report recommends that the FOS is effectively split out into two separate services: one for consumers and one for SMEs. This new banking ombudsman would deal with complaints from SMEs which fall within the FOS's expanded jurisdiction under PS18/21 (as well as existing micro-enterprise complaints) but the Report additionally recommends a voluntary extension of that jurisdiction. The new facility would be supported by a specialist SME advisory board and include detailed reporting procedures and requirements.
Mr Walker and Professor Hodges have given evidence this morning to the Treasury Select Committee (the Committee) on SME Finance, which primarily focused on the Report's recommendations for legacy complaints and its departure from a tribunal system, even for larger complaints, which had been favoured by the regulator and the APPG. Mr Walker responded to questions supporting a tribunal service indicating that he had decided against it to eliminate the need for lawyers in the process; reduce the creation of further legal precedent; and to enable decisions on a "fair and reasonable" basis.
In terms of the legacy issues, the event proposed in the report to provide "closure and emotional release" for SMEs arguably adds little. However with distrust still existing with SMEs towards Banks, Mr Walker sees it as an important, high profile event where Senior Management can publicly acknowledge their hurt. This he hopes will enable both the SME community and the Banks to draw a line under past behaviours and move forward in a positive fashion.
The new banking ombudsman facility is a departure from the tribunal system that many were arguing for and is perhaps the most controversial aspect of the report. Concerns had already been raised by various parties, following the FCA's proposed extension to the FOS's jurisdiction, including its capability to deal with the more complex complaints that will be received from SMEs which have not been addressed by the Report. There will also inevitably be a lack of clarity as to what the FOS will consider to be "fair and reasonable" when it does start to consider complaints.
There are a couple of other smaller points in the report which are worth noting. Firstly, Mr Walker's view is that the proposed increase of the FOS's limit for financial compensation to £350,000 (see CP18/31) is not sufficient in the long term and should be increased to £600,000. Secondly, while the Report stops short of supporting the APPG's proposal that the right for a private person to take action under s.138D of FSMA claims be extended to SMEs, favouring a quicker fix instead, it does say those changes should be kept under review which is a further indication of the likely regulatory direction of travel.
If the recommendations of Mr Walker’s report are accepted and ultimately implemented, then they will transform the SME complaints landscape in the UK. Firms will need to commit significant resource to dealing with complaints falling within the new voluntary jurisdiction. However if the proposals do enable all parties to move on from legacy issues then they will hopefully enable Banks and SMEs to return to business as usual at a time of significant economic turbulence ahead of Brexit.