On Friday 30 November 2018, UK Finance published an industry response (the Response) to Simon Walker's review into the complaints and alternative dispute resolution (ADR) landscape for SME banking (the Walker Review – see our previous article.
The Response has subsequently been endorsed by HMT in an open letter to the APPG on Fair Business Banking published on 3 December 2018.
The response was prepared with and agreed by seven major UK banks currently operating in the market, namely Barclays, CYBG, Danske Bank, HSBC, Lloyds, RBS and Santander. It makes a number of key proposals:
- It confirms industry support for the FCA's intended expansion of the Financial Ombudsman Service's (FOS's) compulsory jurisdiction to cover a new category of Eligible Complainant of entities with turnover up to £6.5m and balance sheets of up to £5m ("small businesses") (see our article on PS18/21);
- Supports access to an appropriate voluntary ombudsman scheme for businesses with turnover of between £6.5m and £10m and a balance sheet of up to £7.5m;
- Proposes the establishment of a voluntary ombudsman scheme for eligible historical cases, where businesses have unresolved complaints which were first raised in the period 1 January 2008 to 30 November 2018; and
- Proposes the establishment of an SME Advisory Council, to oversee and maximise use of data collection from SME complaints with a view to identifying emerging trends and any areas for concern.
We consider each of these in more detail below.
Expansion of the FOS's compulsory jurisdiction
The Response confirms the industry's support for the proposed expansion of the FOS's compulsory jurisdiction set out in the FCA's policy statement PS18/21 published in October 2018, including the proposed increase in maximum financial compensation redress award to £350,000.
However, the Response states that the FOS would need to make full use of its existing powers to appropriately assess and resolve these complaints, more specifically, utilise its rights to hear in-person testimony and provide face-to-face mediation and require disclosure by businesses. So, whilst the Response supports the Walker Review's recommendation that a distinct and separate "branch" of the FOS should be set up to deal with complaints from SMEs, it also recommends that the FOS takes a fresh view of how best it can use its powers to resolve these complaints.
Access to a voluntary ombudsman scheme for larger SMEs
The Response confirms the industry's support for the Walker Review's recommendation that a voluntary scheme be established to consider complaints from SMEs that would be outside of the FOS's proposed revised jurisdiction but have insufficient resources to pursue resolution through the courts.
Whilst the industry considers the FOS would be the appropriate home for such a scheme, through further expansion of its jurisdiction, it also appreciates the various concerns that have been raised by stakeholders regarding the FOS's ability and resource availability to cover such complaints. The Response therefore confirms the industry's willingness to set up an interim voluntary ADR process to handle these complaints. The eligibility criteria for complainants would be as proposed in the Walker Review; namely businesses with up to £10m turnover and a balance sheet of less than £7.5m (at the point of complaint). The Response also supports the Walker Review's proposal that the maximum binding award for the voluntary scheme be £600,000.
A voluntary ombudsman scheme for historical cases
The Response proposes that a further voluntary "dispute resolution service" (DRS) be set up to oversee resolution of existing complaints from businesses that have not already been resolved by an independent review process relating to events between 1 January 2008 and 30 November 2018 and which have been raised with the relevant business during that period.
The DRS would have a contractually binding power to make awards of up to £350,000.
The Review sets out a series of key principles for the establishment and operation of the DRS:
- Independent leadership and governance;
- Expertise of resource;
- Independent legal expertise to support the Head of the DRS;
- Decision making on a fair and reasonable basis;
- Transparency (although initial decisions would remain private, appeal decisions would be published);
- Appeals via an "appeals panel" with a final appeal decision made by the Head of the DRS;
- Contractual powers of disclosure over businesses; and
- An approach to consequential loss based on that of the FOS.
The seven banks involved in the Response have agreed to support the establishment of the DRS to start in September 2019 and to fund it, with each bank paying a proportionate fee based on their market share of the UK business current account market.
The SME Advisory Council
The Walker Review recommended not only a focus on real-time complaints data collection and analysis but also a formal "reconciliation and closure" process between the major banks and the SME community. The Response addresses these recommendations by proposing an SME Advisory Council (the Council) be set up to identify emerging issues and trends and provide an independent assessment of how issues are being addressed. A key feature of the Council will be to facilitate personal testimony from individuals to ensure that issues are heard, understood and acknowledged.
The DRS Steering Group
In relation to both voluntary ombudsman schemes, the Response indicates that the DRS Steering Group (the Steering Group) will be established and start work in December 2018. The Steering Group will work on the creation and implementation of the review of historic complaints and the options for the voluntary ombudsman scheme.
The Response is a clear statement from the seven participating banks that they support an expanded ombudsman scheme over a financial services tribunal for more complex SME complaints. However this Response does not speak for all financial service providers operating in the SME banking market. Until other providers have confirmed their position, there is a risk therefore that the voluntary scheme set up may create a two-tier SME lending market where SMEs have recourse through a voluntary scheme if they bank with some banks, but do not have the same option if they bank with others.
The establishment of the Council is a pragmatic approach to the Walker Review's recommendations, but it remains to be seen whether SME's and other stakeholders will regard it as being truly independent.
Overall, the theme of the Response is constructive with an eagerness to implement positive change swiftly. That HMT has subsequently endorsed the view and rejected the APPG's argument that a financial services tribunal is the better format for SME complaints resolution is helpful confirmation for the industry and the FCA.
There are however elements of the Response that have only been set out at high level and there is clearly further work to be done by all parties in this rapidly developing area.