FCA seeks to widen access to FOS for small businesses – the most significant expansion of FOS jurisdiction in many years
FOS resolves individual complaints between financial businesses and their customers (eligible complainants) and is free for eligible complainants. Under the current rules, the businesses eligible to complain to FOS are micro-enterprises with fewer than 10 employees and either a turnover or a balance sheet of no more than €2 million. Businesses that do not fit this specification have limited options when harm has been suffered and are often left to resolve complaints via the courts.
The FCA has recently issued a consultation paper which proposes (amongst other changes) to substantially widen this eligibility for small and medium sized enterprises (“SMEs”) and estimates that this will allow more than 80% of the approximately 200,000 SMEs who are not currently eligible to access FOS.
What is an SME and what is the purpose of the consultation?
SMEs are businesses employing under 250 staff, or with an annual turnover of under €50m. Traditionally, regulators, the courts and the law have treated SMEs differently from individual consumers because they generally have greater resources and experience and their owners often have limited liability. But not all businesses are the same and the FCA has recognised that many SMEs are akin to individual consumers when buying or using financial products. However, when things go wrong, individual consumers have a variety of options open to them which includes referring a complaint to FOS, whereas SMEs do not, and instead have to rely primarily on the courts which can be a very expensive and time consuming process.
In light of the above, in November 2015, the FCA published a Discussion Paper ‘Our approach to SMEs as users of financial services’ which reviewed the regulatory protections available to SMEs. The analysis and feedback confirmed that many SMEs struggle to resolve disputes with financial firms and seek redress. This consultation follows the Discussion Paper and makes a number of proposals which seek to address the position and strike a fair balance between providing protection for SMEs and avoiding unnecessary requirements on financial firms.
Proposed changes under the consultation
The FCA’s proposals include amending the scope of FOS’ compulsory jurisdiction to:
- Introduce a new category of eligible complainant into DISP called ‘small businesses’ so that small businesses may refer complaints to FOS. In order to constitute a ‘small business’ all 3 of the following criteria must be met: (i) an annual turnover of less than £6.5m; (ii) an annual balance sheet total of less than £5m; and (iii) fewer than 50 employees.
- Amending DISP so that charities with income up to £6.5m and trusts with net assets up to £5m at the time they make a complaint to a firm would also become eligible complainants for the purposes of referring complaints to FOS.
- Introducing another new category of eligible complainant into DISP to cover a guarantor. This will allow those who have provided security or guarantee for a micro enterprise or small business to refer a complaint to FOS whether or not they are also a ‘micro-enterprise’ or a consumer.
Other points to note
- The proposal does not change the exclusions in DISP 2.7.9R which already apply to micro-enterprises. This means that a small business which is an authorised firm would not be an eligible complainant if its complaint is about regulated activities for which the firm also has permissions, or if the complaint is about activities where the business is acting as a professional client or eligible counterparty.
- The FCA did consider whether to consult on higher thresholds for ‘small businesses’ to widen the access proposed but ultimately considered that firms above the small business threshold should be adequately sophisticated and resourced to protect their interests in disputes with financial firms.
- The FCA also considered whether to increase the limit on awards that FOS can currently make (£150,000) given that businesses tend to have higher value complaints but declined to do so. The aim of FOS is to provide quick and informal redress and there is no right to appeal a decision outside of judicial review. If the award limit was to be increased then it might be appropriate to give financial firms a way to appeal decisions and financial firms might expect the decision making and investigation process to more closely resemble those of a court. The FCA has no power to make these fundamental changes to FOS’ process and in any event, the costs of investing in FOS’s skills and specialisms which might be required would have to be borne by the industry and ultimately its consumers.
Overall, the consultation is good news for SMEs who under the proposals will be granted access to FOS - a far less formal adjudication forum which makes decisions on what is fair and reasonable rather than on points of law. Even those businesses that will remain illegible based on size alone (an estimated 40,000) are likely to see a benefit as the more business complaints FOS deals with – the more range of decisions financial services firms will need to take into account which will ultimately feed through to how financial firms deal with all business customers regardless of whether they are eligible complainants or not.
SMEs may consider that the proposals may not go far enough. Many eligible SMEs may find that FOS cannot deal with their complaint after all if it is high value (in excess of £150,000). Although the FCA has chosen not to increase FOS’ award limit, it does recognise that the award limit would have to be increased very substantially if it was to make a material difference to the position of SMEs with high value disputes.
For financial firms, these proposals might not be so welcome. Whilst the FCA is optimistic that in the long run the number of complaints will fall because financial firms will take into account determinations when creating new products and dealing with complaints and business customers (ultimately improving financial services) – this may be too optimistic and in the short term at the very least complaints are likely to increase which will also lead to an increase in case fees for financial firms. For both sides, there will also be a concern that an increase in complaints will also increase the time taken to resolve complaints unless FOS increases its resources.
Financial firms may also have concerns that the extended jurisdiction will lead to more complex complaints being dealt with by FOS. Existing concerns around consistency of decision making and the depth of expertise and analysis of complex complaints will be heightened. If SMEs are not happy with decisions made by the FOS, they are still able to go to court. This option is not open to financial firms which means the quality of the decision making by FOS is critical.
It is proposed that the changes to DISP should come into effect on 1 December 2018. Adding small businesses as eligible complainants will apply only to complaints made to a firm for its actions or failure to act that occurred on or after 1 December 2018. Adding guarantors as eligible complainants will apply for guarantees or security given on or after the same date.
Responses to the consultation are due by 22 April 2018.