Financial services companies may face more disputes with SMEs. In consultation paper CP18/3, published on 22 January 2018, the FCA has proposed to extend access to the Financial Services Ombudsman to small businesses, charities and trusts that meet certain thresholds.
Financial Ombudsman Service
The Ombudsman provides a free and independent dispute resolution service. It considers disputes about financial products and services regulated by the FCA. It can also consider disputes about some financial products and services not regulated by the FCA, including lending to businesses.
The need for change
Currently, only consumers and the smallest businesses (micro-enterprises, small charities and trusts) can refer complaints against banks and other financial services providers to the Ombudsman. Micro-enterprise is an EU-term and these businesses have fewer than 10 employees and either turnover or a balance of no more than €2 million. Guarantors of non-corporate loans are able to refer their complaints to the Ombudsman. However, personal guarantors of corporate loans who are involved in the business are generally not able to as they would fall outside the definitions of "micro-enterprise" and "consumer".
The reason that larger businesses do not have access to the Ombudsman service is that they generally have greater resources than individual consumers, their owners often have limited liability and they have more bargaining power to negotiate contract terms with large financial firms.
After publishing a discussion paper in 2015 on the regulatory protections available to SMEs, the FCA identified that many SMEs do not have the means, expertise and resources for resolving complaints and seeking redress. It found that many SMEs using financial products behave similarly to individual consumers and can experience harm in similar situations. This is often due to gaps in the protection that regulation provides, including access to redress. When things go wrong only a very small proportion of SMEs take their disputes with financial services firms to court and the World Bank estimates that taking a dispute to court might cost an SME in the UK up to 44% of its claim.
To address this problem, the FCA wish to allow a broader range of small businesses to refer complaints against financial services firms to the Ombudsman.
Small businesses as eligible complainants
The FCA aims to provide access to the Ombudsman for more than 160,000 of the approximately 200,000 SMEs who are not currently eligible. To achieve this it is proposing to change the definition of "eligible complainant" in the DISP rules (as set out in the FCA Handbook) and define a new category of "small businesses" that are too large to be micro-enterprises but have:
- an annual turnover below £6.5 million
- an annual balance sheet total smaller than £5million, and
- fewer than 50 employees.
The FCA also proposes to expand the eligibility thresholds for charities and trusts so that they are similar to those for the new small business category.
The FCA also proposes to introduce rules that will make a guarantor a new category of eligible complainant if it is an individual who is not a consumer (as defined in DISP) and who has given a guarantee or security for certain obligations or liabilities of a micro-enterprise or a small business (on the date the guarantee was given).
Disputes not covered
Disputes from SMEs above the Ombudsman award limit of £150,000 are not in scope. The FCA has suggested that a higher award limit should be set. However, it highlights that the award limit may need to be increased very substantially in order to make a material difference to the position of SMEs with high value disputes. In turn, the parties to the highest value complaints might expect the basis for decision making to more closely resemble a court. Although these fundamental changes would help the Ombudsman deal with significantly higher value disputes, the FCA does not have the power to introduce them and it would require amendments to primary legislation, which only the Government can introduce.
The recommended date for the prospective changes to the definition of "eligible complainant" in DISP is 1 December 2018 and it is expected to only apply to complaints made which occur on or after 1 December 2018.
Wider effects of the consultation
Initially, the FCA’s intervention may cause the number of SME complaints to the Ombudsman to increase and some SMEs will receive redress that they previously would not have. However, the FCA believes that over time it will improve the way financial services businesses handle SME complaints. Hopefully, this will lead to fewer complaints and a better standard of service for SME customers in this context.
The FCA would like firms to respond with feedback on its consultation paper by 22 April 2018 and plans to publish the results in the summer.
Firms should look at whether they agree with:
- the proposed changes to the definition of eligible complainant
- the appropriateness of the proposed size thresholds and criteria for small businesses
- whether SMEs should only be required to pass one of the tests of employee numbers, turnover and assets instead rather than all three
- the changes introducing guarantors as eligible complainants
- whether there should be a different transitional period than the recommended 1 December 2018, and
- how access to redress might be improved for SMEs.