According to a consultation document published by the Financial Conduct Authority (FCA) last month, more than 160,000 additional firms may soon have access to the Financial Ombudsman Service (FOS).
The proposed change will enable many small businesses to take action against banks and financial services providers when they believe they have been treated unfairly or received inadequate service.
The Chief Executive of the FCA, Andrew Bailey said: “Our evidence suggests some small businesses currently find it hard to achieve a fair outcome in disputes with financial services firms because court action is not a realistic option for them.
“We have considered what could be done within our powers and the remit of the Financial Ombudsman Service to improve this situation and are proposing to expand access to the Ombudsman.”
The news has been given a cautious welcome by some types of small firm, which are currently excluded from utilising the FOS to settle disputes.
What does the consultation document actually propose?
Carl Johnson, a solicitor and expert in financial regulatory law at Stephensons explained that the FCA’s definition of ‘small businesses’ falls within very particular criteria.
“In short, the FCA is proposing to extend the remit of the FOS to include dealing with disputes from a new category of complainants. These businesses must have 50 employees or fewer; an annual turnover which is below £6.5 million, and, gross assets below £5 million.
“Up until now, only individual consumers and so-called ‘micro-businesses’ – those with fewer than ten staff – were able to access the FOS scheme. This proposal would mean more SME’s, charities and trusts would become eligible.”
Why has the FCA taken steps to widen access to the Financial Ombudsman Service to small firms?
Johnson explains: “The FCA is looking to address criticisms that businesses are subject to a two-tier system.
“Aside from micro-businesses, all other businesses are currently forced to pursue any grievance against a financial services firm through the courts. Litigation is costly and time-consuming, particularly against organisations with considerable resources and seemingly bottomless budgets.”
The FCA’s consultation notes that many firms which are in dispute with a financial services provider are already in financial difficulty, further preventing them from pursuing legal action.
Why has the FCA chosen to act now?
This situation has been a political issue since the fallout of the financial crisis in 2008 where many SMEs were forced to absorb significant losses with many closing down entirely.
“This was certainly true in the case of the Royal Bank of Scotland (RBS) HBOS mis-selling scandal in which RBS was accused of mistreating as many as 16,000 small business customers between 2005 and 2013”, says Johnson
“With little realistic prospect of legal recourse, many of these SME’s were left at the mercy of the banks.
“In April 2017, the FCA published a feedback statement setting out the results of a consultation regarding its mission and objectives. One of the areas which formed part of the consultation was the suitability and availability of redress schemes. In the feedback statement, the FCA indicated its intention to consult on proposals relating to access to the FOS.
“The FCA’s consultation document acknowledged that financial services firms should be entitled to treat most of their business clients as more sophisticated than individual consumers. However, it is noted that in the case of SMEs, many have more in common with consumers than a larger business. As such, it is proposed that they should have the same access to the FCA that both consumers and micro-businesses currently do.”
Is this a positive development for SMEs?
“This is certainly a positive development for SMEs”, says Johnson. “The proposals should allow for a greater realistic prospect of recourse where businesses are outmatched in their ability to pursue a dispute in the courts. Hopefully, this will mean incidents such as the recent mis-selling scandals are less likely to be repeated.”
How is this likely to affect smaller financial services firms?
“Providers should be wary of the changes and make sure they are aware of the expanded remit”, says Johnson. “They would be wise to seek specialist advice on how it will affect their practices and be conscious that their dealings with small business clients could form the basis of a complaint to the FOS.”
How likely is it that these proposals will go ahead?
Industry insiders suggest that the proposals are almost certain to be implemented in December of this year.
“The FCA has requested responses to its consultation by 22 April and will publish a policy statement in the summer”, explains Johnson.
“The proposals do appear to be a proportionate response to the longstanding inequality within the sector. If they are properly implemented, they are likely to prove popular with the small business community and provide a greater sense of oversight.”
- About the author: Carl Johnson is a partner and regulatory solicitor at the national law firm, Stephensons. He specialises in professional misconduct and acts for a wide range of regulated bodies, including accountancy firms.
- About Stephensons: Stephensons is a national, full-service law firm with offices across the country. For more information, visit www.stephensons.co.uk or find us on Twitter and Facebook.