Widening access to FOS for small businesses: FCA publishes policy statement, 'near final' rules and further consultation on FOS financial award limit
Earlier this year the Financial Conduct Authority (FCA) issued a consultation proposing to extend access to the Financial Ombudsman Service (FOS) to some SME's. The proposal was to create a new category of eligible complainant - the "small business" which would be able to access the FOS on the same terms as individual consumers and micro-enterprises, enabling disputes to be resolved quickly, informally and at low cost. Although aimed at banks following the interest rate hedging product scandal, this proposed change had potentially significant implications for non-consumer insurance.
The FCA has now published its Policy Statement confirming its plans to extend access to the FOS to "small businesses" with an annual turnover of £6.5m or below and either fewer than 50 employees or an annual balance sheet below £5m. Final rules will only be implemented if the FCA is satisfied that the FOS can adequately address concerns around its resourcing and capabilities to deal with the expanded jurisdiction and the FOS will set up a ring-fenced unit to specialise in handling SME complaints.
A Consultation Paper has also been published proposing changes to the limit on the amount of compensation the FOS can require firms to pay when it upholds a complaint.
The Ombudsman provides an independent dispute resolution service between financial businesses and their customers and is free for those making a complaint. Under the current eligibility criteria, the only businesses eligible to complain to the FOS are micro-enterprises with fewer than 10 employees and either a turnover or a balance sheet of no more than €2m.
The Ombudsman can consider disputes about financial products and services it regulates (‘regulated activities’) and activities that support the delivery of regulated activities. In practice, this includes a number of services that both consumers and SMEs use regularly including, for example, complaints about insurance. The rules for complaints handling are published in the ‘Dispute resolution: complaints’ (DISP) section of the FCA Handbook.
Who do the changes apply to?
- providers of regulated and unregulated financial services to SMEs, charities and trusts, including advisers, credit providers and intermediaries dealing with SMEs
- people who are self‑employed, own or manage SMEs, charities or trusts, or provide guarantees for finance given to SMEs, charities and trusts
- those who provide business support to SMEs, charities and trusts, and to organisations that represent businesses and self‑employed individuals.
The new rules
The scope of the FOS’ compulsory jurisdiction will be amended to introduce a new category of eligible complainant into DISP called ‘small businesses’ so that these may refer complaints to FOS. However, in a change from the original proposals following responses to the consultation, the FCA has now issued a Policy Statement making changes to its approach relaxing its proposed eligibility criteria for SMEs so that they would only have to meet the turnover test of less than £6.5m and one of either the headcount of fewer than 50 employees or the balance sheet total test of less that £5m, rather than all three. The changes to the approach will mean around 210,000 additional SMEs will be eligible to have access to the ombudsman service.
Near final rules
The FCA has published 'near‑final' rules (in Appendix 1 of the Policy Statement) to give the FOS the degree of certainty it needs to take reasonable steps in order to implement the proposals. These steps include hiring any extra staff and consultants with the necessary skills and expertise the ombudsman service feels are appropriate. It is important that the FOS can take these steps now if the extension of the service to SMEs is to start on 1 April 2019.
In November 2018, the FCA will consider the FOS’s draft business plan and budget for 2019‑20, ahead of the FOS' own public consultation and will also consider the FOS' progress towards meeting the recommendations made by Richard Lloyd’s recent independent review (the ‘Lloyd Review’). If, at that point, the FCA is satisfied with the FOS' preparations, it intends to finalise its rules on extending the service and will most likely do this in December 2018.
Impact: number of complainants
The FCA estimates that around 210,000 additional UK SMEs will be eligible to complain to the ombudsman service under the new "small businesses" eligibility criteria.
The FCA has assessed the impact of relaxing its originally proposed 'three‑limb’ eligibility test for the proposed "small businesses" category in this way and found that this relaxation is expected to further increase the number of eligible complainants by around 4%. As this is only a modest increase in the figures published in the original consultation paper, the FCA is satisfied that it does not need to consult again before making rules.
How will the FOS approach complaints involving newly‑eligible SMEs?
Around a fifth of the respondents who supported the proposals said they had concerns about the FOS’ ability to deal with disputes involving newly‑eligible SMEs and most of these were from the general insurance sector. One body told the FCA that individual consumers and micro‑enterprises usually buy insurance with fixed cover limits to allow firms to take a more standardised approach when dealing with complaints. However, this respondent stated that SME's can have more bespoke and more complex insurance needs meaning that a standardised approach is not always appropriate and those resolving disputes will need to have the technical expertise to assess the complaint in much more detail.
Other responses stated that newly‑eligible SMEs would be more likely to use unregulated financial services than individual consumers and micro‑enterprises and asked how the FOS would approach complaints about these products and services, when industry does not have a consistent view of what ‘good practice’ looks like. Responses from the insurance industry focused on how the FOS would consider complaints under the Insurance Act 2015, highlighting a lack of legal precedent to which the FOS could refer.
In response, the FCA state in the Policy Statement that the FOS will create a ring-fenced, specialist unit to handle complaints from SME customers under the proposed extended jurisdiction. Key components to be in place from day 1 will include:
a dedicated team of 20 SME investigators with specialist knowledge and skills, recruited internally and externally
teams led and managed by people with specialist SME knowledge and experience, including specialist SME ombudsmen
dedicated legal resource to support SME complaint handling and access to additional expertise and technical advice, e.g. forensic accountants or experts on novel or complex financial products and services
a panel of external experts to support the knowledge of the FOS' SME teams and provide access to sector expertise and insight
an SME advisory group with representatives from industry and small business sectors to provide helpful insight and support
deployment of decision-making tools to ensure business size threshold tests for the new SME jurisdiction are applied consistently
a professional practice group and SME lead to develop the FOS' approach to SME cases, ensuring casework consistency and generating insight to feed back to industry and stakeholders
a dedicated microsite and phone line for complainants
The FCA believes that the FOS is the right scheme to resolve complaints from the type of businesses covered by the new eligibility criteria and that firms’ uncertainty about how the FOS approaches disputes about unregulated financial services is not well founded. The FOS is required to decide complaints based on what is fair and reasonable in all the circumstances of the case and will take into account: relevant law and regulations, regulators’ rules, guidance and standards, codes of practice and, where appropriate, what it considers to have been good industry practice at the relevant time (DISP 3.6.4R). It therefore believes that firms can be confident it will take relevant law into account when dealing with complaints. For example, in commercial insurance cases, the FOS has indicated that legal standards will be particularly important when it decides what is fair and reasonable for complaints from large businesses and for others with a more sophisticated knowledge of insurance.
The FCA stresses that the FOS works in a legislative and regulatory environment that is constantly evolving. It is, therefore, accepted that legal precedent may not always be available for a complaint but this should not be a barrier to the FOS taking on cases. It is noted that as a fallback, the FOS has the power, in some circumstances, to refer a complaint that raises ‘an important or novel point of law with significant consequences’ to the courts so that it can be considered as a test case (DISP 3.4.2R).
Change to FOS financial award limit
The FCA has also published Consultation Paper CP18/31, proposing changes to the limit on the amount of compensation the FOS can require firms to pay when it upholds a complaint – so that, on 1 April 2019, the FOS' £150,000 award limit should change to:
- £350,000 for complaints about acts or omissions by firms on or after 1 April 2019
- £160,000 for complaints about acts or omissions by firms before 1 April 2019, and which are referred to the ombudsman service after that date. (This is so that the limit for these complaints reflects inflation (as measured by the Consumer Prices Index) as the £150,000 limit has been in place since 2012.
It is also proposed that, from 1 April 2020 onwards, both award limits should be automatically adjusted on 1 April in line with the CPI. For any complaints referred to the ombudsman service before 1 April 2019 the financial compensation limit will remain at £150,000.
- Appendix 1 in the Policy Statement contains the near‑final text of the rules and guidance the FCA intends to make. The FCA expects to finalise these once it has considered and approved the FOS' business plan and budget for 2019‑20, before the end of 2018 and for these to come into force on 1 April 2019. At this stage, it does not expect to make any changes to the near‑final rules.
- The deadline for responding to the Consultation on increasing the FOS' award limit is 21 December 2018.
- The FCA will carry out a post‑implementation review of the impact of its finalised new rules within 2 years of the finalised new rules coming into force.
- In view of the potential unfairness to firms of applying the FCA rules to complaints about firms’ conduct that occurred before the commencement date, the FCA will apply the new rules only to acts or omissions by firms that take place after the rules come into effect.
For more information please contact, Helen Coates, Director Insurance, Commercial, D +44 161 604 1607 E 841607 M +44(0)7710186453 or Fiona James, Professional Support Lawyer M +4407921397715.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.