On 16 October 2018, the FCA issued a Policy Statement (PS 18/21) with near-final rules which will expand access to the Financial Ombudsman Service (FOS) for small and medium-sized enterprises (SMEs). These changes include an amendment to the definition of “eligible complainant” in the Dispute Resolution rules in the FCA Handbook (DISP) to include SMEs, charities, and trusts, as well as personal guarantors of loans to a business that they are involved in. At the moment, only micro-enterprises (i.e. businesses with less than 10 people and an annual turnover/balance sheet of up to EUR 2 million) are eligible complainants.
The FCA anticipates implementing the changes from 1 April 2019 (this is a provisional start date), following the near-final rules being made final before the end of 2018. The reason for this intermediate stage in the policy-making is to allow the FOS to take reasonable and concrete steps to implement the proposals, which include hiring any extra staff and consultants with the necessary skills and appropriate expertise.
If the change is finalised then, starting on 1 April 2019, SMEs with;
- An annual turnover of less than £6.5m; and
- Either (i) fewer than 50 employees or (ii) a balance sheet total of less than £5m, will become eligible complainants under the DISP rules.
In keeping with its consumer protection objective, the FCA’s rationale for the changes is to address recent analysis suggesting that, for smaller SMEs, the costs and practicalities of litigation are preclusive. In the related Consultation Paper (CP 18/3), the FCA noted that, whilst larger SMEs have the bargaining power, organisational resources and understanding of financial services to protect their interests in disputes with firms, smaller SMEs are unlikely to possess the necessary (financial and legal) resources to resolve disputes through the courts.
The FOS has more discretion than the courts when adjudicating on disputes and that it is not bound to follow even its own precedent, which in turn introduces a greater level of uncertainty for both parties to a dispute. Nevertheless, the FCA has said that firms can be confident the FOS will take relevant law, regulations, regulators’ rules, guidance and standards, codes of practice and, where appropriate, good industry practice, into account when dealing with complaints.
The FCA estimates that, annually, there are around 1,300 more complex and higher value complaints, so it is now planned that the FOS will set up a specialist SME unit to handle more complex disputes and to address the concern about the lack of certainty in the FOS’ handling of such disputes. Whilst the lack of certainty may be acceptable for lower value complaints from consumers (where the case management priority is efficiency) it is a serious concern for higher value and more complex disputes.
Firms are reminded that if they are in doubt about the eligibility of a business, charity or trust they should treat the complainant as eligible, otherwise they might be in breach of rules on the eligibility of complaints.
Through another consultation paper (CP 18/31) published in October, the FCA is proposing to increase the FOS award limit from £150,000 to £350,000. Given that the last increase to the FOS’s award limit was in January 2012 (from £100,000 to £ 150,000), the FCA considers that the current limit is no longer adequate. The proposal is that the limit of £350,000 would apply to complaints about a firm’s acts or omissions that happened on or after the provisional date of 1 April 2019; for complaints submitted after the provisional date in relation to acts or omission that occurred before the FCA has proposed to increase to the current limit is to £160,000. Deadline for responses to that consultation paper is 21 December 2018.
How will these changes impact firms?
Firms have an obligation to increase consumer awareness of the protections available to the newly eligible complaints, as well as the obligation to investigate, assess and resolve more complaints. This is likely to be the largest cost for firms, with other costs, such as training and IT changes, not expected to be significant.
Firms also need to ensure that they are appropriately resourced to respond to greater numbers of more complex FOS complaints, and to ensure that their complaint management function is properly and effectively organised. One of the main risks is that financial institutions will face a potential larger financial impact than has been the case with the current jurisdictions and limits of the FOS.
To ensure that you reach a fully compliant position in time and to understand how the requirements specifically apply to your firm, please do not hesitate to contact one of our consultants.