All change for SME financial disputes from 1 April 2019. But is it a foolish date?
Since our article in Financier World (see here) was written at the end of 2018, it is worth highlighting some updates on the substantial changes to the SME financial disputes regimes due this year.
Changes to the FOS
On 22 January 2019, pursuant to PS18/21, it was confirmed that from 1 April 2019 the FOS jurisdiction is due to expand dramatically (see here).
In particular, eligible complainants will now include “small businesses” who have an annual turnover of less than ￡6.5 million (or its equivalent in any other currency); and
- employ fewer than 50 persons; or
- have balance sheet total of less than ￡5 million.
We also expect to see complaints to the FOS arising on/after 1 April 2019 become eligible for awards of up to ￡350,000 (up from ￡150,000) pursuant to the proposals in CP18/3. That consultation closed on 21 December 2018 and a Policy Statement is due in the Spring.
However, early doubts were expressed that the FOS would be able to command the necessary confidence from all stakeholders in managing this expansion in its role, particularly by 1 April 2019. For example:
“131. Providing more small businesses with access to the Financial Ombudsman Service is a sensible step. However the Committee was concerned by the timeline for the change originally proposed by the FCA, and was unconvinced that the necessary due diligence regarding the Ombudsman’s readiness and capability had been undertaken.
132. The FCA has extended the timeline, with widened SME access to the FOS now expected to take effect from April 2019. Nevertheless, this leaves less than six months for the FOS to build the specialist unit that will be responsible for handling SME complaints, and to establish, from scratch, a wide range of proposed auxiliary tools and resources that will support that unit. By his own admission, Simon Walker’s proposals to build this new capability within the FOS by the second half of 2019 are “extremely ambitious”. This, coupled with concerns raised by many stakeholders regarding the Ombudsman’s effectiveness in dealing with its current remit, threatens to undermine the proposal. Providing wider access to an Ombudsman that is under-prepared and under-resourced will yield little benefit.” (emphasis added)
Treasury Committee - Twenty-Fourth Report of Session 2017–19 - SME Finance
On 23 January 2019, further concerns about the current operation of the FOS have been raised (see here). Reports suggest that the waiting list for a complaint to reach an Adjudicator (the preliminary consideration stage before an ombudsman) has risen tenfold and there are 30,000 cases yet to reach this stage.
Quite aside to concerns as to the capacity and expertise of the FOS’ 20-strong specialist SME unit, these reports might well raise further doubts over its readiness (and the impact on the industry) in advance of 1 April 2019 - particularly as it is hard to predict the combined effect of the two significant changes both due to be implemented on 1 April 2019.
Industry Initiatives
The ambition behind an enhanced FOS service is broadly supported. However, with concerns raised as to its ability to deliver upon this ambition, doubt will also be thrown on the effectiveness of other initiatives which are intended to compliment an enhanced FOS.
For instance, in response to the Walker review (see here), during the course of 2019, 7 major banks will take forward proposals to rebuild confidence in their handling of disputes and enhance the dispute resolution routes available to SME customers. In particular, they have committed to:
- Supporting the expansion of the scope and capability of the FOS;
- Creation of a voluntary banking Ombudsman scheme – which, in future, they suggest may come under the auspices of the FOS; and
- Establishment of an independent SME Advisory Council.
Therefore, a properly functioning expanded FOS (with the potential to incorporate a voluntary banking Ombudsman scheme in future) is fundamental to the success of these proposals. Indeed, it provides the foundation for the Government’s support (see here) of the arguments against the creation of a Financial Services Tribunal ("FST") or wider regulation of SME lending. For example, on 3 December 2018 John Glen MP wrote to the APPG on fair business banking (see here), expressing support for both the FOS and a voluntary scheme - as opposed to an FST and greater regulation.
In a further development, on 19 January 2019 in a letter to UK finance (see here), the Government has set out its expectations in relation to the industry’s proposals for an alternative Ombudsman scheme to be “truly robust and independent”. In his letter, the Chancellor has also said, under the “backward looking” element of the voluntary Ombudsman scheme, he expects the banks' "default position" should be to pay whatever sum the new scheme awarded in compensation.
Understandably at this early stage, there is a lack of clarity as the terms, scope and formation of a voluntary Ombudsman scheme (given its terms will need input from Government and Regulators). Nevertheless, the Chancellor’s comment is being represented (see here) by Kevin Hollinrake MP (of the APPG on fair business banking) as support for a redress scheme with no cap on compensation. That would be a quite dramatic development for a voluntary Ombudsman scheme - given that the basis for consideration of these complaints may not be based on strict legal principles.
Commentary
An enhanced FOS service, a voluntary banking Ombudsman or any other industry-led initiative requires public support and confidence that it will be a capable forum for resolution of such matters.
It has always been quite hard to see how any industry-led initiative can command the confidence of the SME sector stoked up by claimant specialists and sceptical of the industry's battle with legacy matters. Added to that, it is also quite hard to see how the industry will be able to meet the requirements – which are not found in changes to the law or regulation but in stakeholder correspondence containing “expectations”.
If speed and efficiency are not present in an enhanced FOS (and current reports give cause for concern) or if the voluntary banking Ombudsman does not live up to the varied desires of competing voices - does an FST or greater regulation merit a second look? That is certainly the view of shadow City Minister Jonathan Reynolds MP expressed on 23 January 2019 (see here).
Naturally, the banking sector will be very keen for the enhancement of the FOS (as the first of this year’s developments) to be successful due to the impact on its subsequent initiatives. However, one should not forget that it is not only the banking industry who are impacted by the changes to the FOS. These changes will have a dramatic effect across the financial services industry. As such, all financial services firms would be well-advised to advocate that the FOS is adequately resourced and prepared rather than rushing to hit an arbitrary deadline of 1 April 2019.
As with other current events, where there are questions over readiness, sometimes a delay is necessary.