Small businesses; large losses?

On Friday the FCA published a wide ranging discussion paper in which it seeks comments on proposed changes to the way in which it, and the FOS, deals with SME businesses.

Included within the paper are proposals to widen the application of various FCA rules to services/advice provided to more SMEs than they currently apply to, the suggestion that more SME's should be eligible to complain to FOS and the idea that the FOS award limit be increased in respect of complaints by SMEs.

Currently the regulatory protections provided to SME businesses decrease as businesses get larger.  In particular:

•  The ability to make a direct statutory claim (under s138D of FSMA) against FCA regulated firms for breach of the Act or FCA rules is generally not available to companies.  (Although this position is currently being litigated and the Court of Appeal will hear the appeal in a case dealing with this point in July next year.)

•  Only "micro enterprises" (businesses with fewer than 10 employees and turnover or assets of less than 2 million Euros) are eligible to access a respondent's regulated complaints handling process or, if still dissatisfied, take complaints to the FOS.

Amongst numerous other questions raised as part of its consultation, it is especially noteworthy that the FCA is asking:

•  Should some rules currently only applying to firms' dealings with consumers also be extended so as to apply to firms' dealing with some or all SME clients?

•  Should more SME entities be eligible to have their complaints dealt with before the FOS?

•  Should the FOS' monetary award limit (currently £150,000) be increased in respect of complaints against SMEs (as opposed to consumers)?

This consultation appears to have been prompted, in part at least, by concerns over the number of SME businesses that were allegedly mis-sold interest rate hedging products.  Many SMEs that were sold such products are not, say the FOS, sophisticated buyers of financial services but, in fact, should be treated more akin to consumers.  The losses on interest rate hedging products can often substantially exceed the FOS award limit, which seems to have been a catalyst for the suggestion that the award limit should be increased, and it is this last proposal that seems likely to be the most controversial.

Whilst arguments can be made on both sides as to whether more SMEs should be provided with greater regulatory protection via application of more of the FCA rules or by allowing access to FOS, applying higher award limits to SMEs than apply to consumers does not seem to me to have any justification at all.  The FCA's argument appears to be that SMEs are more likely to suffer more significant losses than consumers and so should be able to recover more redress. Leaving aside whether it is true that SMEs' losses are more often greater than those of consumers, this is beside the point.  The FOS' remit is not (or should not be) to provide a forum for providing full compensation for all levels of complaint.  Its remit is to provide a free, quick and informal dispute resolution service to the financial services industry.  As such, the award limit is not designed so as to allow full recovery of compensation in the majority of cases.  The limit is designed to reflect the fact that the quick and informal nature of the service (which is not obliged to apply the law) is only justifiable if the amount awarded is limited. 

On this basis, to say that the limit should be increased to allow SMEs to recover a greater proportion of the losses they might suffer rather misses the point.  If £150,000 is the right limit when balancing a firm's right to access justice (via proper application of the law in Court) against consumer protection (via a free and quick dispute resolution service), then surely £150,000 remains the right limit when considering protecting SME businesses' rights.  Indeed, many may argue that if there is to be a distinction between the level of redress recoverable, it is consumers who should be given greater protection.

The deadline for submitting responses to the FCA's consultation is 18 March 2016.