FOS consultation on SME access to Ombudsman service

23 January 2018. Published by David Allinson, Partner

The FCA is currently consulting on proposed new rules to allow larger small and medium sized enterprises to refer complaints to the FOS.

The FCA has published a consultation paper on SMEs' access to FOS.  The –FCA states that SMEs (being businesses with fewer than 250 staff or turnover of less than €50m) struggle to resolve disputes through the courts and are left with few alternatives.


The FCA therefore proposes to change the definition of 'eligible complainant' to include larger SMEs, charities and trusts (along with guarantors for SME loans).


Currently, businesses with fewer than 10 employees and a turnover or annual balance sheet of less than €2m are eligible complainants ('micro enterprises'), as are certain small charities and trusts.  The proposal is to widen access so that this includes 'small businesses', being businesses with fewer than 50 employees, annual turnover below £6.5m and a balance sheet of less than £5m.


The FOS' rationale for this is that SMEs often have more in common with individual consumers than with larger businesses and might not have the necessary bargaining power to negotiate with large financial services firms.  The consultation paper specifically mentions that SMEs can have difficulty in negotiating terms with banks and that pursuing an action through the court can be prohibitively expensive.


The proposed changes are likely to have greater impact on banks (who more often engage with SMEs) than the financial advice community. The paper goes so far as to state that cancellation of overdrafts and the sale of hedging products can be areas of concern for an SME.   Investment firms will be more worried about their exposure to claims from larger charities and trusts.


This proposal could also lead to increased complaints against insurers and insurance intermediaries being referred to the FOS, as this would open up the FOS to larger commercial insurance complaints.


In general terms, however, it seems that this is unlikely to have a significant impact on the volume of complaints; the paper estimates that these changes would result in around 160,000 more SMEs being eligible and perhaps 1,500 additional complaints per year.


In theory, however, this could lead to more complex, higher value complaints being heard by the FOS. In discussing this, the FOS makes perhaps its most worrying comments; discussing an increase to the compensatory award cap, potentially to as much as £600,000. This would apparently allow the FOS to compensate around 60% of the potential redress which falls outside of its current limit.


If the FOS does start hearing more complex, higher value complaints there may be reason for the FCA to propose increasing the cap. However, this would fundamentally change the purpose of the FOS as an organisation; the FOS was always intended to resolve complaints quickly, informally and at a low cost. It's questionable whether it has the expertise or processes in place to deal with complex, high value disputes – or whether doing so would comply with principles of natural justice and the right to a fair and proper judicial process.


The paper itself highlights some difficulties with this; specifically that firms have no right of appeal against a final decision (other than the very high bar of judicial review) and that FOS decisions are only binding if accepted by a complainant.


In the absence of an increase in the compensation cap, it's unlikely that we will see a large number of higher value complaints being referred to the FOS.  The FOS is already in the habit of splitting complaints to maximise its award making powers.  However, that an increase is being discussed (again) merely shows that the issue remains on the FCA's agenda for now, at least.