Posted: 24th January 2018


On the 22nd January, the FCA released CP18 / 03 - a consultation on small and medium-sized enterprises’ (SME) access to the Financial Ombudsman Service (FOS). This consultation follows a previous discussion paper in 2016 - ‘Our Approach to SMEs as Users of Financial Services’.

The latest consultation paper details proposed changes to the definition of ‘eligible complaints’ within the DISP rules. This is to potentially allow SMEs, charities and trusts access to alternative routes to dispute resolution. If taken forward, this means that approximately 160,000 (currently ineligible) SMEs, charities and trusts may be able to refer complaints to the Ombudsman, with the ability to seek redress up to the FOS award limit of £150,000.

Currently, most SMEs struggle to resolve disputes through courts and have very little access to alternative means of doing so. With reference to SME complaint data, the FCA also outlines the potential to increase the Ombudsman award limit to £600,000.

The regulator is also consulting on rules which will allow individuals who have provided personal guarantees or security for certain SMEs’ or micro-enterprises’ liabilities to refer complaints to the Ombudsman.

Eligible complainant proposed changes

By definition, SMEs are businesses employing under 250 staff, or with an annual turnover of under £50m. Currently, for the purpose of DISP, the definition of an eligible complainant is limited to a consumer and/or a micro-enterprise (employing fewer than 10 people, and with an annual turnover or annual balance sheet that does not exceed £2m).

The new definition will now include businesses, charities and trusts that are too large to be ‘micro-enterprises’, but ‘have annual turnover below £6.5m, an annual balance sheet total smaller than £5m, and fewer than 50 employees’.

The FCA has called this the ‘3-test approach’ and all three criteria must be met in order for the Ombudsman to consider an SME as a small business.

The FCA also proposes to extend eligibility to personal guarantors of corporate loans, provided the borrowing business also meets the eligibility criteria.

For complaint handling under DISP, the FCA has set out its proposed definition of ‘guarantors’ as individuals who are not consumers and who have given a guarantee or security for an obligation or liability of a micro-enterprise or small business (as of the date the guarantor gave the guarantee).

Disputes not covered will include those that exceed the FOS award limit of £150,000, and for SMEs that exceed the eligibility criteria. Disputes involving dissolved businesses or those subject to insolvency proceedings are unlikely to be covered.

Although there may be scope for eligible complainants to complain and acquire redress (capped at £150,000), the FCA speculates this may deter some firms from bringing their complaint to the Ombudsman.

The FCA presents an argument as to why a new compulsory jurisdiction for the Ombudsman may be necessary, with a different award limit, a more legalistic approach and different eligibility criteria. It highlighted that more material changes, such as changing the basis for the way the Ombudsman makes decisions may necessary. It argues that this will enable the Ombudsman to deal with significantly higher value disputes, but would require legislation, which only the Government can introduce. 

Proposed transition period

1st December 2018 is the proposed date for the revised definition of an ‘eligible complainant’ to come into force, and the proposed changes involving guarantors (as outlined above) will come into force on the same date. It would apply only to complaints made to a firm about the firm’s actions, or failure to act, which occur from the 1st December 2018 onwards.

Regulatory Next Steps

The deadline for a response to the consultation paper is the 22nd April 2018. There are number of questions contained within the paper and firms are asked to provide responses to these question by the 22nd April.

Considerations for firms

Firms should consider the impact of the proposed changes on their own target operating models and consider how they can handle complaints for newly eligible SMEs and guarantors, and ensure they provide redress were appropriate.

The increased complexity of such complaints is likely to pose challenges for firms and they should consider how complaints will be identified, resolved and communicated. This is likely to mean that firms need to:

  • Re-visit training and competency schemes
  • Re-visit their definition of a complaint (especially in relation to materiality)
  • Update systems and related literature
  • Provide updates to all customer-facing and impacted internal teams on the proposed changes
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