City watchdogs want to radically expand access to redress for tens of thousands of small businesses that cannot afford the legal costs of taking banks and other financial services providers to court.
In a consultation paper today, the Financial Conduct Authority proposes bringing an additional 160,000 SMEs within the remit of the Financial Ombudsman Service (FOS), which has the power to order compensation for loss up to £150,000. This would be achieved by greatly increasing the eligibility threshold for referring complaints to the ombudsman, which presently covers only individual consumers and microbusinesses.
Today’s development follows a Commons debate last week on calls for a formal tribunal system to deal with such disputes, spurred by controversy enveloping Royal Bank of Scotland and its Global Restructuring Group. Barrister Richard Samuel of 3 Hare Court, principal author of the tribunal plan, insists this route would be ‘100% better’ than expanding the ombudsman scheme because tribunals can ‘change culture’ and develop the law.
In today’s consultation, the FCA points out that many SMEs struggle to resolve disputes with financial services providers through the courts and have few alternative routes to redress. Only a tiny proportion of SMEs go to court as the associated legal costs can swallow up a large chunk of the claim.
’Not all legal action requires a court hearing, but even starting legal proceedings can be very expensive,’ says the FCA. ’The court fee alone for starting a claim of over £10,000 is 5% and fees are only capped once the value of the claim goes over £200k. SMEs might also be discouraged from taking issues to court by the prospect of having to cover the other party’s legal costs.’
Under the FCA’s plan, about 160,000 additional SMEs would be able to refer complaints to the ombudsman. The watchdog wants to widen eligiblity to those with turnover below £6.5m, an annual balance sheet total under £5m and fewer than 50 staff.
The FCA points out that a more formal scheme of resolving disputes - such as a tribunal - would require legislation, ‘which only the government is in a positon to bring about’.
But Richard Samuel dismissed this, pointing out that primary legislation already exists in the form of the Tribunals, Courts and Enforcement Act 2007. ’You could simply expand an existing chamber or bolt on a new one,’ he told the Gazette.
Samuel suspects the Treasury has little appetite for establishing a new tribunal as its civil servants grapple with Brexit. But he believes a new tribunal would not be difficult to establish or expensive, as funds could simply by reallocated from mass redress schemes that are being closed down anyway.
’Tribunals could change banking culture,’ Samuel stressed. ’Look at how employment tribunals moved us on from the “master-slave’ scenario to the current framework of unfair dismissal and discrimination. A second factor in the favour of tribunals is that they apply and create law - the ombudsman service does not, merely coming to a “reasonable outcome”. If we want the law to develop that is the way to go.’
Samuels also pointed out that the ombudsman service is not wholly independent in that it is funded by the banks.
The financial services industry has broadly welcomed the FCA’s plans. Stephen Pegge, managing director, commercial finance at industry body UK Finance said: ’Businesses should expect to receive the highest-quality service from the banking industry. Where things do go wrong, the vast majority of complaints are handled satisfactorily in-house while the current Financial Ombudsman (FOS) scheme provides a useful way of resolving complaints for the smallest firms. However, the system needs to be strengthened, and the industry fully supports the proposed extensions to businesses that do not already have access to Alternative Dispute Resolution (ADR) services, working closely with government to ensure a fair, accessible and efficient framework is delivered.’
UK Finance is commissioning an independent review of the ADR landscape for SMEs, ’to identify any gaps and how they could be addressed’.
Ian Rand, chief executive of Barclays Business Banking, commented: ’Barclays supports an expansion of the scope and funding of the Financial Ombudsman in order to provide an effective resolution service that small businesses already know and can trust. No bank has done more than Barclays to help struggling small businesses with over 70% of cases brought back to health, which is why we believe the expanded Ombudsman route is the most effective way of resolving those cases that do require further arbitration.’