On 22 January 2018, the FCA launched a consultation on plans to give more small businesses access to the Financial Ombudsman Service (FOS).
Currently, consumers and ‘micro enterprises’ with complaints against financial services companies including banks and insurance companies, can make a complaint to the FOS. The Ombudsman service is free and can tell a business to pay the amount of compensation which the FOS considers fair, up to a maximum limit of £150,000, excluding any interest and costs. If the Ombudsman considers that fair compensation would exceed £150,000, it can recommend that the business pays the additional amount as well.
Under the present regime, companies which fall outside the definition of a micro enterprise cannot make use of the FOS and would have to bring a claim against the relevant financial services company in court; an expensive exercise particularly bearing in mind the size and resources of many banks, insurance companies etc. Andrew Bailey, Chief Executive at the FCA said:
“Our evidence suggests some small businesses currently find it hard to achieve a fair outcome in disputes with financial services firms because court action is not a realistic option for them.”
Micro enterprises are defined by reference to the number of a company’s employees and its annual turnover/balance sheet. The current criteria, and proposed new criteria are as follows:
|Current eligibility requirements||
|Fewer than ten employees||
Fewer than 50 employees
|Annual turnover or annual balance sheet that does not exceed €2m||
Annual turnover below £6.5m
An annual balance sheet below £5m
The FCA estimates that the new eligibility requirements would provide approximately 160,000 additional SMEs, charities and trusts with access to the FOS.
The FCA also proposed to extend eligibility to personal guarantors of corporate loans, provided the borrowing business also meets the new eligibility criteria. This would protect, for example, shareholders and directors who have given personal guarantees to a bank in order to obtain funding for a company. Often, in such cases, a failure to repay the loan can result in the guarantor losing his or her home.
The proposals do not extend to cover all so-called SMEs (Small and Medium Sized Businesses) which are businesses with under 250 employees, or with an annual turnover of under €50m, but will undoubtedly give access to more businesses who simply cannot afford to bring court claims against their bank, insurer etc.
Importantly, however, the FCA does not propose to increase the maximum compensation that can be awarded by the FOS, which will remain £150,000. In theory, the larger a company’s balance sheet, the more likely it will be to have insured more valuable assets or taken out larger loans. As such, without any increase to the binding award limit, it is possible that some newly eligible companies will still find that the FOS cannot look at their complaints.
The FCA is asking for responses to the consultation by 22 April 2018.