What is "the gap" and why does it need to be addressed?

The FCA Consultation

As things stand, only consumers and micro-enterprises can refer disputes with financial services firms to the Financial Ombudsman Service (the FOS).  Micro-enterprises are the smallest businesses – those with fewer than 10 employees and which have a turnover or annual balance sheet that does not exceed €2m.  Complainants which are over those thresholds have to rely on the Courts to resolve disputes with financial services firms. 

Although only 3.7% of businesses fall outside of the FOS's jurisdiction, these businesses employ 67% of the workforce in private enterprise and generate 82% of the total turnover of FOS eligible businesses [1].  This so-called "gap" has been recognised by the FCA and was the subject of a consultation from January – April 2018 [2].   The FCA's Policy Statement following the consultation is yet to be published.

The FCA has accepted that it has historically strayed into the role of arbiter to fill the gap.  The FCA had tried to put access to justice within reach of SMEs which were outside the FOS's jurisdiction without the need to resort to Court proceedings.  To that end, it assisted with setting up remediation exercises to achieve this but has since described them as inadequate.  

The APPG report

The "gap" between those within the FOS jurisdiction and those who are left to resort to Court action has also been recognised by the All-Party Parliamentary Group on Fair Business Banking (the APPG).  The APPG has long campaigned for a new approach for financial dispute resolution as they believe there is a need for a formal mechanism "to fill the current gap in provision that exists between the Financial Ombudsman Service (FOS) and the courts" [3].   Following the FCA's consultation, the APPG has published a report through the Centre for Policy Studies in which it recommended various changes to the way disputes with financial services are resolved. 

The FCA's Consultation Proposals - Expanding the FOS's remit?

The FCA has approached the "gap" with the expectation of expanding the FOS's remit.  In order to try and address SMEs' struggles, the FCA consulted on its proposals to change the definition of an "eligible complainant" for the purposes of the DISP rules.  Whilst consumers and micro-enterprises would remain within the FOS's jurisdiction, the FCA proposed to introduce a new category called "small business".  These would be:

• businesses with an annual turnover of less than £6.5m 
• an annual balance sheet of less than £5m
• fewer than 50 employees

The FCA considers this would allow access to FOS to over 80% of approximately 200,000 SMEs who are not currently eligible. 

The consultation also covered proposals to allow individuals who have provided personal guarantees or security for certain SMEs' liabilities to refer complaints to FOS.  Some have suggested that trying to expand the remit of the FOS will not fill "the gap" and that the FOS is not currently in a position to deal with such complex cases.  Certain responses to the consultation support this view.  

Further, some disagree with the FCA's view: "the courts remain the most appropriate place for larger SMEs to resolve financial services disputes".  This is what led, in part, to the APPG publishing its report on the subject.

The APPG report

The APPG was "very clear" that the FOS "in its current form is not a suitable body for the resolution" of financial disputes in the business community and that they were "cautious of any extension of eligibility" if this would negatively impact access to justice – such as longer delays, inconsistent decisions and incorrect results.  It has gone a step further in its recommendations.  Its view is that even if the FOS eligibility criteria is extended, a new Financial Services Tribunal is needed to bridge the gap for access to justice.  In order to achieve justice for SMEs, the APPG recommends that:

1. A Financial Services Tribunal be established.  This is a key difference from the FCA's approach.  The APPG envisages the establishment of a new tribunal, akin to an Employment Tribunal, as a primary dispute resolution mechanism.  The tribunal would have procedural powers, similar to the Civil Procedure Rules with robust case management powers.  The tribunal would provide a quicker and more accessible route to justice for disputes which are too complex for the FOS to determine.  The tribunal would give public, reasoned judgments with precedent authority by experts in the field.  It would also allow for possible "one way qualified costs shifting" in certain cases so that SMEs could recover their costs if they won, but financial institutions could not.  If established, this tribunal would represent a key plank to the APPG's answer to "the gap".

2. Legal rights of SMEs be enhanced by extending the right of action under s.138D of FSMA 2000 to allow SMEs to sue for breach of the FCA rules.  Alternatively, the APPG suggests that the FCA's PRIN rules be actionable by SMEs.

3. Regulatory protection be extended to include certain unregulated activities, such as commercial lending, including fixed rate loans, so that more s.138D claims can be brought.

4. Time limits for bringing claims be addressed to identify if there is any way SMEs could bring historic banking claims that are currently time barred by the Limitation Act – possibly for matters that occurred 10-15 years ago.

Conclusion

Overall, it seems that the APPG's recommendations have garnered broad political support. At the launch of the report in the House of Commons, John Glen, the economic secretary to the Treasury, promised to consider the proposals on behalf of the Government, as did representatives from the FCA. 

We will need to wait for the FCA's Policy Statement to know what it proposes. It does appear however that there is a view, held strongly by some, there is a gap in access to justice and change of some sort is needed.  The FOS, as a form of alternative dispute resolution, has a valuable function and will remain central to protecting the rights of consumers and smaller businesses.  But even if the FOS's remit is extended and more complainants are brought within its jurisdiction, it will not address all of the concerns.  The FOS does not give all of the benefits highlighted above of a primary resolution mechanism.  We can therefore see that those who feel that SMEs need access to justice through a judicial or quasi-judicial process may continue to lobby for something more.

[1] Public responses to CP18/3: Consultation on SME access to the Financial Ombudsman Service and Feedback to DP15/7: SMEs as Users of Financial Services

[2] CP18/3: Consultation on SME access to the Financial Ombudsman Service and Feedback to DP15/7: SMEs as Users of Financial Services 

[3] The All-Party Parliamentary Group on Fair Banking, 'Fair Business Banking for All: How to improve access to justice for businesses in financial services disputes', page 6