On 16 October 2018, the FCA and the FOS issued two publications which together could have a significant impact on financial services firms and their complaints and disputes handling.
Consultation on increasing FOS monetary award
The first is a consultation on increasing the monetary limit the FOS can award from the current level of £150,000 to £350,000 CP18/31: Increasing the award limit for the Financial Ombudsman Service | FCA for complaints in respect of acts or omissions that take place from 1 April 2019. The last change was made in 2012, when the limit was increased from £100,000 based on general price inflation. The deadline for responses is 21 December 2018.
The near-final rules on increasing access to the FOS for SMEs
The second is the publication of near-final rules attached to a Policy Statement PS18/21: SME access to the Financial Ombudsman Service – near-final rules | FCA on increasing access to the FOS for SMEs with an annual turnover of under £6.5 million and either an annual balance sheet total of under £5 million or fewer than 50 employees. These are broadly equivalent criteria for charities and trusts. The FCA takes the view that larger SMEs have sufficient financial management and legal expertise to protect their own interests. In addition it is proposed that those guaranteeing personal loans to a business (with which they are involved) should also be able to complain to the FOS. A consultation paper on this was previously published in January 2018 and the policy statement describes the responses to that paper.
The reason for publishing near-final rules is that the FOS has recognised that it may need time to develop the necessary components for implementation. The FCA intends that the new rules shall come into force on 1 April 2019. Currently, only micro-enterprises are eligible to complain to the FOS, being those employing fewer than 10 persons with a turnover or annual balance sheet not exceeding €2 million.
The most obvious impact of these changes is that eligible SMEs are more likely to bring a claim through the FOS than through the courts. Notably, the court fee to issue a claim for more than £200,000 is £10,000 whereas the FOS is free for complainants. Further, complainants are not bound by a decision (unlike firms) and so may bring a court action even if the FOS decides the case against them.
The FCA points out that the complainants at which these reforms are targeted already lack the means to go to court. Whilst there are available damages-based fee arrangements with no up-front costs, they are more common for personal injury claims than for financial services disputes. Third party litigation funding, which can provide a risk-sharing mechanism, is also an option, but currently the market is typically for claims over £500,000 and most are in the range of £1 million to £50 million, although it is starting to become available for claims under £1million.
The FCA has received responses questioning the FOS's expertise for dealing with complaints for newly eligible SMEs. In response, it has indicated that such complaints will be dealt with by a ring-fenced specialist unit with a dedicated team of 20 SME investigators with specialist knowledge. The investigation will be supported by forensic accountants or experts in novel or complex financial products. There will also be an SME advisory group with representation from industry and small business sectors to provide helpful insight and support.
There has been some criticism of the way the FOS handles existing claims. Some groups have suggested it has a bias in favour of firms. Some firms take the view that the FOS uses its broad discretion to arrive at pro-consumer outcomes. The All Party Parliamentary Group on Fair Business Banking recommended that a separate tribunal providing a court-like process for financial services disputes involving SMEs should be set up rather than extending the remit of the FOS, which the Committee thought might have unintended consequences. The FCA does not see this as a reason not to extend SME eligibility, seeing a role for both an extended service and a tribunal to meet differing needs. To implement a new tribunal will require primary legislation. In the light of the FCA's policy statement and proposals for the FOS, it seems unlikely the government will introduce such legislation.
At the end of its policy statement the FCA mentions its duty of care, which raises the possibility of a much broader duty of care being owed to consumers of financial services products than currently exists. There is clearly a potential overlap between the extension of the FOS's remit and the possible new duty of care.