In March 2018, UK Finance commissioned an independent review of the complaints and resolution landscape for UK SMEs from Simon Walker CBE, Professor Christopher Hodges and Professor Robert, who published their report in October 2018 (the Walker Review). The Walker Review focused primarily on those SME disputes that remain unresolved through existing complaints procedures and may be unsuitable for court process. In order to achieve fair outcomes for this group, the Walker Review made a number of recommendations for the settlement of future disputes as well as suggesting ways of bringing closure for past disputes, which the leading banks have now largely agreed to adopt.
The Financial Ombudsman Service
In our article Changes to the Financial Ombudsman Service (FOS) we explained that the FCA was:
- undertaking a consultation on increasing the FOS's monetary award limit in April 2019 from its current level of £150,000 to £350,000, for complaints in relation to acts and/or omissions taking place after that date; and
- increasing access to the FOS for SMEs with an annual turnover of £6.5 million and either an annual balance sheet total of under £5 million or fewer than 50 employees (currently, only micro-enterprises are eligible, being those with fewer than 10 employees with a turnover or annual balance sheet not exceeding €2 million).
The FCA has also provided further information on how the FOS intends to handle SME complaints by creating a ring-fenced specialist unit, with a dedicated team of 20 SME investigators with specialist knowledge and skills.
The Walker Review recommended:
- a new dedicated SME division should be created under the governance of the FOS and within its legal framework. It should handle all eligible disputes, including from small business and micro-enterprises, bolstered by the appointment of new specialist senior managers;
- in order to support the new SME division of the FOS, an expert advisory panel should be set up to provide high-level guidance and expertise on technical banking and legal issues arising in complex banking disputes. This mirrors the existing FOS provision for consumer complaints. The new panel would provide data and feedback to the FCA, and would be chaired by a retired judge, with the support of leading industry professionals; and
- real-time data monitoring and feedback to the FCA and appropriate government departments should be at the core of the new SME division to enable potential problem areas to be identified at an early stage.
Voluntary ombudsman scheme and Dispute Resolution Service (DRS)
The Walker Review also recommended the introduction of a voluntary ombudsman scheme to support larger businesses (with turnovers between £6.5 million and £10 million) that are not FOS "eligible complainants" ideally under the existing FOS scheme, as well as a separate voluntary scheme to consider any legacy SME disputes that arose with banks following the financial crisis, which have not been eligible for other forms of dispute resolution. He proposed that once such a scheme has bedded down, say in two years (and assuming its successful operation), the size of business within its scope be reviewed and the limit of award raised to £600,000.
Finally, and separately to the ombudsman proposals, the Walker Review proposed that senior representatives of the major banks should support a formal process seeking to achieve reconciliation and closure. They should meet and listen to a representative sample of affected SMEs to acknowledge their losses and experiences and commit to a new system of dispute resolution to ensure past issues do not infect future relationships. This includes establishing a monitoring council of stakeholders, including SME representatives, to work in collaboration, to ensure processes are optimal and effective, to deal with prevailing issues and to act as an early warning mechanism.
Following this review, in his 2018 Budget, Chancellor Philip Hammond said the government expected the banking industry to set out its response to the Walker Review by the end of November. Consequently, on 30 November 2018, UK Finance published the industry's response largely adopting Simon Walker's recommendations. The seven initial participating banks have agreed to:
- support the FCA's proposed extension of the FOS for SMEs in April 2019. They recommend that the employee test be removed so that SMEs are only required to meet the balance sheet and turnover test, believing it will address challenges by small businesses that rely on seasonal or temporary workers and remove most complex holding structures. They also support the recommendations of the Walker Review regarding the FOS;
- establish an interim voluntary dispute resolution process for businesses with a turnover between £6.5 million and £10 million and a balance sheet of £7.5 million, believing the natural home for this to be the FOS;
- establish an independent process, referred to as the Dispute Resolution Service (DRS), for reviewing legacy complaints since 2008 not previously addressed by another review process; and
- establish an independent and transparent SME advisory council to consider emerging trends and issues regarding access to finance, the treatment of SMEs by financial services providers and the appropriate support for SMEs. The council should be willing to hear personal testimony of individuals with complaints to ensure issues are heard, understood and acknowledged.
The further expansion proposed for larger SMEs will require the support of the FCA and government. UK Finance acknowledges that concerns have been raised about the FOS's capacity to take on a further expanded role and as a result the seven initial participating banks have offered to establish an interim voluntary ombudsman process with a target date of September 2019, whilst consideration is given to the FOS taking on the role. The banks have agreed to an award limit of £600,000 in line with Walker's recommendations. Similar to the current regime for smaller SMEs, the voluntary ombudsman (or FOS if it takes on this role) will be able to recommend greater awards, which the financial services firm can choose whether or not to follow, leaving the complainant with the option of accepting the maximum £600,000 award or pursuing legal action.
To be eligible to access the DRS for legacy complaints, a business must:
- have registered a complaint with its provider between 1 January 2008 and 30 November 2018 (relating to an event during this period);
- not have accepted an offer of settlement from its provider in relation to the complaint;
- not have been subject to an independent review process; and
- have been ineligible for the FOS at the time of the complaint but eligible under the expanded scope in April 2019.
Businesses that have already brought litigation in relation to the dispute underlying their complaint, or that have raised a complaint that was already time barred when it was made, will not be eligible for the DRS. Consideration will also be given to the eligibility of directors and shareholders to pursue complaints relating to insolvent/dissolved firms. As to the award limit, this will be £350,000, in line with the FOS's increased award limit which will take place in April 2019. Similar to the FOS, the DRS would be able to recommend greater awards which the financial services firm can choose whether or not to follow. It is proposed that the DRS operate under an independent board of directors with representatives from mainstream business, and the head of the DRS should be a former senior judge who will sit for a maximum of three years. The head will be supported by an appropriate panel of technical and legal experts and the DRS would make decisions on an equivalent fair and reasonable basis as applied by the FOS. Disputes not settled through the first stage of the DRS process will have the right to be reviewed by an expert appeals panel, with a final appeal decision made by the head of the DRS. The DRS will be able to consider consequential loss claims on the same basis as the FOS. The seven initial participating banks have agreed to support and fund the establishment of the DRS with a target date of September 2019 and will establish a steering group to commence work immediately.
UK Finance has stated that the effectiveness of the proposals made by the seven participating banks will be enhanced by the broadest possible participation, including from non-bank lenders and new providers in the marketplace that serve eligible SMEs.
In their aim to deliver stronger, fairer outcomes for SMEs, the leading banks have provided a firm commitment to give access to dispute resolution forums to those SMEs whose only option previously would have been to undertake expensive, lengthy litigation. It will result in 99.5% of SMEs being eligible for a free dispute resolution forum, which will consider their case on a "fair and reasonable" basis, rather than the strict legal basis of the courts. The DRS is designed to remedy customer discontent over the past 10 years and plug the gap for those SMEs who did not have access to a dispute resolution forum or other form of independent review process. It will put those complainants with legacy complaints on an equal footing to those SMEs eligible for the FOS, post April 2019.
There has been some criticism levelled at independent review schemes, for a perceived lack of independence given the banks' control over them. This should be taken into consideration when the DRS, or the interim voluntary ombudsman process, is established to avoid similar complaints.
Whilst the commitment to ensure SME disputes are dealt with appropriately is positive and the proposals will, no doubt, be welcomed by SMEs, expanding the FOS further before even the current expansion has been able to bed in and its success measured must be exercised with a degree of caution. Walker has admitted his recommendations are "ambitious", and has acknowledged that if the ombudsman system fails, all options, including a financial services tribunal, should be explored.
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