A changing battlefield for SME disputes


Financier Worldwide Magazine

February 2019 Issue

A positive legacy of the global financial crisis (GFC) will be the widening and strengthening of the options available to small and medium-sized enterprises (SMEs) to resolve disputes with financial institutions. A decade since the GFC, 2018 saw the publication of a wealth of reports, reviews and consultations focused on improving the ways in which SMEs can access justice in those disputes.

An SME is an enterprise with fewer than 250 employees and either turnover of €50m or less or a balance sheet of €43m or less, according to the European Union. In the UK, the Department for Business, Energy & Industrial Standards define SMEs as enterprises with fewer than 250 employees. SMEs account for 99.9 percent of private sector businesses in the UK and are therefore crucial to the UK’s economy.

All SMEs can seek to resolve disputes with financial institutions by complaining to the institution, by litigating and, increasingly, by exerting pressure through the media.

Micro-enterprises, the very smallest SMEs, have the additional option of complaining to the Financial Ombudsman Service (FOS). An SME is a micro-enterprise if it has fewer than 10 employees and either turnover or a balance sheet of €2m or less, according to the Financial Conduct Authority (FCA) Handbook. The FOS will decide the complaint for free based on the parties’ submissions, provided that the institution and the activity complained about are within its jurisdiction. It will do so based on what is fair in all the circumstances, rather than on legal causes of action, and may direct the institution to make a payment of £150,000 or less, or recommend a higher award.

This year’s publications agree that SMEs can nonetheless struggle to access justice in disputes with financial institutions for three broad reasons. First, litigation is said to be too expensive for many SMEs to contemplate, notwithstanding the increasing sophistication of the litigation funding market. A claimant must bear an issue fee of up to £10,000 and the risk that if it loses the litigation, it will have to cover that fee, its own legal costs and the defendant’s legal costs. Secondly, it is recognised that access to the FOS is limited to micro-enterprises and that the FOS’ scope for resolving material disputes is restricted by its award limit and capability. Thirdly, it is said that the law and the regulator fail to recognise that some SMEs are no more sophisticated and have no greater bargaining power than many individual customers. For example, whereas an individual who has suffered loss due to a breach of the FCA’s rules can bring a claim for damages under s.138D of the Financial Services and Markets Act 2000 (FSMA), SMEs cannot. All of these criticisms carry weight in light of the financial disputes that arose from the GFC.

The battlefield for SME disputes is changing in response to these criticisms. In October, the FCA confirmed in Policy Statement 18/21 that ‘small businesses’ will soon be eligible complainants to the FOS. The FCA’s near-final rules define ‘small businesses’ as entities with an annual turnover of less than £6.5m and either an annual balance sheet of less than £5m or fewer than 50 employees. The FCA has set a target date of 1 April 2019 for this change.

Also in October, the FCA issued Consultation Paper 18/31 on increasing the award limit for the FOS. It proposes that, effective from 1 April 2019, the award limit be increased to £160,000 for complaints about acts or omissions before that date and to £350,000 for complaints about acts or omissions on or after that date, with both limits to rise annually in line with inflation. The consultation has support both from bodies representing SMEs and from those representing firms. The FCA has set a target date of 1 April 2019 for this change. Assuming the award limit is increased, which is likely, this means that from 1 April 2019, an estimated 99.5 percent of SMEs will be eligible to complain to the FOS and to seek a binding award of up to £350,000.

This is a fundamental change. Whereas the FOS presently decides complaints which are contained in value and, consequently, complexity, it must prepare to handle larger and more complex disputes which demand a more nuanced approach. Financial institutions must also prepare for the change. They should anticipate that to the extent newly eligible SMEs have been deterred by the costs of litigation, they will soon look to the FOS. This will impact both smaller regulated firms, which feel the impact of each complaint, and larger regulated firms, which feel the impact of a volume of complaints.

Looking further ahead, there are proposals to make more far-reaching changes to improve SME access to justice – particularly where banking disputes are concerned.

A first set of proposals has been put forward by the All Party Parliamentary Group on Fair Business Banking (APPG). The APPG looks back to the GFC and its fallout, which informs what it proposes. Its suggestions can be found in its ‘Fair Business Banking for All’ report, published in July, and include the following. First, extending the s.138D FSMA right of action to SMEs, or extending to SMEs a wider cause of action for breaches of the FCA’s Principles for Business. Second, introducing a Financial Services Tribunal (FST) to hear financial services disputes. The APPG considers the FST should operate a no-costs regime – save in complex cases where there would be one-way costs shifting, with costs borne by the financial institution. Third, challenging the government to see what can be done to help those who have suffered from “historic banking abuses” going back 10 to 15 years.

An alternative set of proposals has been advanced by Simon Walker CBE in his ‘Walker Review’, which was published in October. Mr Walker was commissioned by UK Finance to act in an independent capacity and review the complaints and dispute resolution landscape for the UK’s SME market. His perspective is quite different to that of the APPG. It is informed by data which shows that, today, banking complaints are commonly about administrative and customer service issues (35 percent of complaints), errors and failures to follow instructions (19 percent) and time-scale issues (16 percent). He also relies on data showing that most complaints are resolved very quickly within the banks’ internal complaints processes, with two-thirds of complaints resolved on the day they are made. Mr Walker suggests that, a decade on from the GFC, we need to ensure that dispute resolution mechanisms are appropriate for the future. His proposals include the following. First, create a business banking ombudsman pillar within FOS to win the confidence of SMEs. He suggests that, in due course, its award limit might stand at £600,000. Second, UK banks establish and fund a voluntary ombudsman service for businesses with turnover between £6.5m and £10m, which will not be eligible complainants to the FOS but might, he suggests, still struggle to afford litigation. Third, UK banks establish a voluntary scheme to consider unresolved disputes that have arisen since the GFC.

In late 2018, and through UK Finance, seven major banks have said they will support key recommendations from the Walker Review. In particular, they consider that the proposed ombudsman service for larger businesses, but will temporarily support and fund a voluntary scheme for businesses which meet the turnover criteria and have a balance sheet total up to £7.5m. They will also support the creation of a voluntary and independent dispute resolution service for reviewing unresolved complaints involving newly eligible SMEs that have arisen since 2008 and have not been addressed by an independent review process.

In the meantime, the government’s position has also become clearer. On 3 December, the Economic Secretary to the Treasury wrote to the APPG and explained that the government considers the proposed ombudsman services to be preferable to an FST and that it does not think there is a clear case for the expansion of s.138D FSMA.

Manifestly, the battlefield for SME disputes is changing. The scope of the FOS is expanding to include ‘small businesses’ and its award limit will likely increase to £350,000. It is also starting to become apparent how it might change further. Given the approach by the industry’s largest players, it seems likely that there will be an ombudsman with a remit to consider complaints by larger businesses with a turnover up to £10m and an ability to award up to £600,000. Whether this regime is limited to the customers of particular banks or applied across the industry is yet to be seen. As a consequence of the high costs of litigation and the perceived inadequacy of the law to protect SMEs in pursuing an aim of improving access to justice, it seems likely that the role of the court may be diminished. But, at least at the moment, it appears that the momentum behind calls to create an FST and to extend s.138D FSMA has stalled.

One inevitably questions whether the alternatives proposed by either side will satisfy the ambition of improving access to justice and maintain the confidence of all stakeholders going forward – particularly were there to be another financial crisis when such new regimes would be most tested.


James Gliddon is a senior associate and Rachel Harrison is an associate at CMS Cameron McKenna Nabarro Olswang LLP. Mr Gliddon can be contacted on +44 (0)20 7367 2148 or by email: james.gliddon@cms-cmno.com. Ms Harrison can be contacted on +44 (0)20 7367 2497 or by email: rachel.harrison@cms-cmno.com.

© Financier Worldwide


James Gliddon and Rachel Harrison

CMS Cameron McKenna Nabarro Olswang LLP

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