Retail Banking: Expansion of FOS regime

Important FOS updates

Proposal to increase FOS award limits

In a consultation paper published on 16 October 2018 (CP 18/31) the FCA set out proposals to increase the Financial Ombudsman Service (FOS) award limit from £150,000 to £350,000.

It is proposed that the new limit would apply to all complaints referred to the FOS after 01 April 2019, and relating to matters which took place on or after 01 April 2019.

While the FOS is already free to recommend any award that it considers fair, the award limit is a cap on the compensation which the FOS can compel a firm to pay. The FCA says that it has proposed this latest increase to the FOS award limit in furtherance of its consumer protection objective, and to ensure that users of financial services can receive fair compensation from the ombudsman service. The new award limit will also have been influenced by the upcoming inclusion of SMEs within FOS jurisdiction (see below), to better align FOS compensation with the value of financial products and services available to SMEs.

Responses to CP 18/31 may be submitted to the FCA before 21 December 2018. The FCA has also welcomed feedback on the interplay between the proposed award limit increase, and the extension of FOS jurisdiction to capture SMEs.

FOS moves closer to bringing SMEs within its jurisdiction

Currently, the FOS only has jurisdiction to determine complaints from individual consumers, “micro-enterprises” and smaller charities and trusts.

However, in a consultation paper published earlier this year (CP 18/3) the FCA proposed to bring more complainants within FOS jurisdiction. The most significant of the proposed changes was to capture more businesses, by including small and medium-sized enterprises (SMEs) within the definition of “eligible complainant”. In support of this proposal, the FCA reasoned that businesses which satisfy its definition of “SME” would be unlikely to have access to sufficient legal and financial management expertise to protect their interests in legal disputes.

As a follow up to CP 18/3, on 16 October 2018 the FCA published “near-final” rules on extending the FOS’ jurisdiction, by way of policy statement PS 18/21. The rules are expected to come into force in April 2019, and under these rules:

• SMEs can refer a complaint to FOS if they have with an annual turnover below £6.5m and has either (i) less than 50 employees; or (ii) a balance sheet total of less than £5m. (This is slightly less restrictive than the definition that the FCA had proposed.)
• Threshold conditions for charities and trusts have been aligned with the new thresholds for SMEs. A charity can refer a complaint to the FOS if it has a turnover of less than £6.5m and a trusts can refer a complaint provided they have a net asset value of less than £5m.
• Personal guarantors who are neither consumers nor micro-enterprises will also be permitted to refer a complaint to the FOS.

Related developments

The All Party Parliamentary Group on Fair Business Banking chaired by Kevin Hollinrake MP published a report in July 2018. The report highlights perceived anomalies in the current system which, it is said, place SMEs at a disadvantage compared to individuals when it comes to resolving disputes with their bank. To address this issue, the report proposes, amongst other things, the introduction of a new Financial Services Tribunal to deal with claims by SMEs against financial services providers which would otherwise have to go to a court. It is anticipated that legislation would be needed to implement this proposal so it is not likely to be introduced in the short term. However, it does appear to have the support of the FCA which sees it as complimentary to the changes to the FOS regime discussed above.

Comment

The FCA is pushing ahead with changes to the FOS regime and it now seems likely that the FOS will be dealing with SME claims from April next year and that its claims limit will be increased to £350,000.

The FOS process is designed to be user-friendly, and the cost of the process is borne by firms, rather than complainants. With its consumer-protection mandate, the FOS is also sympathetic to complainants, and often guided by principles of “fairness” rather than strict legal rules. In practice, this has meant that the outcome of FOS complaints is often less predictable.

All this makes the FOS a very attractive option for complainants, especially when compared to costly and often lengthy litigation. Making FOS available to more businesses, and increasing its award limit, will almost certainly lead to an increase in FOS complaints. Also, with PPI deadlines fast-approaching, it is very possible that claims management companies could try to generate new FOS claims from businesses which are newly within its jurisdiction (as an aside, April 2019 is also when claims management companies become regulated by the FCA).

For firms, the proposed changes will require that teams dealing with FOS complaints are sufficiently resourced and equipped to respond to all complaints in a comprehensive and timely way. This will be all the more important given that the financial risk of an adverse FOS finding will be higher, in line with the proposed increase to the award limit.

The FOS has to reach a view based on what is “fair and reasonable” in all circumstances. While it should take the law into account, this will not always be determinative. Businesses might therefore be concerned with a situation where potentially more sophisticated disputes are bought into FOS’ jurisdiction (by i) opening it up to SMEs; and ii) increasing the award limit) but these disputes are dealt with in a non-legalistic way and the right of appeal is very limited. In essence, the right of appeal is limited to judicial review, although historically there have been few successful challenges to FOS judicial reviews.

Update

The FCA has now published PS 19/8 “Increasing the award limit for the FOS”. This Policy Statement confirms that the FCA will be implementing the proposal to increase the FOS award limits as consulted on. The award limit will therefore be increased from £150,000 to £350,000. This will apply to complaints referred to the service from 01 April 2019 about acts or omissions by firms from the same date. For complaints referred to the service from 01 April 2019 about earlier acts or omissions, the award limit will be increased to £160,000.