Extension of FOS access
On 16 October 2018, the FCA published Policy Statement PS18/21, which proposes near-final rules to expand access to the Financial Ombudsman Service (FOS) for small and medium-sized enterprises (SMEs), as well as charities and trusts. Alongside that Policy Statement, the FCA also published Consultation Paper CP18/31, proposing an increase to the award limit available to the FOS to £350,000.
The changes under both PS18/21 and CP18/31 are proposed for implementation on 1 April 2019.
Background to changes
Eligible claimant expansion
In November 2015, the FCA published a discussion paper on its “approach to SMEs as users of financial services” (DP15/7). This highlighted the difficulties faced by SMEs in resolving disputes with financial service providers. The FCA’s subsequent Consultation Paper (CP18/3) in January 2018 suggested that there were SMEs not covered by the existing “micro-enterprise” definition in the DISP rules that would be unlikely to possess the necessary (financial and legal) resources to resolve disputes through the Courts. In light of its concern on this point, the FCA is proposing to amend DISP 2.7.3 to include newly-defined “small businesses” amongst the group of eligible FOS complainants. This will raise the eligibility threshold for access to the FOS to companies with:
- An annual turnover of less than £6.5m; and
- Either (i) fewer than 50 employees or (ii) a balance sheet total of less than £5m.
This compares to the existing threshold for businesses, which covers only “micro-enterprises” (i.e. businesses employing fewer than 10 people and with an annual turnover/balance sheet of €2m or less).
Increase in award limit
Alongside the proposed changes to complainant eligibility, the FCA has stated that it proposes to raise the award limit from £150,000 to £350,0001 to address concerns that complainants are failing to receive sufficient compensation in high value complaints. In CP18/31, the FCA also noted that, in general, it did not consider litigation to present a viable or realistic alternative for SMEs of limited resources, and therefore that the FOS provided the appropriate avenue for complaints.
Potential impact of the proposed changes
Complexity, volume and significance of complaints
The FCA estimates that the planned change will allow access to the FOS to an additional 210,000 potential new SME complainants, which will inevitably increase the volume of complaints handled by the FOS.
It is also notable that a number of these potential new complainants will be relatively sophisticated businesses, many classified as Professional under the FCA regulatory scheme – and potentially with greater financial resources than respondent firms (in the case of smaller respondents, such as IFAs). It is reasonable to expect (as the FCA has acknowledged) that these more sophisticated complainants, able to access higher value awards, will bring complaints to the FOS of a greater complexity than has previously been the case. How the FOS assesses “fair and reasonable” redress in these circumstances, given the size and sophistication of some eligible complainants, will be a key issue.
In order to address this expected rise in both volume and complexity of complaints, the FCA has proposed that there will be in place, from 1 April 2019, a specialist team within the FOS dedicated to handling SME complaints. This will comprise 20 SME-specialist investigators, with dedicated legal and technical support services.
Certainty of decision-making
As noted above, the FCA has sought to address the concerns raised in response to CP18/3 about the lack of certainty in the FOS’ handling of more complex complaints (and in the Lloyd Review2 concerning the quality of the FOS’ casework) by putting in place a specialist SME unit, with its own legal support group and access to external industry or sector expertise.
That specialist unit should assist the effectiveness of adjudicators in reaching consistent decisions on what is “fair and reasonable” in all circumstances of the case, as adjudicators are required to do under DISP 3.6.1R. The FCA points to the obligations on FOS adjudicators to take account of relevant law, regulatory rules and guidance, codes of practice and industry good practice (under DISP 3.6.4R) as providing certainty to both complainants and respondents.
However, any assessment of what is “fair and reasonable” is inherently flexible and subjective. Indeed, the FOS is not bound to follow even its own precedent, which in turn introduces a greater level of uncertainty for both parties to a dispute. That lack of certainty may be acceptable for lower value complaints from consumers, where the priority of the system is efficiency, but it will be a matter of concern in higher value and more complex disputes.
As the FCA notes, the FOS has the ability to refer cases to the Courts in circumstances where a case “raises an important or novel point of law, which has important consequences” and would suitable as a test case.3 However, such a referral can be made only with the consent of the complainant (as it would clearly be inappropriate to refer a case involving an unwilling complaint).
The lack of rigour in decision-making is not addressed in any detail in the FCA’s consultation paper. For example:
- There is no automatic right to a hearing in the course of a complaint to the FOS. Instead, the decision to hear oral submissions is left to the ombudsman’s discretion, and in our experience happens very rarely in practice.4
- There are no disclosure requirements and it is up to the adjudicator in each complaint to determine what evidence is admissible or inadmissible. An adjudicator may include evidence that would not be admissible in court, or exclude otherwise admissible evidence, as they see fit.5 This is significant as many complaints turn on the credibility of conflicting accounts of what was said and done during the process of selling a financial product to a complainant.
- There is no appeal mechanism for respondents.6 Although it is possible to bring a judicial review against a FOS decision, in reality that is a high bar for a respondent. This difficulty was highlighted in the 2017 High Court decision (in a judicial review brought by Aviva7), in which the Court confirmed that the FOS as able to depart from relevant law where it considers such an approach to be fair and reasonable.
The FOS as an alternative to the court system
The January 2018 Consultation Paper (CP18/3) explained that a key reason for the proposed extension of the eligibility criteria for the FOS is the lack of access in practice of SMEs to redress through bringing civil claims in the Courts. CP18/3 refers, in support of this conclusion, to various analyses of the practicalities for SMEs of litigating, concluding that the cost of civil litigation is preclusive for many potential SME complainants.
However, the growth of “no win, no fee” arrangements and after-the-event insurance to support litigants, and the rise of litigation funders have arguably made it easier than ever for potential litigants to fund litigation. These serve to remove much of the risk for potential litigants – claimants are in any event protected by the basic principle of litigation in England and Wales that the losing party in a case will pay the winning party’s fees (or at least the majority of them). These factors should make the courts an accessible and reliable means of dispute resolution for SME complainants with valid claims.
One curious aspect of the changes in the FOS’ remit is how far it will now vary from the court system. Under the FCA’s proposals, the FOS will be able to resolve disputes of up to £350,000 in value. By contrast, claims for more than £25,000 that are litigated in England & Wales are automatically considered to be sufficiently complex to be assigned to the multitrack, to allow for a higher level of case management and hearings that are anticipated to last over a day. This contrasts starkly with the lack of formal case management and rigout in FOS proceedings.
On 23 October 2018, Simon Walker published his report on the landscape for dispute resolution for SMEs in the UK, which included consideration of the FCA’s proposals both to extend the eligibility criteria for SMEs and raise the award limit. The report expressed strong support for the proposals – but also went further than the FCA in recommending that a voluntary ombudsman scheme be established for larger SMEs (with an annual turnover of between £6.5m and £10m). Perhaps more significantly, the report also recommended that, following a two-year “bedding down” period for the new regime, the eligibility criteria are again reviewed (on the size of SMEs included), and the award limit raised further, to £600,000. The FCA has not yet responded to these proposals.
Although not yet formally confirmed, it is likely that the FCA’s proposed changes will be implemented from April 2019; there is momentum behind them, and the FCA has made its views clear in PS18/21. The FCA has, however, noted the concerns about the current capability and capacity of the FOS to handle the greater caseload and complexity, and will consider the Ombudsman’s draft business plan and budget, expected in November/December 2018, before finalising the new rules. These planned changes will present increased risks to financial institutions, which will inevitably need to ensure that they are appropriately resourced to respond to more complex FOS complaints, which can be expected in greater numbers, and with greater financial impact than has been the case to date.
 This upper limit will apply to post-1 April 2019 acts / omissions; the upper limit for pre-April 2019 acts/omissions will be raised to £160,000. Both of these limits are proposed to increase automatically each year in line with CPI.
 The Lloyd Review was an independent assessment of the FOS commissioned by the FOS board to address concerns raised in Channel 4’s Dispatches programme about the fairness of FOS decisions for consumers. It was published in July 2018 and found that, while there was no institutional bias against consumers, “New investigators can lack knowledge, confidence and consistent exposure to complex problems…[and] knowledge support, training and quality assurance will require continuous improvement, in particular to ensure the quality of casework is sufficiently robust for higher-risk issues (including those associated with complex cases)”
 DISP 3.4.2R
 DISP 3.5.5R
 DISP 3.5.9R
 While it remains open to a complainant to reject a FOS determination and pursue a complaint through the courts if it wishes.
 R (on the application of Aviva Life & Pensions (UK) Ltd) v Financial Ombudsman Service & ors  EWHC 352 (Admin)