Important Consultation - FCA approach to SMEs as users of financial services

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1 Important Consultation - FCA approach to SMEs as users of financial services The financial regulator, the FCA, is currently consulting on whether there is adequate protection for small and medium sized enterprises (SMEs) when they use financial products and services. The FCA has prepared a discussion paper in which it says: We are asking for your thoughts on whether the level of protection provided to SMEs in our Handbook is broadly right; whether our rules should treat more SMEs like individual consumers and extend provisions reserved only for the smallest SMEs to larger ones; how good practices could best be promoted among firms; and whether more ambitious voluntary standards could provide an alternative to, or complement, changes to our rules. Link to the FCA press release about the consultation: Who should respond? The FCA says that it wants to hear from businesses and self-employed individuals, as well as their advisers and representatives and financial services firms. The discussion paper gives a very broad definition of an SME as any entity of any legal form engaged in an economic activity that employs fewer than 250 persons, has an annual turnover not exceeding 50m and/or a balancesheet total not exceeding 43m. Those who own and run SMEs are some of the best placed people to comment on whether or not there is adequate protection for them as users of financial services. This is a rare and important opportunity for every owner, director or employee (and any interested customer, representative or adviser) of a small or medium sized business, trading or insolvent, to have their say and, where possible, provide details of their own relevant experiences. This could include anyone with firsthand experience of harm done to a business by bank misconduct or mis-selling which may have been avoided or batter resolved with more effective regulation, and also anyone who is unsure or confused about when and how their business is protected under current regulatory and statutory provisions. What will be the result of the consultation? The FCA says: We will use responses to this paper, alongside evidence from discussions and roundtables with stakeholders, to consider whether to consult on changing our rules or take other action. We will consider all views and comments and publish our feedback. We will also use our findings and all public responses to this paper in order to inform our ongoing interaction with firms, stakeholders, legislators, policymakers and regulators in the UK and abroad. Responses to this consultation could therefore affect future regulation and legislation. But there is only a short time left to make your views known as the deadline for responding to the FCA is 18 th March 2016.

2 How to Respond Responses can be submitted via an online response form on the FCA website: or by or in writing to the FCA to: Emmanuel Schizas, Strategy and Competition Division, Financial Conduct Authority. 25 The North Colonnade, Canary Wharf, London E14 5HS There are 8 questions scattered through the discussion paper and also repeated in the appendices at the end and while you don t need to feel bound to answer all or any of the questions, they are guidelines to the type of information the FCA is seeking. You could just give a brief statement of your own business relevant experience. It s a good idea to include an indication of the size (eg number of employees) and type of business (ie sole trader, partnership, limited company etc). If you have had a poor experience of a complaint handling or dispute resolution process you could also mention this. Examples of where the current regulatory and legal framework may not have offered enough protection to a SME, leading to a poor outcome could include mis-selling (eg of an IRHP/fixed rate loan, EFG loan or any other business-related finance or financial service) or other mistreatment, such as the provision of unclear/unfair terms and conditions, abrupt changes of terms or cancellation of facilities, unfairly applied covenant breaches, eg triggered by sudden substantial down valuation of assets, or inappropriate activities of a bank s Business Support department such RBS GRG. It is not necessary to read the whole of the discussion paper (some people may well be put off from contributing to the consultation if they attempt to read all 57 pages!) although it might be worth reading the summary on pages 7-8. The discussion paper claims to be of direct interest to consumers who are self employed, own or manage SMEs, or contribute to a family business but seems to be aimed more at industry professionals. The mind-numbing catalogue of existing rules and regulation, principles and guidelines that the document depicts is possibly unavoidable due to the excessive complexity and inconsistency of the current regulatory framework as it is applied across differing products and services and varying sizes and types of SMEs. It acknowledges, for instance, that the term SME does not occur in the FCA Glossary and there is no single set of enterprise size thresholds applying to the rules throughout our Handbook. Issues to consider Whether all/ any SME users of financial services have adequate protection and whether protection should vary for different products/services and for different sizes/types of SMEs? There is potential for a poor outcome and thus arguably a need for some regulatory protection wherever there is an imbalance of bargaining power and asymmetry of information between a supplier and a customer.

3 Inappropriate incentivisation of staff and/or lack of disclosure of incentives can also be an important factor associated with poor outcomes for customers. Poor outcomes can be compounded by not receiving sufficient disclosure of information from your bank to fully understand what has happened and/or argue your case successfully without recourse to legal action. SMEs are particularly vulnerable because the potential losses resulting from mis-sale and/or misconduct can be large, life changing sums and can have far reaching effects, impacting on many more than just the business owner(s) and their families - including any employees and their families, as well as suppliers and customers. Many of the current FCA rules are complex and inconsistent in their treatment of both similar sized but differently composed businesses and smaller and larger businesses across different types of products/services; SMEs of all types and sizes can and often do fall between the resulting cracks in regulation. With some limited exceptions, most commercial lending over 25,000 and all lending to companies is not currently regulated. Individuals, eg sole traders, have better regulatory protection in many cases than companies with similar numbers of employees and levels of assets and turnover. They also have far greater statutory legal protection. Only a private person who suffers loss as a result of breaches of FCA rules has a general statutory right of action for damages under section 138D of FSMA; so while sole traders may be able to bring an action for damages, SME companies that suffer loss while carrying on business of any kind may not. It may not necessarily follow that, just because an SME owner has grown a successful business, they have any greater knowledge or access to specialised advice about financial products and services or are any less vulnerable to being a victim of bank misconduct than a smaller concern. There is the potential for more lives to be damaged as a result, since the reach in terms of the number of employees, customers and suppliers will be greater. It could be argued that the only businesses that require a lower level of regulatory protection are those that: 1. have sufficient information and genuine ability to understand the terms and conditions of the financial products/services that they purchase and 2. sufficient size and power to successfully negotiate with their bank over those terms and conditions and 3. substantial reserves to take legal action against their bank, if necessary, without impacting their cashflow It is very unlikely that many, if any, SMEs would meet all of those criteria. The discussion paper presents an argument that increasing the regulatory protection for SMEs may produce poorer outcomes for them: by increasing the minimum cost to firms of serving SME customers that individually generate relatively little revenue, interventions might reduce SMEs access to services, such as lending, or the level and quality of service available to them, or even incentivise firms to provide SMEs with

4 unsuitable products. Regulatory uncertainty can also dampen innovation and discourage entry into the market, limiting the level of competition and choice for SMEs. There are a number of possible responses to the greater regulation may bring about worse outcomes for SMEs type argument and it is worth noting the acknowledgement later in the discussion paper that Firms considering entering the retail banking market have not generally mentioned conduct rules as a barrier. It is also arguable that a simpler, more consistent and homogenous regulatory approach with respect to SMEs is likely to be easier and less costly for firms to understand and adhere to and could lead to increased competition as well being more effective. Dispute Resolution including Financial Ombudsman Service (FOS) The FCA is asking for comments on the current limits of FOS in terms of eligibility to complain and maximum compensation that can be awarded. The current eligibility criteria exclude anything bigger than micro enterprises (businesses employing less than 10 persons, annual turnover and/or annual balance sheet total not exceeding 2m). If you are outside the eligibility criteria for the FOS or if you believe that they and/or the current 150,000 limit on redress should be increased then you should obviously comment on this. It is worth noting that if you are outside the eligibility criteria for FOS then you may not be considered to be an eligible complainant within the current regulatory system, in which case the bank may not be obliged to follow the usual reporting obligations in respect of your complaint. You might also have further views to put forward as to whether you feel the FOS, even with higher limits, is able to effectively deal with disputes between businesses and banks. Such disputes can be complex, involve high value losses and can also be affected by a lack of sufficient disclosure of pertinent data. It is arguable that if banks were obliged to disclose all pertinent information to the customer and their representatives as soon as a complaint is made, regardless of whether the customer is an individual or a company, then many disputes could be resolved quickly with far less need for regulatory intervention and/or referral to FOS and less likelihood of business owners having to resort to expensive legal action. The FOS can request additional data from the bank but can t or won t act to compel the bank to supply anything outstanding. Additionally, FOS is reluctant to interfere with what it considers to be the legitimate exercise of the bank s own commercial judgement. Use of voluntary codes and/or issuing guidance The FCA is asking respondents to consider alternative types of tools that might be used to improve protection for SMEs. While they may consider that there is a need for better protection, business people may not know which actual nuts and bolts should be changed to achieve this and so may not have a view on whether voluntary codes or guidelines are likely to be an adequate substitute for any absence of effective regulatory and legal protection. But will SMEs have confidence in voluntary

5 codes which have little or no input into them from representatives from the SME community? The discussion document states that the FCA would seek to engage with industry associations and bodies, as well as with the Banking Standards Board (BSB) and its member firms, and encourage them to develop and take ownership of such voluntary codes. Despite its official sounding title, the Banking Standards Board is made up of banks and other financial institutions; it is not a regulatory body or a consumer association. The Questions 1. Are there specific products, services or distribution channels that are particularly associated with poor outcomes for SMEs? 2. How and where should we draw the line between SMEs that should benefit from the consumer safeguards in our Handbook and those that should not? Should we aim to treat all SMEs in the same way where possible? 3. Is the current treatment of SMEs in our rules broadly correct? What do you see as the most important benefits and shortcomings of our current approach? 4. Should we expand the eligibility criteria of the ombudsman service? How and where should the line be drawn? 5. Should the ombudsman service s award limit be increased from its current value of 150,000 for some or all SME complainants? Would it be fair for different award limits to apply to eligible complainants depending on whether the complainant is a business or an individual consumer? 6. Should we make our rules more consistent, to the extent possible, across the products and services used by SMEs? 7. Should we encourage the development of voluntary codes of practice in the manner discussed in Chapter 6 of this Discussion Paper? 8. Should we issue guidance to firms on particular aspects of their dealings with SME clients, and, if so, which aspects?