Executive summary
In late 2018, the Financial Conduct Authority (FCA) issued Policy Statement 18/21 confirming its plans to extend access to the Financial Ombudsman Service (FOS) to more SMEs from 1 April 2019 (see DWF Update Oct 2018). A new category of eligible complainant will be created on that date, namely the "small business", an SME with an annual turnover of under £6.5m and either fewer than 50 employees or an annual balance sheet total of under £5m.
Consultation Paper CP18/31 published in January 2018 had originally proposed to increase the level of the maximum financial award the FOS can make from £150,000 to £600,000. However, Policy Statement 18/21 confirmed that the increase in the financial award limit was to be the subject of further consultation.
The FCA has now confirmed in a new Policy Statement 19/8 released on 8 March 2019 that the FOS award limit will be increased to:
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£350,000 for complaints about acts or omissions by firms which took place on or after 1 April 2019
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£160,000 for complaints about acts or omissions by firms which took place before 1 April 2019 and which are referred to the FOS on or after 1 April 2019.
From 1 April 2020 onwards, both award limits will be automatically adjusted each year in line with inflation, as measured by the Consumer Prices Index (CPI). For any complaints referred to the FOS before 1 April 2019, the limit will remain at £150,000.
Background
The FOS provides an independent dispute resolution service between financial businesses and their customers and is free for those making a complaint. The FOS can consider disputes about financial products and services it regulates (‘regulated activities’) and activities that support the delivery of regulated activities. In practice, this includes a number of services that both consumers and SMEs use regularly including, for example, complaints about insurance. The rules for complaints handling are published in the ‘Dispute resolution: complaints’ (DISP) section of the FCA Handbook.
Who do the changes apply to?
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providers of regulated and unregulated financial services to consumers, SMEs, charities and trusts, including advisers, credit providers and intermediaries dealing with SMEs
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people who are consumers, self‑employed, own or manage SMEs, charities or trusts, or provide guarantees for finance given to SMEs, charities and trusts
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those who provide business support to SMEs, charities and trusts, and to organisations that represent businesses and self‑employed individuals such as for example insurance brokers.
New rules
The scope of the FOS’ compulsory jurisdiction is being amended to introduce a new category of eligible complainant into DISP called ‘small businesses’ so that these may refer complaints to the FOS from 1 April 2019. The new eligibility criteria for SMEs will be that they will have to meet the turnover test of less than £6.5m and either have a headcount of fewer than 50 employees or a balance sheet total of less than £5m.
Change to FOS financial award limit
The FOS award limit will be increased to:
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£350,000 for complaints about acts or omissions by firms which took place on or after 1 April 2019
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£160,000 for complaints about acts or omissions by firms which took place before 1 April 2019 and which are referred to the FOS on or after 1 April 2019
From 1 April 2020 onwards, both award limits will be automatically adjusted each year in line with inflation, as measured by the Consumer Prices Index (CPI). For any complaints referred to the FOS before 1 April 2019, the limit will remain at £150,000.
It should however be noted that the transitional provision relating to 2.7.3R(6), which extends the eligibility criteria to small businesses, states that it applies only to a complaint concerning an act or omission which occurs on or after 1 April 2019 (Small Business (Eligible Complainant) Instrument 2018, Annex A, page 6 (see Policy Statement 19/8)).
Inflation linked adjustments
The FCA is proceeding with future inflation-linked adjustments to FOS award limits for complaints about both pre - and post - 1 April 2019 acts or omissions.
On 1 April each year, for complaints referred to the FOS on or after this date up to and including 31 March in the following year, the award limits are to be adjusted by: (a) applying the percentage increase in CPI between January 2019 and January of that year; and (b) rounding down to the nearest £5,000.
Next steps
Firms will now need to focus on the changes they will need to have in place on the 1 April 2019. These include:
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updating consumer-facing information about complaint handling procedures
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ensuring they are using the most recent version of the FOS' standard explanatory leaflet
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ensuring complaint handling staff are aware of the increased limits
Comment
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The FOS route of redress will inevitably be attractive to small businesses for whom the introduction of increased court fees (5% of the value of the claim if over £10,000 and £10,000 for a claim value greater than £200,000) may well have proven to be a barrier to obtaining redress.
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Eligibility for the FOS will provide small businesses with an alternative to the courts for dispute resolution, enabling the complainant to avoid the funding challenges and costs risk associated with litigation. With the increased financial award limit from 1 April, and no cost to the complainant in pursuing a complaint via the FOS, small businesses are likely to utilise this route in the knowledge that if they are dissatisfied with the Ombudsman's determination, they still have the option to litigate the dispute.
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The FOS is funded by levies and case fees paid by the FCA regulated businesses whereas the court service relies on public funds. With constant competing demands on the public purse, the broadening of the FOS eligibility criteria and increased financial award limit make this an attractive route for small businesses and may well reduce demand/costs to the court service, which no doubt would be beneficial from a public spending perspective, albeit potentially at the expense of regulated businesses.
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There have in recent years been legislative changes which have benefited non-consumers such as the Insurance Act 2015 and Enterprise Act 2016. Allowing small businesses access to the FOS (which determines cases based on what it believes to be fair and reasonable in all the circumstances and is not constrained by strict legal principles) is likely to be viewed positively by these non-consumers.
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Notably, general insurers were one of main respondent groups to the award limit consultation, with their challenges tending to be on whether such a large, single increase was necessary and the ability of the FOS to deal with more complex cases.
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Insurers and the FOS alike will need additional skilled resource to handle such claims, which may prove time consuming and inevitably there is a financial cost associated with that process. Given insurers will be exposed to a greater volume of case fees (currently £550 per case accepted by the FOS) and potentially to higher awards against them, it is conceivable that this may impact upon underwriting of risks and may for example lead to higher premiums.
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It is of note that in addition to the financial award limit, the FOS also has the power to award interest (which it usually awards at 8% per annum) and can in appropriate cases also make an award in respect of costs.
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In its press release, the FCA estimated there could be up to 500 complaints upheld by the FOS annually where the amount of compensation the FOS determines is due, is above the previous award limit of £150,000. They therefore concluded there was a risk of very significant financial harm to complainants if they did not receive the full amount of compensation the FOS considers due and stated that "Previously, if firms did not voluntarily pay compensation above the award limit then complainants could be suffering an aggregate financial harm of up to £47.6 million per year".
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It is yet to be seen how many businesses will utilise the FOS route and of those, how many will be high value complaints. Policy Statement PS 19/8 (at para 1.28) states that the FCA's analysis of data led them to revise their estimates of high value complaints significantly downwards – from around 2,000 to around 500 – compared to their original estimate in CP 18/31. They went on to state "We estimate that around three quarters of these 500 high value complaints will be covered by the £350,000 limit".
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It may be that the move towards that route of redress is gradual as awareness grows. However, insurers ought to be ensuring that their complaints handling teams, who may previously have had limited exposure to commercial/small business risks, are adequately trained and skilled to enable them to deal with such complaints which are likely to be of a more complex, technically challenging and document intensive nature. There also remains a need for insurers to issuing a final decision letter within the required initial 8 week period (DISP 1.6.2) which may prove challenging.
Contact
For further information please contact:
Helen Coates, Partner
Insurance, Commercial
D +44 161 604 1607
M +44(0)7710 186 453
Fiona James, Director
Professional Support Lawyer
Insurance
M +44 (0) 7921 397 715
