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The report, commissioned by UK Finance in March this year, follows a lengthy period of consultation with a variety of industry stakeholders as well as a detailed review and analysis of complaints data voluntarily provided by firms. It was supported by Professor Christopher Hodges, Professor of Justice Systems, from the University of Oxford and Professor Robert Blackburn, Director of the Small Business Research Centre at Kingston University.
The report’s key findings are as follows:
In response to the report’s findings, Mr Walker makes several recommendations, aimed at drawing a line under legacy issues still being faced by the UK banking sector and providing access to appropriate dispute resolution forums for SMEs. These are:
The APPG and others have long advocated the creation of a financial services tribunal system as the most appropriate way of resolving disputes that fall between the FOS and the courts. However, Mr Walker's view is that a tribunal system would have a number of key disadvantages. First, it would be costly for SMEs given its inevitable involvement of legal counsel. It therefore fails to address the imbalance in "legal firepower" that prevents the courts from being a suitable forum for many SMEs. Secondly, it would necessarily determine disputes in accordance with relevant legal principles. In Mr Walker's eyes, this would not be appropriate, as many valid disputes concern conduct within the terms of the contractual relationship between the parties but which is none the less unreasonable. Finally, the establishment of a tribunal system would not be quick, in particular given legislative change would be required at a time when Parliament is largely consumed by Brexit issues.
The report therefore favours an ombudsman-style approach, which would require no legal representation, be quick to set up and assess complaints on a "fair and reasonable" basis. Leveraging off the FOS's existing infrastructure and legal framework, but at the same time acknowledging the FOS's existing focus on individual consumers, the Report recommends that the FOS is effectively split out into two separate services: one for consumers and one for SMEs. This new banking ombudsman would deal with complaints from SMEs which fall within the FOS's expanded jurisdiction under PS18/21 (as well as existing micro-enterprise complaints) but the Report additionally recommends a voluntary extension of that jurisdiction. The new facility would be supported by a specialist SME advisory board and include detailed reporting procedures and requirements.
Mr Walker and Professor Hodges have given evidence this morning to the Treasury Select Committee (the Committee) on SME Finance, which primarily focused on the Report's recommendations for legacy complaints and its departure from a tribunal system, even for larger complaints, which had been favoured by the regulator and the APPG. Mr Walker responded to questions supporting a tribunal service indicating that he had decided against it to eliminate the need for lawyers in the process; reduce the creation of further legal precedent; and to enable decisions on a "fair and reasonable" basis.
In terms of the legacy issues, the event proposed in the report to provide "closure and emotional release" for SMEs arguably adds little. However with distrust still existing with SMEs towards Banks, Mr Walker sees it as an important, high profile event where Senior Management can publicly acknowledge their hurt. This he hopes will enable both the SME community and the Banks to draw a line under past behaviours and move forward in a positive fashion.
The new banking ombudsman facility is a departure from the tribunal system that many were arguing for and is perhaps the most controversial aspect of the report. Concerns had already been raised by various parties, following the FCA's proposed extension to the FOS's jurisdiction, including its capability to deal with the more complex complaints that will be received from SMEs which have not been addressed by the Report. There will also inevitably be a lack of clarity as to what the FOS will consider to be "fair and reasonable" when it does start to consider complaints.
There are a couple of other smaller points in the report which are worth noting. Firstly, Mr Walker's view is that the proposed increase of the FOS's limit for financial compensation to £350,000 (see CP18/31) is not sufficient in the long term and should be increased to £600,000. Secondly, while the Report stops short of supporting the APPG's proposal that the right for a private person to take action under s.138D of FSMA claims be extended to SMEs, favouring a quicker fix instead, it does say those changes should be kept under review which is a further indication of the likely regulatory direction of travel.
If the recommendations of Mr Walker’s report are accepted and ultimately implemented, then they will transform the SME complaints landscape in the UK. Firms will need to commit significant resource to dealing with complaints falling within the new voluntary jurisdiction. However if the proposals do enable all parties to move on from legacy issues then they will hopefully enable Banks and SMEs to return to business as usual at a time of significant economic turbulence ahead of Brexit.
TLT have market leading experience in the arena of SME disputes and complaints, from advising firms on ad hoc complaints issues through to working closely with firms to manage high profile remediation projects. Should you wish to discuss any aspect of the Report or wider SME banking disputes more generally, please contact Paul Gair, Partner, Patrick Shee, Associate, or Jack Hargreaves, Solicitor in TLT London’s Financial Services, Disputes and Investigations team.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.
23 October 2018
by Paul Gair