One of the big challenges we face is correcting the misconception, often repeated, that the majority of private businesses have adequate recourse to dispute resolution and redress in the event that problems arise with a financial services provider.
In fact the current dispute resolution options open to businesses are haphazard and woefully inadequate.
In the event of a dispute or breakdown of the banking relationship, businesses must rely first on a lender’s internal complaints procedure. Where that fails to provide satisfaction, some can go to the Financial Ombudsman Service (FOS). However, the remit and resources of the FOS are limited and it can only act in cases of microbusinesses with fewer than 10 employees and a turnover of less than 2m Euros. It only has the power to enforce compensation up to a value of just £150,000—which is insufficient for many complex business disputes—and it has no investigatory or enforcement powers. It is simply not equipped to deal with complex commercial finance disputes.
The Financial Conduct Authority (FCA) does not regulate most of the commercial lending sector. It is therefore unable to intervene until it acknowledges a market failure of immense size in terms of the total economic detriment or the number of affected consumers, such as the scandals involving Interest Rate Hedging Products and Royal Bank of Scotland’s Global Restructuring Group. By this time the worst damage has been done.
According to the Office of National Statistics, private enterprise in the UK constitutes 5.4m private businesses with a total employment of close to 26 million and an annual turnover of over £3.8 trillion. It’s no wonder private enterprise and SMEs are so often called the ‘lifeblood of the economy’.
Of these, 96.3%, or over 5.1 million are classified as micro-businesses, having less than 10 employees and so could, subject to the limits and limitations mentioned above, approach the FOS.
The remaining—at a minimum—3.7% of businesses not covered by the FOS in fact employ 67% of the workforce in private enterprise—employing over 17 million—and generate 82% of the total turnover in this sector, or £2.9 trillion. This figure represents employers of over 50% of the entire workforce of the UK.
Source: Office of National Statistics
Beyond the FOS, there is usually just one alternative open to a private business if it is to stand a chance of resolving any kind of financial dispute: litigation. It must be prepared to go to court as though it were the contractual equal of its lender, usually with a huge disparity in financial capability, knowledge and standard of legal representation. This is just not a realistic option for the vast majority. Quite simply justice is inaccessible and unaffordable to most businesses in this situation. What started out as an uneven playing field becomes a mountain. It is not just owners, directors and customers of that business that are disadvantaged; its work force and entire supply chain are made vulnerable.
The FCA redress scheme set up for IRHP mis-selling did not work well and should not be used as a model for redress moving forward. Erroneous categorisation of ‘sophistication’ excluded businesses with legitimate complaints, and insolvent businesses were included but the scheme could never work for them. One-off schemes like this cannot act as a sticking-plaster for recurring issues. We need a systematic, holistic approach to protection and dispute resolution.
Fair Business Banking for All
To address the problems business owners face when seeking redress, the APPG on Fair Business Banking has recently launched our report, Fair Business Banking for All, published by the Centre for Policy Studies, which outlines our proposals to reduce the gap in accessing justice and to provide businesses owners with the confidence that they can access suitable redress in disputes with financial services providers.
Primarily, the APPG calls for the establishment of a Financial Services Tribunal with the legal powers required to force the disclosure of information and the attendance of witnesses as well as having clear procedural rules. In order to address the imbalance of power in financial services disputes, the default position would be that the losing side would not have to pay the other side’s costs to remove this element of risk for the claimants. However, claimants could apply to have this changed in cases deemed complex and therefore costlier with the use of ‘qualified one-way cost shifting’, meaning businesses would be able to recover their costs, subject to a cap, while financial firms would not. We propose that the costs of operating the Financial Services Tribunal would be met by the Treasury who could be reimbursed via a small levy introduced on financial services companies.
Moving forward, however, we must not forget the individual cases of historic banking abuses, of which many are not able to bring claims against banks due to the ‘statute of limitations’, which limits the period for bringing claims to six years in England and Wales and 5 years in Scotland. The APPG therefore calls on the UK Government to ensure that those who have suffered from historic banking misconduct will be allowed to take their cases to the Financial Services Tribunal.
Besides offering our suggestions for a primary dispute resolution mechanism, the report also recognises the regulatory void in business lending which denies many business customers the legal right to challenge their financial service provider in the event of a dispute. The report therefore calls for an enhancement in the legal rights of SMEs so that they have the legal right of action for breach of FCA rules and the FCA ‘Principles for Businesses’. Furthermore, the regulatory regime under the Financial Services and Markets Act (FSMA) does not apply to all financial services provided by banks. Crucially, it does not apply to commercial lending, so the FCA is unable to bring enforcement proceedings and private persons are unable to bring section 138D claims.
As well as increasing access to justice for small businesses, we believe that these proposals will also provide a timely boost to the UK economy. Without access to adequate dispute resolution mechanisms, business owners will have a lack of faith in their financial service providers and a lack of confidence in their ability to access adequate recourse in the event of a dispute. This has contributed to a fall in demand for borrowing by businesses, which means we are not realising the true entrepreneurial strength of the UK economy.
The cost involved in producing this report were met by a one-off contribution from RBS. They did not have any influence on the terms of reference for the project nor the content of the report at any stage.