• FOS powers to be extended

    Addressing the power imbalance in lending

Views from the flipside

The UK’s biggest banks have been mired in various scandals over the years. But for many small businesses, one particular scandal sticks out, because it shone a light on the lack of support for SMEs that encounter issues with financial institutions.

When companies that banked with RBS were in hot water financially, a division within the bank called the Global Restructuring Group (GRG) stepped in to help.

And yet GRG – which closed in 2013 – was accused of pushing these troubled firms into bankruptcy. While many smaller companies faced issues with the bank, they were unable to lodge a complaint with the Financial Ombudsman Service (FOS) because their turnover exceeded the €2m restriction.

But this restriction looks set to change. The FOS is currently limited to resolving complaints from individuals and micro firms, but last month the Financial Conduct Authority (FCA) called for the ombudsman’s powers to stretch to allow small businesses to lodge complaints.

The FCA will soon outline its proposals, which should include a bump to the existing maximum £150,000 fine. Fairness is a priority for the FOS when looking at cases, and the body takes the level of sophistication and knowledge of the complainant into account.

For example, a consumer will usually know less than a lender because they are not a specialist in finance, and they will have less power than a lender because they have fewer resources. Of course, the same imbalance can be seen between small companies and the big institutions they work with.

The GRG saga is a case point because it seems to illustrate a system which wasn’t in balance – that is, GRG had all the resources and the knowledge. There are plenty of businesses which don’t have the sophistication to deal with the problem (such as a legal team), even though their turnover and staff numbers exceed the micro business definition. And yet, these small firms have been unable to get help.

Better support for small businesses

Extending the FOS powers will come as welcome news to small companies, some of which have been forced to go through the costly and lengthy court system in order to resolves disputes with the big banks. The ombudsman offers a low cost means of resolving disputes, meaning that this change will save companies heaps of money in legal costs – money they could be spending on growing their business instead.

“All complaints would be dealt with in the same way, irrespective of whether a company has FOS rights or not,” says Simon Williams, head of compliance at LDF, stressing the importance of fairness when looking at complaints.

“The main difference between the banks and companies like ours is we like to look at each case and don’t differentiate on an arbitrary threshold, whereas the banks are often more process-focused. “To us, it’s simply good customer service to do this,” Williams adds.

The compliance boss also points out that, if companies use the threshold to treat complaints differently, they risk missing out on key learning points, while also alienating some of their client base. We’ve heard time and time again that smaller companies are struggling to get the working capital they need to bolster their businesses, so this move from the regulator finally offers some support for those firms in the squeezed middle.

Perhaps it might even stop the big banks from exploiting SMEs. Many SMEs are grappling with the finance issues and regulatory changes after the 2008 credit crunch. It’s time we gave them a break. Extending the ombudsman’s powers is a good start.

flipside

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Views from the flipside

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