The current landscape
In February this year TLT hosted a client event titled the Changing Landscape of SME Banking Disputes. Speakers from UK Finance, RBS, the Financial Ombudsman Service (FOS) and the CBI provide their views on why the landscape looked like it did and how they thought it would change in the near future.
The event provoked rich debate and came at a time when the expansion of the FOS's jurisdiction to include SMEs of a certain size (the FOS Expansion) was not yet in force and the voluntary Dispute Resolution Scheme (DRS) for complaints brought by large SMEs, both on a "go forward" and "legacy" basis, was embryonic.
Now that the FOS Expansion has come into effect and the DRS is gaining structure in advance of the pilot scheme going live later this year, it is becoming possible to see the beginnings of a framework as to how quickly and how significantly the SME complaints landscape is likely to evolve. Stretching the title metaphor a little further, in this article we look at three contrasting scenarios which may reflect the shape of things to come, before discussing which is most likely to occur.
Some would argue that SME complaints have been bubbling under the surface for a long time, gradually building up pressure. Claims management companies are rumoured to have been stockpiling complainants, waiting for an appropriate time to send in complaints to maximise the chances of redress. With the FOS Expansion and the introduction of the DRS, a sudden and comprehensive outlet is provided for all those complaints to go "live". The resources required to deal with the complaints; the claims management industry's involvement; the outcomes, Final Decisions and appeals may quickly and significantly change the landscape for commercial complaints and have a lasting effect. That effect, however, may in the long term prove to sow fertile ground for new SME lending as the trust and confidence between SMEs and lenders strengthens and provision of funding increases.
In this scenario, change is gradual but the end result is fundamentally different and irreversible. Here, slowly but surely, SME complaints start to come in through the newly available avenues, perhaps in low volumes but with a steady flow. As the FOS, DRS and claims management industry take hold and drive firms to manage commercial complaints in similar ways to retail complaints, the two areas move closer together until finally, they join and retail and commercial complaints share in all but name the same resources within firms, complaints handling rules and independent resolution schemes. In the longer term, as that bond grows stronger and lines become more blurred, formal regulation in the retail space is extended across to capture commercial lending and the merging of the two landscapes is complete.
In this hypothetical, there is no sudden deluge of SME complaints and firms soak up those that do eventuate via existing resource. Despite the best efforts of firms and industry and wider stakeholders to change the look of landscape for the better, trust levels in the market place remain an issue in the SME lending space and the objective of drawing a line in the sand in respect of legacy and historical reputational issues is not quite achieved. Frustratingly for both firms and SMEs, things essentially stay more or less the same as before.
The three scenarios detailed above are deliberately simplistic and controversial. Clearly, the future will adopt elements of all three and look different for different lenders, product areas, types and sizes of SMEs as well as depend on a multitude of other external factors. We can, however, draw out a few characteristics and conclusions which are perhaps more likely than others to come to pass.
From what has been seen so far, the FOS small business jurisdiction hasn't resulted in an onslaught of complaints since it came into force on 1 April. Indeed, the FOS only expects to see around 1,200 in the first year. However, it remains to be seen whether the DRS will produce higher volumes, in particular by virtue of the "legacy" element of its scope. There is some analysis that suggests that claims management companies have been quietly stockpiling complaints ready for release into the DRS as soon as it goes live, although the total number is still unknown and hard to estimate. Overall, however, it does not seem too likely that the sudden and dramatic onslaught envisaged in scenario one will arise.
More likely is the steady flow of SME complaints reflected in scenario two. As SMEs acknowledge and start to utilise their new avenues of complaints resolution, in-flow may also pick up pace in the longer term. Whether the "tectonic shift" across to merge with retail complaints in scenario two will happen is more open to be debate. Although firms' and the FOS's own resources may overlap to enhance efficiencies in the longer term, the larger point around the extension of regulation to include commercial lending is still very much up in the air (and remains controversial within the industry and amongst wider stakeholders).
Perhaps we can reasonably disregard a scenario three landscape. It is highly unlikely, given the media and political pressures that abound in this space, together with reputational risk and focus on cultural turnaround, that the SME complaints landscape will remain unchanged going forward. For that reason, it is imperative for firms to stay at the forefront of developments in the area so that they can not only plan ahead on an informed and strategic basis, but also input into how they believe the landscape should look like in the future.
What is agreed amongst everyone inhabiting that landscape is that, however change comes, it should be an improvement in the long term, engendering increased trust and confidence in the SME finance market and creating a more efficient and robust environment for commercial lending going forward. After all, SME lending is such a crucial part of our economy (SMEs contributed 52% of all private sector turnover last year), can anyone afford for it not to be preserved and encouraged?
For more information contact Peter Richards-Gaskin, Partner (firstname.lastname@example.org) or Jack Hargreaves, Solicitor (email@example.com), in TLT'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 July 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.