Are lessors looking at higher regulatory fees as the FCA’s oversight expands?

Lorenzo Migliorato looks at the prospect of growing regulation in the SME finance funding market.

Though the Financial Conduct Authority (FCA) was primarily conceived as consumer finance and banking watchdog, recent quakes across the SME space have put pressure on regulators to expand its remit to at least cover smaller firms, short of a legislative overhaul of its functions.

A consultation is currently open on widening access to the FCA’s dispute arbitrator, the Financial Ombudsman Service (FOS), to firms beyond micro-enterprises. Under the proposed expanded eligibility criteria (fewer than 50 employees, turnover below £6.5m and gross assets below £5m), 160,000 new entities would gain access to the FOS. In the FCA’s eyes, this is to give firms more options than either a complaints review process set up by banks themselves, or an expensive court proceeding.

As the number of firms covered by the FOS – and the Financial Services Compensation Scheme (FSCS) – expands, it is likely that the FCA will raise the levies that fund its functions. Already, regulated firms need to pay a £550 fee for each successive “eligible” complaint against them after the first 25. As more of a lessor’s clients gain access to the FOS, the number of disputes levied against it is also set to rise, likely beyond a couple of dozen.

Generally, lessors will increase their spending on advisors to avoid missteps, and could even start favouring out-of-court settlements, so that the complaint tally in their FCA file is contained. However, commercial lending has long been unregulated, and there is no clean-cut definition of “unprincipled” behaviour that a lender should refrain from to avoid FCA scrutiny.

Asset finance companies have advised the regulator of a better way to work out FCA charges, based on interest earned rather than per rental payments. Another FCA consultation has recently ended that would look to change the formulas used. But with one consultation on compliance and overhead costs for lessors ending, another consultation opens on the FCA’s decision over extending the FOS’s remit to SMEs. The final decision will be revealed this summer.