The shadow of FCA regulation for SME leasing 

News that SMEs will be able to access the Financial Ombudsman following the RBS-GRG report was welcomed by some, but is regulatory creep afoot?

At the moment, it is only consumer business that is regulated by the Financial Conduct Authority (FCA) in the UK.

However, following the RBS GRG report, it was suggested that SMEs be able to access the Financial Ombudsman service as recourse for complaints about service.

A report from a Treasury select committee in July by MPs suggested that business lending be brought into the “regulatory perimeter” as part of an inquiry into access to finance for SMEs. The inference was that this might start the ball rolling for FCA coverage of SME finance.

In July, FOS review author Richard Lloyd said he favoured FCA-mandated redress schemes in case of large-scale mis-selling cases, rather than having each person affected go through the FOS route on an individual basis, as Leasing Life reported at the time.

His comments echoed those by FCA head Andrew Bailey last year, when he said of the RBS-GRG case: “It just doesn’t seem to me to be sensible that every time we get one of these things happening we have to set something new up [a customer redress scheme on part of the specific bank].

“I think it would be much better if we had a standing scheme.”

The introduction of a standing scheme could see the introduction of new rules for loan and lease pricing, and enhanced powers for the FCA to fine firms. It could also open the door to relative existing legislation that concerns affordability and vulnerability that currently governs consumer finance.

There is no doubt from the industry’s point of view that direct regulation of the commercial finance sector would mean complication, a growth in costs, and a pressure on profits.

In consumer lending, under the retail distribution review, commission is banned and firms have to be upfront about their costs and pricing on loans.

The complicated commission structuring that has worked well for the UK leasing and asset finance market between banks and brokers would be subjected to a more transparent approach, with SMEs aware of their fees in an upfront manner.

From an industry perspective this would be very disruptive where a great proportion of the billions of pounds of written business is done via a relationship-driven approach, with the industry priding itself on full-service value and a personal approach.

However, according to a press report in the P2P trade press, it’s understood that the Treasury itself is resistant to bringing SME finance to the FCA, citing concerns over complexity and it being unnecessary.

This resistance seems like common sense, or at least where the line of compromise stands between concern for small business customers and the provision of credit to SMEs.

Market response

At the end of November 2018, banking trade association UK Finance proposed an industry-funded alternative dispute resolution (ADR) service for larger SMEs, supported by the seven largest high street banks.

Small and medium-size enterprises (SMEs) with a turnover between £6.5m and £10m and a balance sheet up to £7.5m will be able to have their banking and finance disputes reviewed and redressed through alternative dispute resolution arrangements, following the creation of a specialist ombudsman service to address larger and more complex cases for eligible SMEs.

UK Finance said the industry was committed to establishing an independent review process for unresolved legacy complaints brought forward by SMEs since 2008. This is alongside the creation of an independent SME advisory council with the ability to consider the treatment of SME customers and emerging issues and trends.

To deliver these new voluntary arrangements, the industry will establish an independent Implementation Steering Group to undertake further work to develop the scope, operation and funding of the scheme for eligible historic cases; and to develop and implement the voluntary ombudsman scheme refining the application, delivery and funding of a voluntary ombudsman scheme for SMEs with turnover of between £6.5 million and £10 million and a balance sheet up to £7.5 million.

Independent SME Advisory Council

UK Finance said it will also support the creation of an independent and transparent advisory council with the ability to consider emerging trends and issues regarding access to finance, the treatment of SME customers by financial services providers and the provision of appropriate support to SMEs to ensure there is an ongoing dialogue to address potential challenges early and effectively.