The financial regulator, the Financial Conduct Authority (FCA) is currently consulting on whether there is adequate protection for small and medium-sized enterprises (SMEs) when they use financial products and services.
In the introduction to its consultation it states that:
“We are asking for your thoughts on whether the level of protection provided to SMEs in our handbook is broadly right; whether our rules should treat more SMEs like individual consumers and extend provisions reserved only for the small SMEs to larger ones; how good practices could be best promoted among firms; and whether more ambitious voluntary standards could provide an alternative to or compliment changes to our rules.”
This consultation hopes to address a very real issue which we have seen time and time again in working with SME clients who have disputes with their banks.
Whilst there is adequate protection in place in respect of individuals, and in some cases micro enterprises, to date SMEs have been relatively poorly protected by the FCA conduct of business rules contained within their handbooks. The reason being is that they are treated no different from much larger “blue chip” organisations. Much larger organisations in their discussions and negotiations with banks have much more bargaining power and access to their own independent advice and financial information.
The FCA has asked SMEs to consider the issue of this imbalance of bargaining power and asymmetry of information between an SME and a bank as a supplier of financial services.
The review also seeks SMEs’ views on the inappropriate Incentivisation of bank staff and the lack of disclosure of incentives which can also result in poor outcomes for SME customers.
An example of this is the non-disclosure of sales commission for the sale of some financial products, such as interest rate hedging agreements. The failure to disclose that a product is being sold on a commissioned basis could result in a breach of the FCA’s conduct of business rules. However such a breach would not be actionable by an SME, however it would be actionable by an individual who was sold the same product.
SMEs are particularly vulnerable to issues of mis-selling of financial products in that the potential losses resulting from a mis-sale and/or misconduct can be large, and in some cases life changing sums.
The mis-selling of financial products to SMEs can have knock on effects to their directors, owners and their family members as well as suppliers and customers. Personal guarantees and securities will often be in place over the assets of the directors and their spouses.
This gap in protection can perhaps be seen most readily in cases involving individuals as sole traders. They enjoy better regulatory protection as they are treated as private persons. If they suffer a loss as a result of breaches of the FCA rules, they have a statutory right of action for damages. While sole traders can bring an action under the terms of the Financial Services and Markets Act 2000 for a bank’s non-compliance with the Conduct of Business Rules an SME of comparative size would not have this ability.
Once the FCA has gathered the results of the consultation it intends to publish its feedback. The FCA has stated that it will use its finding to inform its ongoing interactions with firms, stakeholders, legislators, policy makers and regulators in the UK and abroad.
As such responses to this consultation could therefore affect future regulation and legislation.
The consultation is due to draw to a close later this month. The FCA has asked that submissions are made by 18 March 2016.
We have provided a link below to the consultation’s webpage:
If you have any questions regarding the scheme or you are a director or owner of an SME which has had difficulties with its bank then please let us know. Contact us today via our online contact form.