Small business customers of financial services may need extra protections, says FCA

It is seeking views about whether its rules "strike the right balance" between protecting small and medium-sized enterprises (SMEs) and encouraging financial firms to offer their services to SME customers. It has also proposed extending the remit of the Financial Ombudsman Service (FOS) so that more businesses can pursue claims against providers without having to go to court.

The FCA said that SMEs had "traditionally been treated as having greater self-sufficiency and bargaining power" than individuals, but that their "needs, behaviour and expertise" were often similar.

"Our own work has shown that SMEs can experience poor outcomes in a wider range of situations," it said. "They can be exposed to risk at the point of purchase due to product complexity, limited choice or poorly managed expectations. When things go wrong, some struggle to navigate the complaints and claims processes or to obtain redress."

Insurance law expert Alexis Roberts of Pinsent Masons, the law firm behind Out-Law.com, said that, in the context of insurance, the FCA's discussion paper followed on from its previous work, which had uncovered a number of issues with the ways in which firms in the insurance industry deal with their SME customers.

"In the insurance context, the discussion paper follows its other thematic work on conflicts of interest in the SME broker market in May 2014, and SME experience in the insurance claims market in May 2015 – both of which are explicitly referred to in the paper," he said. "Issues that emerged during those reviews may be revisited now - particularly conflicts of interest, given the FCA highlighted this as a forward-looking area of focus in its business plan in the context of culture and controls."

"The fact that the FCA is engaging in a discussion with the SME market directly also demonstrates the regulator's ongoing customer-centric focus. It is too early to predict what regulators changes, if any, might result from the paper; but the FCA has noted, in the insurance context, that forthcoming regulatory and legislative change introduced through the Insurance Act and the Insurance Distribution Directive will already impact the SME market and will have to be taken into account," he said.

The FCA has asked SMEs and the financial firms that provide services to them to respond to its paper by 18 March 2016. In particular, it has asked for examples of "specific products, services or distribution channels" where issues for SMEs tend to arise, and submissions on "how and where" it should draw the line between those SMEs that receive the additional protections available to consumers and those that do not.

Only a "small minority" of SMEs are currently prevented from taking complaints to the FOS by its current eligibility criteria, according to the FCA. However, those that are unable to do so account for a substantial share of demand for financial services among smaller businesses, and the FCA is concerned that some of them are likely to be less experienced dealing with financial products and services.

As well as extending the FOS' remit, the FCA has proposed increasing the maximum redress the FOS can order a firm to pay to an SME beyond the existing £150,000 limit. It is also considering whether firms could use voluntary standards to further improve the experiences of small businesses, much in the same way as the existing Lending Code.

In its May 2014 review of insurance brokers and intermediaries' conflicts of interest, the FCA found that not all intermediaries understood or took steps to mitigate the conflicts of interest arising from their business models. This is of particular concern to SMEs, almost half of whom purchase insurance through a broker. Its May 2015 review of general insurance claims made by SMEs found a gap between SME customers' expectations and the claims service that they received.

The 2015 Insurance Act will introduce a new duty of 'fair presentation' on insured parties, which will apply to non-consumer insurance contracts. New, more flexible remedies will apply where the policyholder breaches this duty, so that the insurer will only be able to refuse cover where the breach was deliberate or reckless or where the insurer would not have entered into the contract on any terms had the breach not occurred. Further regulatory change may also result from the implementation of the EU's Insurance Distribution Directive, which is currently anticipated to be in place by the end of 2017.