SMEs access to the Financial Ombudsman Service: implications for the insurance sector

The challenges small and medium-sized enterprises (SMEs) have in obtaining compensation from financial services providers has attracted the interest of the UK Government and the UK Financial Conduct Authority (the FCA) following the LIBOR rate rigging scandal and other controversies.

Some reforms have been implemented with Section 13A of the Insurance Act 2015 allowing SMEs to bring damages claims for the late or non-payment of valid insurance claims. The FCA has now confirmed it plans to extend access to the Financial Ombudsman Service (the FOS) to many more SMEs.

The FCA's new near-final rules, which it intends to implement from 1 April 2019, will allow SMEs that satisfy the relevant criteria to file complaints with the FOS against the providers of regulated financial services, including insurance companies and brokers. SMEs will constitute eligible complainants where they have:

• An annual turnover of less than £6.5 million; and
• Less than 50 employees or an annual balance sheet total of under £5 million.

These thresholds are significantly higher than those that currently apply which limit SMEs access to the FOS to micro-enterprises who employ fewer than 10 people and have a turnover or annual balance sheet of less than €2 million (c. £1.75 million based on current exchange rates).

The criteria for establishing whether a business is an SME is to be assessed at the time of the complaint not the date an insurance policy was entered into or an agreement with a broker signed. Insurers and brokers can take account of the turnover, assets and number of employees of any parent companies or other controlling enterprises in considering whether the relevant criteria has been satisfied. This will likely bar small companies that are part of much larger corporate groups from accessing the FOS.

Where the position is not clear though insurers and brokers will be obliged to treat a business as falling within the SME criteria. As this information is often difficult to obtain, it is likely that more businesses will be able to access the FOS than may be anticipated.

The changes do not apply to businesses regulated by the FCA. As such, a dispute between a small broker and an insurer could not be referred to the FOS. The directors of insolvent or dissolved companies will also not be able to access the FOS. This is due to the current corporate insolvency regime which can only be reformed by the UK Government. The new rules may therefore have a smaller impact on the D&O insurance sector than the other commercial lines.

The impact of these changes will be heightened if the FCA proceeds with its other proposals. These include increasing the current £150,000 cap on the FOS' compensation awards to (1) £350,000 for complaints concerning acts or omissions after 1 April 2019, (2) £160,000 for complaints regarding acts or omissions prior to 1 April 2019, with both limits to be increased thereafter by inflation each year.

Impact on the insurance sector

Insurers and brokers will need to take swift action to prepare for the FCA's new rules which are due to take effect in less than 6 months' time. Consideration will need to be given to the information requested and collected at the advisory and underwriting stages. Whilst the size of a business at that point will not be determinative of whether it is eligible to file a complaint, the collection of information as to this will make it easier to assess this if a complaint is made.

Contract and policy terms should also be reviewed across all commercial lines to ensure they are clear, easily understandable and in plain English. The FOS is likely to uphold complaints where there is ambiguity as to the meaning of a term or condition.

Claims handlers will need guidance on the new rules, in particular the criteria for establishing whether a business constitutes an eligible SME. Claims management and complaints procedures should be updated. Insurers and brokers will want to check that agents (such as loss adjusters), advisers (including solicitors), and other third party administrators are up to speed with the changes. Protocols or service legal agreements may need to be revised. Guidelines provided to cover holders as to claims handling should also be reviewed.

As the changes will naturally lead to more complaints about brokers and insurers being submitted to the FOS, there may be an increase in the workload of those designated to handle complaints. As SME complaints are often more complex than those of consumers, it may take more time to formulate responses. The percentage of SME complaints that are referred to an ombudsman for a final decision following an initial ruling from an adjudicator may also be higher than the equivalent for consumers.

As the FOS determines complaints on the basis of what it believes is fair and reasonable rather than strict legal liability, it is not obliged to follow the decisions of the UK courts, even where those decisions seem to be directly on point. Thus, the FOS is more likely to uphold complaints than the UK courts.

Where complaints against insurers concerning the late or non-payment of claims are upheld, the amounts awarded may include additional damages on account of this. The financial implications of this could be significant in some cases.

Brokers may respond to these changes by raising their commission and charges, and insurers by increasing the premiums payable by SMEs for certain class of insurers. Such increase in premiums could have an outsized impact in certain areas, where affordable insurance is not always easy to obtain. Where business are required to have certain classes of insurance, this could lead to some deciding to cease trading rather than pay premiums that are not financially sustainable.