The APPG on Fair Business Banking launched their highly anticipated dispute resolution report on 11 July 2018. The report, authored by Kevin Hollinrake MP and undertaken by the Centre for Policy Studies, sets out the position of the APPG on how to improve access to justice for SMEs in financial services disputes.
The two key recommendations of the report are that rights of action under section 138D Financial Services and Markets Act 2000 (“FSMA“) should be extended to SMEs and a new Financial Services Tribunal should be established to resolve disputes between small businesses and banks.
APPG criticises current methods of resolving disputes between SMEs and Banks
The report highlights that business banking scandals- in particular the actions of RBS‘s GRG and Lloyds HBOS has adversely affected many SMEs. To compound the behaviour of the Banks in mis-selling complex derivatives, there are not adequate protections in place to offer an easily accessible forum for dispute resolution if a bank does not adequately deal with a complaint and banks are not held to account to rectify their poor practices. The author of the report, Kevin Hollinrake MP criticised the inadequate protections available for SMEs in financial disputes with banks:
“It is clear to me, and to the other members of the All Party Parliamentary Group on Fair Business Bank that there is a systematic failure here, with many of those firms that have suffered from mistreatment and malpractice denied access to justice. Not only are our banks too big to fail, there are also often too big to take to court”.
Kevin Hollinrake MP, co-chair of APPG on Fair Business Banking
The key failings of the current financial dispute resolution system highlighted in the report are:
- Business customers have “less regulatory protection and fewer options for pursuing redress” than individual consumers, even though they are subject to the same problems but lack the resources or financial sophistication of larger companies.
- Private individuals have the right to pursue damages for breaches of the Conduct of Business Sourcebook Rules (“COBS Rules”) under section 138D FSMA. However, small businesses do not have adequate protections as they do not have the same right of action under s.138D FSMA, leading to the untenable and unfair position that most commercial banking and lending is not regulated.
- The Financial Ombudsman Service (“FOS”) aims to provide a free, impartial and informal forum of Alternative Dispute Resolution. However, many SMEs are denied jurisdiction because only EC defined “micro-enterprises” can have their complaints heard (with a turnover not exceeding €2 million and fewer than 10 employees). The compensation limit of £150,000 is also inadequate to cover the losses suffered by the majority of SMEs.
- The FOS lacks the power to offer appropriate redress. It operates behind closed doors without public scrutiny of its decisions; it cannot act where a business has gone into administration; it lacks the powers of a court to require disclosure and compel witnesses to give evidence and it is not designed for complex disputes.
- There are “significant barriers” to SMEs accessing the courts. Many SMEs are put off by the litigation process because there is often “an insurmountable imbalance of power and resources between financial firms and their business customers”, with SMEs being unable to afford the costs; can afford the time it takes for a resolution; and risk paying the other side’s costs (Banks will on the whole instruct large firms of expensive London lawyers).
- The common law is insufficient in financial services disputes, and despite regulations in the FCA Handbook and PRA Rulebook, many small businesses are unable to bring actions for the breach of FCA or PRA rules.
- The cross-party group of MPs have recognised that there is a “currently a significant problem for businesses in accessing justice” due to the gap in provisions between disputes dealt with by the FOS (£150,000 claim limit) and those capable of being pleaded in court (which claims would usually have to be valued at at least £5 million to attract litigation funding).
LEXLAW’s M Ali Akram contributes to APPG Report: Banks shape precedent to maintain tactical control in financial services dispute litigation
LEXLAW have significant and industry-leading experience in representing SMEs in banking disputes. Our banking litigators- lead by M Ali Akram– have advised on and acted to protect borrower legal rights in the face of predatory bank practices in the High Court than all other law firms in the UK combined.
M Ali Akram provided witness evidence on the effectiveness of the courts in resolving banking disputes to the APPG’s Bridging the Gap inquiry, the statements in which contributed to the APPG’s July 2018 report. In particular, his comments on the clear imbalance of power between the resources of financial firms and SMEs, which has been exploited by the banks to control which cases went to court, was relied upon by the APPG in compiling the report:
“That is one of the major problems that we see in our litigation cases: precedent. The cases that have gone to court have been modelled and shaped by the banks. They’re legally and financially sophisticated so they can overwhelm their opposition and what they do is pick off the good cases and settle them…We’ve had dozens and dozens listed in the past and not one ever went to trial. So what they do is, if a carefully constructed claim is put against them, they will settle it. If a badly managed and badly constructed set of pleadings faces them, they’ll take advantage of that to create a precedent and to maintain tactical control…”
M Ali Akram, LEXLAW Solicitors & Barristers, in APPG’s Fair Business Banking for All Report, July 2018
APPG’s key reform proposals
To “create a more level playing field between financial firms and businesses”, the APPG on Fair Business Banking recommends:
1.Enhance the Legal Rights of SMEs
- The simplest and most effective way to extend the legal rights of SMEs is to extend the section 138D FSMA right of action. It is suggested that this can be done by amending the “private person” definition in FSMA’s Right of Action Regulations 2001 (FSMA (RAR) 2001). Widening the ambit of the definition would give SMEs a right of action for breach of FCA rules.
- An alternative would be to extend SME’s rights of action for a breach of the FCA Principles for Business. It is suggested that PRIN 3.4.4R be amended to remove the restriction.
2. Extend Regulatory Protection
- It is anomalous that some financial services provided by banks is unregulated, which includes commercial lending and the selling of fixed-rate loans.
- The APPG suggest the definition of regulated activities set out in FSMA and FSMA (RAO) 2001 be amended to include unregulated activities including commercial lending.
3. Establish a Financial Services Tribunal
- A new Financial Services Tribunal (which LEXLAW has advocated for over 2 years) would “fill the gap in dispute resolution provision”.
- It is proposed that the Financial Services Tribunal be created under the Tribunals, Courts and Enforcement Act (2007). It will be modeled on the current tribunal system (akin to the Employment Tribunal), with a judge supported by two wing members (one from business and the other from financial services).
- The proposal includes a Tribunal with powers far greater than the FOS have at their disposal with full legal powers to enforce disclosure, compel witness evidence and governed by transparent procedural rules.
- The inherent cost risks of litigation for small businesses would be removed with the default position being that the losing side would not pay the other side’s costs. In more complex and costlier cases, “qualified one-way cost shifting” could be utilised to ensure SMEs could recover their costs (subject to a cap) whereas banks (and their team of expensive London lawyers) would not.
4. Consultation on Insolvent Firms
- Owners of insolvent businesses cannot take their cases to the FOS. If the current right of action under section 138D is extended to include SMEs, it should be possible for liquidators or adminstrators to bring s.138D FSMA claims.
- It is proposed that the government should launch a consultation to improve the common-place situation where insolvency practitioners are reluctant to pursue claims under the apprehension that the costs outweigh the benefits.
5. Address Time Limitations
- The limitation period for bringing a claim in financial services disputes is six years in England and Wales and five years in Scotland. Many cases involving SMEs go back many years and their claims have become unactionable as time has run out to commence a claim.
- In some cases, time can be extended, for example by agreeing a standstill with the errant bank. In addition, section 72 of the Limitation Act 1980 can postpone time running in certain situations, for example where fraud is claimed or where facts relevant to the right of action have been deliberately concealed.
- The APPG has called on the Government to ensure the time limits are extended, so that SMEs that have suffered historic banking abuses (within the past 10-15 years) can take their case to the Financial Services Tribunal.
LEXLAW Banking Litigation & Dispute Resolution
It is an absolute must that victims of Lloyds BSU, RBS GRG or other bank BSUs protect their legal rights. This is the only sensible course of action when a business is facing a high value dispute with a major bank, such as the Royal Bank of Scotland or National Westminster Bank. Otherwise, if there is no redress scheme, or if the bank refuses to offer reasonable redress, customers may well find they are time-barred from commencing legal action and their high value claim is now worthless. Legal rights can be protected by taking urgent legal advice and by instructing specialist financial services litigation solicitors to issue a protective claim form or by instructing us to prepare and agree a carefully written standstill agreement.
Our Financial Services Litigation team of Solicitors and Barristers in London are highly experienced in banking litigation and specialise in representing SMEs in banking disputes. Our high profile and high value cases regularly appear in the national and international media. Our banking litigators advise on the protection of borrower legal rights in the face of predatory bank practices. We have successfully managed and settled court litigation against all major UK banks. Call us on 02071830529 or complete our online contact form.
Financial Services Litigation Team, LEXLAW