"The FCA has had to accept that for the time being its regulated banks' SME lending and any related loan security enforcement activities remain outside the current scope of FCA regulation. "
On 15 April 2020 the FCA sent two Dear CEO letters concerning SMEs, one to its regulated banks lending to SMEs and their owner/managers, the other to its regulated insurers with a specific focus on SME business interruption insurance.
The FCA Dear CEO letter of 15 April 2020 to banks
In the wake of the RBS Global Restructuring Group and HBOS Reading Corporate Division SME lending scandals, the FCA has had to accept that for the time being its regulated banks' SME lending and any related loan security enforcement activities remain outside the current scope of FCA regulation. As Andrew Bailey reminded the MPs questioning his competency to be appointed as the Bank of England's governor, this will require parliamentary legislation to bring such SME lending within the FCA's oversight.
Given the current market upheaval caused by Covid-19 this is an obvious cause for regulatory concern. To bridge that regulatory and legislative gap, the FCA now intends to use their Senior Managers and Certification regime to hold individual senior managers at each bank to account, at least to the FCA.
In this Dear CEO letter to the banks lending to SMEs, each bank is asked to nominate one of their individual senior managers as personally responsible for their bank's lending to SMEs and to be personally accountable for the bank's SME lending practices, including any loan security enforcement actions.
Whilst it remains to be seen whether the FCA can and will actually enforce these accountability expectations as and when there is cause to do so, the remaining gap to be bridged is public disclosure of each bank's nominated senior manager to the SMEs. It does not appear that the FCA intends to make SME lending a senior manager function that can be publicly searched for on the FCA Register.
If the FCA does not make such information public then SMEs and their advisers should now be asking their lending banks who is the senior manager accountable for the banks' lending to them before any enforcement action is threatened by the banks themselves.
The FCA Dear CEO letter of 15 April 2020 to insurers
This Dear CEO letter focuses specifically on conduct in relation to SME business interruption insurance. The FCA expects insurers and brokers to play an essential role in supporting their SME customers who may be unclear whether they have appropriate cover in place. Clear, accurate and timely communication to SME customers is considered crucial, with the FCA collecting information from its regulated firms to assess how they are interpreting policies.
Whilst the FCA have accepted that most policies will not cover pandemics, it is emphasising those policies where it is clear that the insurer has an obligation to pay out. In these instances, the FCA expect claims to be assessed and settled quickly to ensure no financial pressures are exacerbated by slow payment. If there are reasonable grounds to pay part of a claim but not to make a payment of a claim in full, an interim payment should be made. If insurers disagree with this interim payment approach, they are expected to send to the FCA the grounds for reaching that decision including how they believe it represents a fair outcome for customers. Such insurer decisions will be used to inform the FCA's assessment of their culture.
Insurers are reminded that where a policyholder is a small business with an annual turnover below £6.5m, and fewer than 50 employees or an annual balance sheet below £5m, any policy disputes are likely to fall within the jurisdiction of the Financial Ombudsman Service ('FOS'). In due course, it is intended that the FOS will share details of the approach it will be taking to deciding complaints about business interruption insurance, most likely through a series of "lead cases".
The creation and scope of the FCA's small business unit
In these two Dear CEO letters, the FCA has announced the creation of a small business unit, headed by one of its senior leadership team, Andrew Wigston, that will co-ordinate the activities of the FCA across small business issues. These FCA activities will include ensuring its regulated firms are supported through the challenges posed by the current Covid-19 crisis, gathering intelligence about the treatment of small businesses by financial services firms during the crisis and ensuring a co-ordinated response by the FCA to any issues identified.
Anybody advising SMEs and their owner managers should bear these FCA expectations in mind with the FCA having created a small business unit to which concerns about poor conduct and/or customer outcomes can be escalated. Whilst the FOS is also intending to take a pro-active approach in relation to SME business interruption insurance complaints and claims, where any potential claims are in excess of the FOS' £355,000 claim limit then SME and their owner managers should seek legal advice as to how they are best pursued.