THE City watchdog has been accused of not doing enough to show it has learned the lessons of the financial crash, amid claims proposals to help small firms resolve financial disputes will not stop a repeat of one of the biggest banking scandals seen in the last decade.

The Financial Conduct Authority (FCA) has been consulting on how to improve access to the Financial Ombudsman Service (FOS) for small business owners.

Among the proposals is a move to broaden the number of firms which would be eligible to make a complaint to those which turn over less than £6.5 million and have fewer than 50 employees. At present only the smallest firms can complain to the ombudsman.

However, in its response to the consultation, the Federation of Small Businesses (FSB) argues that the FCA has not gone far enough with its recommendations, suggesting that they would unable to stop a repeat of the scandal which engulfed Royal Bank of Scotland’s Global Restructuring Group (GRG) in the aftermath of the financial crisis. A report commissioned by the watchdog into the GRG, a turnaround unit for distressed businesses, highlighted “widespread inappropriate treatment” of Royal Bank business customers at the unit. One internal memo, disclosed by the report, revealed managers were encouraged to let struggling customers “hang themselves”.

The FSB has expressed its disappointment that the owners of dissolved businesses or business subject to insolvency proceedings fall outside the scope of the proposals.

Mike Cherry, national chairman of the FSB, said: “There’s nothing in the FCA’s current proposals that would prevent another GRG-type scenario. Victims of past scandals will be disappointed to see that the FCA is not proposing ombudsman access for them – business owners who’ve lost their firms don’t fall under its new definition of eligible complainant.

“You look at these recommendations and can’t help but feel that the FCA should be doing more to learn lessons from the crash.

“Too often, the regulator doesn’t recognise that small business owners have far more in common with consumers than big corporations.”

The FSB is urging the FCA to give more protection to small business owners who use personal assets as collateral for business loans, observing that the convention led to the ruin of many after the financial crisis of 2008 and 2009. He said: “In instances where small business owners are asked to put personal assets on the line to secure a loan, it’s hard to understand why that’s not deemed consumer lending. If you’re effectively offering your house as collateral to access new finance, common sense dictates that’s consumer activity.

“During the crash, hundreds of small business owners had their lives destroyed because personal belongings were risked as part of commercial transactions.

“Recent media investigations have raised serious questions about the ombudsman’s capacity to take on more complex cases.

“Any widening of its remit must be accompanied by significantly increased investment.

“We should also be focusing on prevention as well as redress. Business lending contracts need to become clearer and more uniform so firms can tell exactly what they’re taking on.

“It could well be that expanding the FOS turns out to be a short-term fix. Over the long term, serious consideration needs to be given to a standalone tribunal for small firms.

“Many will still find themselves between a rock and a hard place: too big for the ombudsman, too small to challenge financial giants.”