UK watchdog says small firms may need more protection from banks

By Huw Jones

LONDON, Nov 27 (Reuters) - Britain's financial regulator has begun investigating how banks treat smaller companies that have been sold products too complex for them to understand.

The Financial Conduct Authority said on Friday it was seeking views on whether small and medium sized enterprises (SMEs) needed more protection and access to the Financial Ombudsman Service, which has powers to demand compensation.

SMEs form the backbone of the British economy, accounting for 47 percent of private sector turnover and 60 percent of employment.

"We want people to tell us whether our rules are appropriate: do they strike the right balance between protecting small businesses and encouraging firms to offer services to SMEs, to compete and to innovate," said Christopher Woolard, the FCA's director of strategy and competition.

The watchdog's own research has found that complex products, limited choice and that poorly managed expectations may expose SMEs to risk.

British lawmakers have been taking a closer look at how the financial sector treats smaller companies, defined in Europe as employing fewer than 250 people and have an annual turnover not exceeding 50 million euros ($53 million).

Banks are already paying compensation to small companies mis-sold complex interest rate swaps to shield them against interest rate increases that never materialised.

In November 2013, reports by Lawrence Tomlinson and Andrew Large raised concerns over RBS (LSE: RBS.L - news) ' treatment of SME clients in financial difficulty.

The Competition and Markets Authority found in October it is difficult for smaller firms to compare the merits of different bank accounts.

The FCA said that only a small minority of SMEs are unable to take complaints to the ombudsman who can order redress.

The FCA is looking at whether the amount of redress the ombudsman can order financial services firms to pay should be increased from its current limit of 150,000 pounds ($225,870).

Parliament's Treasury Select Committeee had raised concerns that SMEs may not have appropriate redress options. ($1 = 0.6641 pounds) ($1 = 0.9452 euros) (Reporting by Huw Jones)