The Financial Conduct Authority (FCA) consultation paper CP18/31 proposed major changes to the award limit of the Financial Ombudsman Service (FOS). At present, the FOS can only instruct firms to pay up to £150,000 in compensation to any individual customer. If the FOS believes that a customer has suffered detriment in excess of this amount, it can recommend that the firm pays additional redress, but cannot force it to do so.

Now the regulator is proposing that this award limit is more than doubled to £350,000. The increase would take effect from April 1 2019, and where the complaint concerned issues that occurred after this date, the limit of £350,000 would apply. Where the complaint concerns issues that occurred prior to April 1, the limit would be £160,000. The consultation paper also proposes that both the £350,000 and £160,000 limits are increased in line with inflation in future years.

At present only around 1% of the Ombudsman’s upheld complaints involve customers who may have suffered detriment in excess of £150,000. However, the FCA adds in its paper that the average detriment from these complaints is as high as £305,000 on average, and that the FOS has had one case where the customer detriment was approximately £921,000. Cases involving business loans, interest rate hedging products (IRHPs), portfolio management and self‑invested personal pensions (SIPPs) are most likely to result in detriment in excess of £150,000.

The FCA will publish its final proposals on this issue in March 2019.

The Personal Investment Management & Financial Advice Association (PIMFA), a trade association that represents advisory and wealth management firms, has written to the FCA expressing its serious concerns about the proposals.

Its response opens with a statement expressing disappointment that the FCA did not engage with the financial services industry on this matter before publishing the consultation paper.

The response goes on to explain that the Association believes that introducing such a large increase would have a significant impact on the ability of its member firms to obtain Professional Indemnity Insurance (PII). PIMFA says that “we do not see how FCA can bring forward proposals in the CP having made no assessment of the impact on the PII market” and calls for the FCA to “undertake a detailed analysis of the impact on the PII market” before proceeding with the increase.

PIMFA also notes that one insurer has already estimated that PPI premiums for personal investment firms will rise by 25% from June 1 2019 when a new requirement is introduced regarding company insolvencies. It adds that the proposed FOS limit increase would push up firms’ premiums even further.

The Association says there could be three consequences of the proposed increase in the award limit:

  • A reduction competition, as new firms find it harder to enter the market
  • An increase in the so-called ‘advice gap’, where access to financial advice will become more difficult as firms pass on the costs of higher PII premiums to their customers via higher fees
  • In order to continue to be able to obtain PII cover at an economic cost, firms may have to alter their service offering

PIMFA also states that these changes should not be introduced until the FOS has had time to fully implement the recommendations of the independent review conducted by Richard Lloyd.

Finally, the Association questions whether FOS staff have the competence to adjudicate on awards of such a high amount, and notes that all civil litigation claims above £100,000 are dealt with in the High Court by senior judges that are highly qualified and have significant experience.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article