Regulatory creep warning over rise in FOS award limit

7 October 2010 | By Natalie Holt

Advisers and lawyers have war-ned of regulatory creep following the FSA’s proposal to raise the Financial Ombudsman Service compensation limit from £100,000 to £150,000.

The proposal was published in a paper on complaint handling last week and, if approved, the new award limit would apply to complaints referred to the FOS from January 1, 2012. The new limit would apply irrespective of when the advice causing the complaint was given.

The FSA says firms should not have been operating under the assumption their liability was capped at £100,000 as legal action can mean redress of over £100,000. It says firms have been given time to prepare, including making any changes to professional indemnity insurance.

In the consultation paper, the FSA says: “We have had some indication from insurers that PII premiums may increase due to an increase to the ombudsman service award limit.

“We have not been able to quantify the size of any potential increase and would welcome further evidence on this point.

“For some small firms, where PII premiums are already relatively high as a proportion of total income, a material increase in PII premiums, if it occurs, may have a significant effect on the individual firm.”

But the regulator does not consider that the impact on firms will be significant as it argues strong competition in the PII market and the small number of high-value cases will mitigate the impact on premiums.

Aifa says it will lobby for a comprehensive review of the FOS’s role and accountability. Director Robert Sinclair says: “There has been regulatory creep, where the FOS has shifted from a dispute resolution service to an organisation that seems to act as both judge and jury.”

GDC Associates partner Derek Gair says: “If the FOS was bound by English law in every respect, I could have some sympathy for raising the limit. But it does not recognise the Limitation Act and does not recognise the right to an independent appeal. Until the FOS recognises those rights, nobody can have any sympathy for this proposed increase.”

CMS Cameron McKenna partner Simon Morris says: “The increase in the maximum award to £150,000 is concerning to the industry when FOS decisions are taken with limited due process.”

Morris argues that the impact of increasing the award limit will not just be felt at an individual firm level. He says: “The FSA is emphasising that when the FOS upholds a complaint, it is setting a binding precedent, so a single FOS decision where there is no right of appeal can expose a firm to thousands and occasionally millions of pounds of compensation across a wide range of similar transactions.”

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