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FCA plans to hike FOS compensation limit by £200,000

The FCA has published a consultation on proposals to hike the maximum compensation amount the Financial Services Ombudsman can require firms to pay.

Raising the maximum amount of compensation would see the cap increase from £150,000 to £350,000.

Adviser and wealth manager trade body Pimfa has already criticised the proposals arguing they could lead to fewer consumers receiving advice.

Pimfa chief executive Liz Field says: “We are deeply concerned that this proposed move could act as a barrier to entry for smaller firms as this will impact a firm’s ability to obtain professional indemnity insurance at a viable economic cost.

“This could reduce the number of firms within our profession and further widen the advice gap…Our profession has an essential role to play in helping to build a culture of savings and investments, and this move could severely impact firm’s ability to be able to provide this vital service to clients”.

The regulator has also confirmed it plans to extend access to the ombudsman to more small and medium-sized businesses.

This will allow a wider number of businesses to seek redress. SMEs will have to meet a turnover test and one of either a headcount or balance sheet total test.

Under previous rules, businesses had to meet all three points before they could take a claim as a business, not an individual, to FOS.

The  announcement of what the FCA calls “near-final” rules comes less than three months after FOS chief executive Caroline Wayman told the FCA the complaints body was ready for new responsibilities.

Wayman said at a meeting in July that she was confident the FOS was ready to take on claims from small businesses, charities and trusts.

FCA chief executive Andrew Bailey says: “The changes are an important extension of the ombudsman service’s role and remit. We will work closely with them to ensure that they are ready, so that SMEs are able to benefit from new rules as soon as they come into force.”

FOS ruling cannot add new duties for Sipp providers, court hears

Bailey adds: “We recognise it is vitally important for SMEs to have a mechanism to resolve disputes and we are clear the FOS is the right route for this.”

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Comments

There are 18 comments at the moment, we would love to hear your opinion too.

  1. This would push PII premiums to levels not seen since the Pension Review in the 90’s !!

  2. This would be both morally and ethically unjustifiable as the FOS does not adjudicate based on law. The system already allows consumers to complain without any financial cost, loss, repercussions or accountability via the FOS. The current £150,000 limit is more than enough, as any compensation above this amount must be a case of law, not what they wished, or thing happened. This effectively puts advisers and PI Insurers in a position of writing a blank cheque for £350,000 with NO appeal.
    This will result in consumers seeing the advice gap become a gaping whole. PI Insurance will be pulled by the clear majority as the market is already to small for them to operate effectively. The FSCS Levies will more than double.
    To me this is a further indication that the FCA knows they are failing to control the market. Their solution is to deflect the blame and cost to the industry with little thought of the consequences to the good and ethical advisers. I wonder, would they accept a reduction in their budget for ever consumers loss under their watch without any form of appeal?

  3. If nothing else, awards of £150,000 not met by their PI insurers are highly likely to wipe out even more small firms.

    And what will happen then to the sums they’ve been ordered but not been able to pay ~ will they be dumped onto the rest of us by way of the FSCS?

    I’m all for consumer protection for the simple reason that, if it’s done right, it enhances consumer confidence and encourages them to come to people like me. But massively ramping up the amounts that the FOS will be empowered to order firms to pay is merely addressing the symptoms not the root causes.

    What is really needed is proportionate and targeted regulation to prevent so many of these motorway pile-ups happening in the first place. What hope of that we wonder?

  4. Hip hip hooray!

    As a mere client who was gouged out of more than half a million, this is great news.

    I personally believe that clients should receive full compensation without any limit applied. Justice should have no limits.

    The firm that ripped me off is still going strong and making profits , by the way, and issuing new Jags to its directors every year.

    • If it was justice according to the law then you are right. The problem is that the FOS does not have to follow the same law that everyone else does.

      Presumably you would support equal justice for all without limit, that also applies to mere financial services firms? When we get that you’ll hear no more complaints from advisers.

    • Barney, did you take legal advice to see if there was a way to pursue a negligence claim through the courts? That route is uncapped, and with losses of over £500k it’s the only option for full restitution.

      If you settled in full after a FOS ruling, you might be unable to open new proceedings, but your posts wasn’t clear about which stage of the process you have reached.

    • Barney, sorry to read and for your loss, I take it you have complained and won your case?

      If you have, you should be willing to name and shame, giving details of how you were gouged out of half a million.

      As a professional adviser I find your comments very upsetting but interesting. Wishing to understand how this happened. Was the problem unregulated investments? Failed fund? I fund it hard to imagine your position. Were the adviser/s regulated?

      I agree clients should be compensated, but also the regulation needs to work to protect both advisers and clients. At this time regulations is not working as the good advisers have to pay for the bad. This will result in massive increased in cost and fees or closure of business and advice.

      The vast majority of claims at this time are unregulated investments, which a very large proportion if advisers don’t use, want removed from regulated pensions and investments offerings.

    • There should be no limit, compensate in full.

  5. Lets face it, why put a ceiling on the FSCS at all ?

    This action from the FCA is confirmation the PI market is broken they know its broken we know its broken, pissing around with FSCS limits is just semantics.

    Barney Cooper is right, people who have been ripped off, scammed, or just had poor advice should compensated in full, however the the system of passing whether a claim is upheld or not should be judged under English law, not by playing, “pin the tail on the donkey” the FOS’s favorite game !

    • DH The FCA is blissfully unaware of the impact this might have on the PI market hence this question in the CP

      Q13: Do you have any analysis or evidence to present in
      relation to how the costs of professional indemnity
      insurance (PII) might change if the ombudsman service’s
      award limit is raised to £350,000?

      I find it pretty disgraceful that they have not established this already

      • Disgraceful or just lazy? Why didn’t they just ask the PI insurers themselves??? In fairness there is an attempt to calculate the extra compensation paid out on approximate figures for claims decisions between £150K and £350K. The figure for the extra compensation not paid (or ‘harm being addressed in FCA terms) was £113M per year. At section 3.26 in the CP they seem to think this will result in extra premiums of £77M based on an assumed claims ratio of 63% but I can’t get my head round that thinking. Unless we’re looking at philanthropic PII insurers, in my view the increase in premiums will need to be a minimum of £113M plus 12% IPT, plus a bit more for the unknowns (e.g. makes it more lucrative for claims companies). Let’s say £130M. It doesn’t say how much of this will be attributable to advisers (as opposed to banks) but it won’t be small. So…

        Costs will go up, clients will have to pay, some won’t be able or willing. Hardly helping to close the advice gap is it? From a client’s perspective surely it’s better to be able to afford an adviser with a lower compensation limit than have no adviser at all? Won’t bother the wealthy so they gain at the expense of the less wealthy.

        At some point you would hope the ‘driving costs down’ department at the FCA will end up speaking to the ‘driving up costs’ departments and some consensus and common sense will prevail.

        This all comes back to what I’ve said a number of times before. The FCA, quite honourably it must be said, want the very best (better than best in the case of the FOS) for consumers but is it practical? The story of when Marx travelled to Russia to meet Lenin is apt. Marx stepped out of First Class train carriage and Lenin was furious, asking why a good communist was not travelling third class with the people. Marx replied, “Clearly you have misunderstood my writings for all these years. I didn’t invent Communism so we could all travel Third Class, I did it so we could all ride in First.” We all know how that ended up…

      • Morning Nick
        I honestly do believe the FCA know this will effect PI premiums just like I honestly believe they couldn’t less

        We have a massive problem here, in that the PI providers have less faith in FOS decisions than we or the public do

        The trouble is, we/our clients have to pay for this absence of faith.

        So the the limit is just (as I said) semantics the FCA know exactly what impact this will have, otherwise they would have not have set a limit. my best guess is…. they have worked on the principle that PI premiums will double by raising the limit to £350,000.
        Now getting them to admit this is another kettle of fish ?

        • Good afternoon DH

          I have just spent some further time reading through the CP. It is full of guesses and estimates about the impact.

          Some good excuses as to why they don’t have precise data but I don’t guess they would accept similar excuses from a regulated firm or individual.

          Sets us up nicely for an increase in FOS costs as well as an increase in PII premiums with the following;

          3.20 The ombudsman should already be ensuring it has the skills and expertise necessary to determine any complaint from currently eligible complainants quickly with minimum formality, and with reference to what in its opinion, is fair and reasonable in all circumstances of the case.

          “Should” is a pretty worrying word don’t they know, haven’t they asked?

          3.22 if the ombudsman service needs additional skills and experience to meet its statutory obligations then it is the service’s responsibility, as an independent body, to ensure it has the revenue (from the levy and case fees paid by firms) to fund those additional resources. Even if the ombudsman service did need further resources specifically because of our award limit proposals, we would not expect these to be significant.

          Don’t they know, haven’t they asked?

          I appreciate this is a consultation paper but I can’t help but feel that the Policy Statement will be a cut and paste job!

  6. FCA chief executive Andrew Bailey says: “The changes are an important extension of the ombudsman service’s role and remit. We will work closely with them to ensure that they are ready, so that SMEs are able to benefit from new rules as soon as they come into force.”

    So the consultation is a farce then…

  7. From a client perspective, this is great news. Anyone subject to poor advice should be able to recoup their losses, and the cap of £150,000 sometimes just isn’t enough.

    From an adviser perspective, this is terrible news because of the way that FOS rulings have a way of pushing firms out of business with the assets then falling onto the FSCS and, via the funding model, the rest of us.

    Part of me is glad to see this happen, but I do hope this triggers a review of how the FSCS funding is achieved, as otherwise this may end up with more good advisers struggling to stay afloat because of the actions of bad ones.

  8. Of course I meant FOS not the FSCS !

  9. My opinion has always been the FOS is not fit for purpose and UK law should adjudicate and apply.

    The FSCS should then have no limit. If PI Insurers and advisers could rely on the law of the UK, contract law, this would be acceptable. At least then the advice and paperwork can be documented so as to offer some certainty and protection to ALL parties, including the consumer.

    At this time the FOS can use hindsight and brush aside caveat emptor as it wishes. There has to be balance. The FOS should only be able to adjudicated on small claims, the remainder should be settled in court. The cost of legal action restricting access to consumers to challenge is often used as the reason for the FOS, but it should apply UK LAW to the letter. The FOS cases reviewed and judged under law.

    As a company we have only had three complaints in 19 years, non upheld, but I have seen clients lie through their teeth and have no repercussions for their dishonesty. What is just as upsetting is it does not cost them a penny.

    The one think we should all agree on is consumers need to be compensated for bad advice. We can also all agree, advisers, PI, clients, is that the system is broken, not fit for purpose, and that is what happens when you do not use the law to settle disputes.

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