The FCA has written to professional indemnity insurers to explain how high value compensation awards might look since the ombudsman increased the award limit to £350,000.
The regulator says in the letter, dated 17 May, it thinks the information will “help address some of the issues or questions stakeholders have raise regarding the ombudsman service approach to complaints.”
The Financial Ombudsman Service increased the ceiling on compensation claims from £150,000 to £350,000 on 1 April.
The change has been met with resistance from some PI insurers. Liberty Speciality Markets previously said it would meet the higher FOS limit, but amended cover will not apply to any defined benefit pension transfers transacted after the 1 April- these will need to be underwritten on an individual basis.
Also, adviser trade body Libertatem has put together a “steering committee” of industry professionals to take their challenges over the FOS limit increase to the FCA.
The details of the projected awards figures from the FCA, based on 195 complaints per year, shows it expects the total value of redress payments for claims between £150,000 and £350,000 to be £50.82m annually.
Of that, £11.32m is expected to relate specifically to complaints against IFAs.
Factoring in £70m worth of claims the FCA says may switch from the courts to the ombudsman service under the new award limit, the total number of claims per year could rise to 488 and the total estimated value of redress goes up to £120.82m.
Again, looking solely at complaints against IFAs the redress figure comes down to £37.36m.
However, the FCA says its figures assume all complaints are subject to the £350,000 limit but points out the new limit only applies to complaints about acts or omissions from 1 April 2019 onwards. Accounting for the lag between the act or omission and the complaint, the figures will most likely look much lower for the next few years, the letter states.
The letter also includes details of the additional governance arrangements FOS has in place for high value complaints. FOS will ensure, “all cases where the potential award for compensation is more than £150,000 are reported to the ombudsman’s legal team and its senior manager.”
The FCA also says: “The ombudsman service will shortly be publishing examples to help stakeholders understand how it has determined in the past that a court would be better placed to deal with a particular complaint.”
Personal Finance Society chief executive Keith Richards told members in a blog post the letter was, “a timely communication from FCA and will hopefully go some way to help mitigate some of the current concerns of PI insurers.”
According to FOS data there were 340,000 complaints to the ombudsman service in 2017/18. Richards says the FCA’s suggestion in the letter, “was that only a small minority of ombudsman awards would be likely to exceed the previous awards limit.”