An increase in the Financial Ombudsman Service compensation cap for small businesses could hit advisers’ professional indemnity insurance premiums.
In a discussion paper published last month on small businesses, the FCA outlined options for expanding the criteria for FOS complaints.
It said as a result the maximum award limit might need to be raised from its current limit of £150,000. The limit was increased from £100,000 in 2011.
Only individuals can be awarded compensation by the FOS, but micro businesses – defined as employing fewer than 10 people and with turnover less than €2m (£1.4m) – count as individuals.
Following the regulator’s interest rate swap misselling review, the Treasury select committee and Parliamentary Commission on Banking Standards recommended the FOS expand to allow more small firms to make complaints.
The regulator says while ineligible small businesses are a small minority of SMEs, they account for a “substantial share of the sector’s demand for financial services”.
The FCA says if larger firms were to be given access to the FOS, the £150,000 limit might need to increase in light of the larger sums newly-eligible businesses could borrow and invest.
The FCA adds: “It might in fact need to be increased regardless of changes to the eligibility criteria. As the Treasury select committee found in the case of interest rate swap misselling, the financial losses sustained by SMEs may exceed it substantially.”
The discussion paper invites views on whether the award limit should be increased for some or all SMEs, and whether it would be fair to have different limits for individuals and businesses.
PI broker O3 Insurance Solutions managing director Jamie Newell says: “Many advisers have SME clients so an increase in the compensation limit could lead to rising PI premiums.”
Clarke Willmott partner Philippa Hann says the suggested changes could lead to more advisers being unable to meet compensation claims against them.
She says: “My experience is many losses exceed the £150,000 limit.
“Advisers already suffer from inadequate insurance cover as it is often written on an aggregate basis, meaning there is a limit on the amount which can be paid out in one year.
“A larger FOS compensation limit could mean fewer clients are compensated if an adviser has multiple claims in one year.”
Jacksons Wealth Management managing director Pete Matthew adds: “An increase in the FOS limit would be worrying for PI premiums.”