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PI fears over FOS limit increase

An increase in the maximum award from the Financial Ombudsman Service could put increase pressure on professional indemnity insurance costs, it has been warned.

The current FOS limit is £150,000 – which can be insufficient to cover pensions complaints in particular – with proposals to increase this to £350,000 from April next year.

The deadline for the consultation closed today, and both Royal London and law firm RPC have claimed that firms could be forced out of the market if greater compensation awards mean PI bills rise further.

Royal London notes that the FCA estimates an extra £77m in PI bills could be needed across all firms falling under FOS, and argues that advisers could have to increase fees on the back of this.

Royal London policy director Steve Webb says: “There is a real risk that raising the FOS limit could lead some PI insurers to withdraw altogether and others to hike their prices. It is already proving difficult for advisers to obtain affordable cover and this could make the situation much worse. If the result is that fewer clients can obtain affordable advice then it is hard to see how consumers will benefit.”

In it consultation, the FCA says there is a shortfall of £113m between compensation recommended and compensation paid because of the award limit.

However, RPC says many business already consider PI “prohibitively expensive”.

It adds: “More claims against financial services firms, for larger amounts, would mean even more expensive PI nsurance. There are already only a limited range of insurers that will provide PI cover to financial services firms.

“Unaffordable PI insurance could mean that more financial services firms are kept out of the market, which would decrease competition at the detriment of consumers.”


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Truly, this is the industry, sorry profession, that will destroy itself.

    Our survey findings in November, carried out since the announcement, have been passed on the the FCA as part of the consultation, the TSC has thrown up some interesting and disturbing repercussion facts if this happened and our survey has been sent to Nicky Morgan MO, who heads up that committee..

    122 responded to the survey, here are the results along with some heartfelt comments that we would advise are taken seriously by the FCA.

    Would it be fair and reasonable for the FOS to increase the maximum award from £150k to £350k, some 133%? 91% say no.

    I would leave the industry

    A totally ridiculous & unwarranted increase!

    It could be fair if advisers had a legal right of appeal on FOS decisions.

    One cannot look at this in isolation. the fact that there is no longstop or independent appeal mechanism means that the supposed balance is unnaturally tilted toward the complainant

    My understanding was that the previous limit identified that larger cases were more appropriately dealt with by the civil court system, where both parties can be represented, and both have the right of appeal. with the level of claim justifying the additional cost involved

    How many RI’s does your firm have?

    50% had one

    36% hade between two and three

    14% had between four and ten

    How many AR’s does your firm have?

    All had between one and three

    What is the current cost of your PI?

    The lowest was £25,00, the highest £50,000 with £12,000 as an average

    When does it renew & who is it with?

    There was a good spread of dates with most being mid to late next year, Collegiate were the most used insurer, Liberty Mutual came second.

    What is the excess?

    Most carried £5,000 excess, one had splits of £10,000 for DB work, £5,000 for investments and £2,500 for protection

    Have you claimed on your PI? If yes, how many times?

    None had claimed

    Have you ever been declined PI renewal?

    Only one

    Have you ever been offered special terms?

    Only two. Some had seen a reduced excess on the first claim and some had seen £10,000 excesses for endowment claims

    How long have you been trading?

    13% had been trading for less than two years, 9% for two to five years

    32% for six to ten years

    46% for over ten years

    Would a £350k FOS award cause you difficulties? If yes, how?

    96% said yes

    As your article predicts, higher PII costs and Cap Ad requirements are likely to create an unreasonable financial burden and a restriction is our ability as a small firm to trade. The additional burden of more businesses folding and higher FSCS costs only adds to this burden.

    Especially if it adds to the capital adequacy rules, we are carrying £20-K now as a one-man band!

    I would immediately cease trading and consider whether to follow HB’s solution if I am to be made destitute by a system which puts me outside the law.

    To be honest any award is likely to exceed my capital resources so my business would fail. At present if my PI insurer picked up claims I could pay for 2 excess claims before I’d breach my cap ad requirements

    Would a £350k FOS award cause you to increase your fees to clients?

    87% said yes.

    A no respondent said No I would probably look to exist the industry

    PI would increase even further so this would have to be passed onto clients. Our fees fund the FOS and they make awards knowing that their own salary is paid each month. We have no way of covering this without charging more.

    Do you transact DB transfer business?

    Exactly a 50%/ 50% split

    I have done in the past but I have now withdrawn from this market due to the risk and added PII costs.

    You’d have to be mad to do so if you were a sole trader or partnership and it’s not a lot better as a Ltd company

    Is now the time to have a product levy or a consumer transaction tax?

    82% said yes

    Increasing the FOS limits would make remaining a small independent firm even harder and inevitably drive up client costs. A fair FOS with a mutual right of appeal and a return to the fines levied being used to partially fund the FSCS would create a less hostile environment for small firms, firms that generally have a closer relationship to their clients and tend to cause less client detriment.

    Of course, it is the right time, in fact it should have been levied years ago we have been shouldering the burden on our own for far too long

    Why hasn’t this been sorted yet? A product levy would be the simplest method of addressing FSCS funding. The problem is that IFAs don’t have a united trading body that can lobby for them. IFAs are a divided bunch and the FCA know it, which is why they don’t give two hoots what they do to IFAs. They’ve never liked small IFAs and have done their damnedest to get rid of us. They only like larger firms so that it’s easier for them to point the finger at one or two individuals.

    Sadly, experience has shown that ‘a consultation’ in regulatory speak is simply a notification that the decision is already made and this is just a polite, box ticking ‘heads up’.

    Over a considerable number of years ‘Consumer detriment’ has been seen because the regulator has noted flaws in product design, marketing or understandings of outcome and purpose- and yes you have guessed it, all with the benefit of hindsight.

    Regulation should be about being smart and not wise after the event. It should be about utilising experience when things going wrong to make sure mistakes and failures do not happen twice.

    To licence a product as fit for purpose, with that purpose clearly defined, as part of the process is the single most effective consumer benefit a regulator could put in place.

    Some have suggested that the resource needed would result in a huge increase in fees, perhaps the contra view that because products are licenced there would be fewer failures to fund might be more appropriate.

    The FCA’s solution is to put up the compensation amounts, rather than addressing how foresight based upon hindsight built up over so many years could remove the problems that result in a pay-out.

    Just a thought.

  2. Combined with the issues around DB advice and the mass exodus of providers from this area..the market is no longer “efficient” or “well ordered”… Which are statutory objectives of the FCA…. Your move FCA…..

  3. Half a million quid was gouged from my pension pot by a so called ‘financial adviser’ and, apparently, the maximum compensation I can expect is £150k. Less my legal fees. The firm that employed him is still in business and paying its directors £250k a year salaries.

    There should be full compensation without limit and without time limitations for making a claim. Period.

    • £150K is the maximum compensation that the Financial Ombudsman Service can order a firm to pay or that the FSCS will pay in the event that a firm against which a complaint has been upheld is unable to do so and is therefore forced into default.

      To complain against a firm about the advice you were given, you do not need to engage the services of a solicitor and nor do you need to do so in any dealings with either the FOS or the FSCS.

      Should you choose to embark on formal legal action against the firm for the full amount of your loss (which should, in theory, be covered by its Professional Indemnity Insurance), there are a number of firms who may take on your case on a No win, no fee basis. The outcome of any such action may be an award for the full amount of your loss, though getting the firm to actually pay it is a different matter.

      As suggested above by Andrew Boyt, by having failed to police the activities of the small number of regulated advice firms mis-advising people such as yourself, the FCA surely bears a large measure of responsibility for the state of this area of the advice market.

      To the rest of us who absolutely do not mis-advise our clients, yet who see our FSCS levies go up and up year after year to pay (if only to a limited extent) the liabilities of the firms that have mis-advised but cannot themselves meet them, the fact that the FCA nor any individuals within it are never in any meaningful way held to account is a source of constant anger and frustration.

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