The proposed massive increase in the Financial Ombudsman Service pay-out limit is an ill-considered shot in the dark that could kill off the professional indemnity market and wound the advice sector.
It is widely recognised that the consumer’s need for financial advice is greater than ever, and so for the Fos to seek to impose such a potentially damaging increase is at best foolhardy and, at worst, grossly irresponsible.
If a bank goes bust, the Financial Services Compensation Scheme compensation is limited to just £85,000, yet Fos is proposing to increase the pay-out in respect of financial advice to £350,000. The current Fos limit of £150,000 – almost double the banks’ FSCS compensation maximum – is already considered excessive by many commentators.
Claims against independent financial advisers, which have never been the dominant cause of Fos liabilities, have been falling for years, and now represent only a tiny proportion of complaints by consumers.
Nonetheless, the advice sector still ends up paying 75 per cent of the FSCS costs, despite the fact that responsible financial advice firms, and their PI insurers, deal with 80 per cent of claims before they ever reach the FSCS.
The fundamental problem lies not with the vast majority of advisers, who strive to give sound advice and look after their clients’ interests, but with the minority of irresponsible and criminal individuals who can generate huge liabilities over a very short period.
There are people like this in every profession, however increasing the level of Fos compensation is definitely not the answer. If anything, it will give them, and the consumers they seek to defraud, a comfort blanket.
Little wonder that in what is an already fragile PI market, insurers are expressing serious concerns about the Fos proposal.
If it goes ahead, we will see even fewer underwriters prepared to risk their capital in the financial services sector when they have so many other more attractive markets they could serve.
Shooting in the dark is always a dangerous pastime, and it invariably ends in tears.
I urge the Financial Conduct Authority and the Fos boards to rethink their proposed increase as a matter of urgency. If there must be an increase then surely a modest incremental amount will give time for its impact to be properly measured and digested.
I believe this would clearly be a common sense approach and in the interest of all concerned.
Ken Davy is chairman of SimplyBiz Group