Fos compensation limit hike may lead to adviser exodus

Fos compensation limit hike may lead to adviser exodus

Advisers have warned they may leave the profession if the Financial Ombudsman Services compensation limit increases to £350,000.

In a survey carried out by Panacea Adviser the overwhelming majority of advisers said the increase would put their business in difficulty because of anticipated increases in professional indemnity insurance premiums.

The survey found 91 per cent of those who responded thought the increase was unfair and unreasonable, while 87 per cent said it would cause them to increase their fees to clients.

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Derek Bradley, chief executive of Panacea Adviser, said: "We believe that his will see the end of smaller IFA firms due to impossible capital adequacy requirements caused by higher excesses to deal with £350,000 claims. It will be the end of anyone looking to start a new firm.

"It will mean that PI premiums will get so high that only the largest firms could afford it.

"And, you guessed it, more firms falling into FSCS default with fewer firms being left to pay the increasing calls for cash."

Last month the FCA announced plans to increase the compensation limit for complaints to the Fos to £350,000, from its current £150,000, as part of its plans to expand the ombudsman's services to small and medium enterprises (SMEs).

From 1 April 2019 limit will increase to £350,000 for complaints about acts or omissions by firms on or after that date. For complaints about acts or omissions by firms before 1 April 2019, the limit will be £160,000.

Both of these limits will be pegged to inflation, as measured by the Consumer Prices Index.

The plans have already attracted criticism from the Personal Finance Society, saying it represented a lack of joined-up thinking from a regulator which had been attempting to help people seek financial advice.

The effects of increasing the Fos compensation limit could also intensify the problems faced by advisers operating in the defined benefit (DB) transfer market, where some have faced difficulty getting their cover renewed and others saw their level of coverage reduced to £500,000.

Panacea Adviser's survey, which was completed by 122 people, found 96 per cent felt the increase would cause difficulties for them and their firm.

But in its paper Increasing the award of the Financial Ombudsman Service out last month the regulator said it was aware PI premiums may increase as a result of the compensation limit going up and acknowledged that for some small firms they are already "relatively high" as a proportion of total income, meaning further increases could have a "significant effect" on them.

But the FCA said it would expect most of the increase in premiums to be offset by the reduction in compensation directly borne by firms.

Assuming the percentage of claims costs incurred in relation to the premiums earned by insurers was 63 per cent, the FCA calculated this would imply an overall increase in insurance costs on firms of £77m, but the FCA said it expects this to be an overestimate because not all claims will be insured or fully insured.