The Financial Conduct Authority has increased the compensation limit of the Financial Ombudsman Scheme, despite insurers forecasting this could push up professional indemnity insurance premiums by 500 per cent.
The warning comes as the regulator today (March 8) confirmed the Fos' compensation limit will increase to £350,000 next month.
The regulator has estimated the price of professional indemnity insurance premiums for defined benefit pension transfer specialists could increase to an upper limit of 140 per cent based on insurers predicting the increase could be between 200 and 500 per cent.
Under the FCA's calculations, a 140 per cent increase would see the median PII premium for a firm with two to five advisers increase from £3,400 to £8,000.
Under a 500 per cent rise, median premiums for the same size firm would increase to £20,100.
While the FCA has confirmed it does not expect a rise of this magnitude to materialise, modelling it as a "worst-case" scenario, it has predicted this outcome could see up to 1,0000 "higher risk" personal investment firms stop providing defined benefit (DB) transfer advice under the new £350,000 award limit.
The regulator said these firms would leave the defined benefit pension transfer advice market because they would be unable to afford PII cover, but did not anticipate them leaving other areas of the advice market.
Under this scenario the City watchdog has predicted 1,5000 "lower risk" personal investment firms would still provide DB transfer advice, a number it said was sufficient to meet demand given indications activity of this kind had already "peaked".
Currently the Fos is limited to awarding compensation to a maximum of £150,000, but from April 1 this will increase to £350,000 for complaints about firms’ actions on or after that date.
For complaints referring to actions which took place before April 1, but are reported to the Fos after that date, the limit will increase to £160,000.
The regulator also confirmed both award limits will be adjusted each year to keep pace with inflation.
The regulator first published proposals to increase the compensation limit in October last year, the first review since 2010, as part of its plans to expand the ombudsman's services to small and medium enterprises (SMEs).
Under these initial proposals, the FCA estimated approximately 2,000 complaints upheld by the ombudsman service each year are 'high value complaints', meaning they result in recommendations for compensation above the current limit of £150,000.
However, in its policy statement published today (March 8) the regulator revised its estimates - bringing the predicted volume of upheld high value complaints down from 2,000 complaints to approximately 500 complaints per year.
It also assessed the value of liabilities above the current award limit, reducing from the initial estimate of £113m to between £21.6m and £47.6m.
The FCA received 130 responses to its consultation paper on the increase to the ombudsman's compensation limit, with most responses coming from personal investment firms, particularly small independent financial advisers, and insurers providing PII to these firms.
The regulator said these respondents did not support any increase to the ombudsman service's limit, mainly due to the potential impact on the PII market.