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.
The City watchdog reported general insurers as the other main respondent group, who tended to challenge the regulator on whether such a large, single increase was necessary and questioned the ability of the ombudsman service to deal with more complex cases.
The FCA said the feedback had led it to focus particularly on the impact of possible changes in the PII market on the supply of DB transfer advice.
The regulator said: "This is because consumers have a statutory right to transfer a DB pension, and there is a statutory requirement that they take advice if they are transferring more than £30,000.
"However, if personal investment firms cannot obtain PII cover then we do not consider that they would be providing DB transfer advice in a way that protects consumers' interests."
Andrew Bailey, chief executive of the FCA, said: "Consumers and small businesses struggle with the cost and time needed to take firms to court, so it is essential they can receive fair compensation from the Financial Ombudsman Service when things go wrong.
"We have listened carefully to the feedback we have received and believe our approach is right and will bring benefits to both the consumers and micro-enterprises currently eligible for the ombudsman service and the small businesses who will become eligible in April."
rachel.addison@ft.com
