Financial Conduct Authority  

Fos limit could see advisers take capital hit

Fos limit could see advisers take capital hit

Advisers could fall foul of capital requirements as professional indemnity insurers are slow to consider the new ombudsman limit in their policies.

Changes to the limit the Fos can pay out are due on April 1, but one adviser has already encountered issues with his policy renewal and expects to be £200,000 short of meeting capital rules as a result.

From April the ombudsman's compensation limit will rise from the current £150,000 to £350,000.

Phil Castle, managing director at Financial Escape, said his insurer Liberty does not yet offer the full £350,000 cover, which means his policy will only pay a maximum of £150,000 in respect of any recommendation made by the ombudsman, leaving him £200,000 short if he receives a claim.

The regulator expects firms to be covered for potential claims either through PI insurance or adequate capital buffers.

Mr Castle said he had alerted the FCA to the looming issue. 

He said: "Those renewing PI insurance soon risk arranging non-compliant policies from April 1, unless standard wording is changed on policies with the likes of Liberty.

"As I understand it from brokers, none of them have amended the limit up from £150,000 yet, so theoretically a claim could come in on April 2, and either you have to have a policy which covers it or £200,000 more capital adequacy.

"It is that which the FCA haven't thought about when they ignored the responses from advisers, Pimfa and PI insurers as part of the sham 'consultation' about a decision they'd already made."

A compliance manager at an adviser company said typically an Article 3 firm would have a capital resource requirement of the higher of £20,000 or 5 per cent of investment income + 2.5 per cent of insurance mediation and home mediation income.

The compliance manager said should an adviser's PI policy not offer full cover in regards to either exclusions or excesses this would require the adviser to hold additional capital as per the regulator's rules in IPRU-INV chapter 13.1. 

He said: "My view would be that this would be treated as an excess should your policy not fully cover you for the £350,000 from the April 1, 2019, and you would need to hold additional capital in this regard as per the  regulator's table.

"For example should a firm's relevant income be between £100,000 and £200,000, the additional capital that would be required to be held would be £70,000 (for an excess of £200,000 +).

"Whilst this is not the full £200,000 that would require for capital adequacy, it is nonetheless a large sum that many firms would simply struggle to hold."

Prior to confirming the compensation change for April the FCA had been warned by insurers that a worst-case scenario could see defined benefit PI insurance premiums jump by 500 per cent and see scores of insurers leave the market. 

In its "worst-case" scenario the FCA predicted a 140 per cent rise in PI premiums, which could see up to 1,000 "higher risk" personal investment firms stop providing DB transfer advice.