More than doubling the limit awarded to consumers for upheld complaints against financial advisers is entirely justified, the Financial Conduct Authority says, as it will “ensure more complainants receive fair compensation” and “build consumer trust in the integrity of the industry”.
Those at the coalface say the move will do almost exactly the opposite, driving businesses to the wall, and leaving potential customers with less choice and ballooning fees.
Since April 1, the Financial Ombudsman Service compensation limit rose 133.3 per cent from £150,000 to £350,000 after the FCA ruled the original limit was insufficient to thwart hundreds of instances of “significant financial harm” occurring each year.
To say it has not gone down well is an understatement.
“All that increasing the threshold will do is to increase the quantum of claims,” says Andrew Swallow, independent financial adviser at Swallow Financial Planning.
“And since professional indemnity insurers pay 100 per cent of a claim above your excess, either the excess will have to rise or the premiums for PI must increase to keep the insurers in business.”
He adds the most likely outcomes are clients swallowing significant fees or the business going bust. “As usual, the long-suffering 99 per cent of clients will end up paying for the 1 per cent, but it was ever such,” Mr Swallow notes.
Advisers seeking renewal quotes report their already high PI premiums, usually around 2 to 3 per cent of turnover, are soaring to between 200 and 500 per cent as a result of the knock-on effect.
“An increase in PI cover of that scale could put some firms at risk; they may cease trading or go to consolidators,” explains Graham Cross, managing director of Helm Godfrey. “It’s going to have a significant impact on business.”
Consolidation is already on the rise, and advisers are more likely than ever to seek the shelter of a purchaser, points out Neil Walkling, managing consultant at Bovill.
“It’s going to ratchet up the costs of doing business, and the cost of regulation, for small directly authorised businesses,” he says.
“There are already a lot of consolidators out there snapping up businesses, and this will accelerate the trend.
The market for specialist advice may also shrink as clients are charged more to cover the exposure, whereas smaller firms will not want the risk of handling complex cases that could generate the type of award the FCA is enabling.
“How does this achieve the regulatory objective of increasing access to advice? It will have the opposite effect,” says Carl Melvin, managing director of Affluent Financial Planning.
The contraction would mean less choice for consumers, and may even imply a failure of the regulator if the raise is necessary to improve conduct, he notes.
For its part, the FCA has said that in the worst-case scenario the increased compensation limit would lead to 1,000 “higher risk” advice companies leaving the defined benefit transfer market.