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.
Likely scenarios
“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.
There is no right of appeal against a Fos decision, save for a judicial review Caroline BradleyAdvisers 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.
This, it said, would leave at least 1,500 “lower risk” companies in the DB transfer market, which it said was sufficient to meet demand.
The FCA said it expected increases in the cost of advice to be “moderate” and would be proportionate to the increased level of consumer protection the higher limit would provide.
Flawed process
Experts say the entire awards process is inconsistent, unbalanced, and needs a rethink beyond just an extension of the payout.
Claims made through the Fos are free, with no risk to the claimant. The person claimed against cannot counterclaim or gain recompense for malicious and unfounded accusations, which also heightens risk.
“There is no right of appeal against a Fos decision, save for a judicial review, which is not an appeal on the facts of the case, only an assessment of if Fos acted reasonably in exercising its powers,” says Caroline Bradley, group risk and regulatory director at Tenet Group.
“Fos takes an inquisitive view, this may include assuming uncorroborated facts are, on balance, correct,” she adds.
Advisers should check their PI cover to ensure it covers the full £350,000 limit, Ms Bradley adds. “If not, there is a requirement for directly authorised firms to hold higher capital.”
Skewed cost benefit
The new limit will apply to complaints about acts or omissions by firms that took place on or after April 1 2019, the FCA has said. There will be a £160,000 limit on complaints raised before then, but which do not get referred until after that date.
The previous increase in Fos limits was in 2012 when the award ceiling rose from £100,000 to £150,000.
Initially, the FCA calculated around 2,000 people each year are entitled to more than the £150,000 limit, which was one of the main drivers for change. However, this sum was later revised down to 500 people in the final consultation response.
“You can see the argument that if you are down £350,000, the arbitrary limit isn’t fair,” says Sir Steve Webb, director of policy at Royal London. “But ultimately, far fewer people will actually benefit than the FCA intended, and there really needs to be some proportionality.”
He explains if a client has lost a sum in the region of £250,000, they still have the option of pursuing the matter in court, which may be a more suitable approach for such sums.
“At some point you must say the claim is so big and serious it should really be pursued in court,” says Mr Walkling.
“I can understand the need to raise it after so many years, but it is so dramatic; if it was going up to £200,000 is one thing, but this is a significant increase. Perhaps claims at that level should really be decided in court.”
Concerns surrounding DB cases in the market will be a major driver for soaring premiums, experts agree.
Last year the work and pensions committee said DB pension transfers represent “another major mis-selling scandal” that “is already erupting”.
“Those who gain are a small number of people who have options, and the losers are a far bigger proportion of the public who will not be able to get DB transfer advice, along with businesses who potentially cannot do work they were doing perfectly well before,” says Mr Webb.
“Advisers are telling me they have been doing this sort of work for 25-plus years, never had a complaint, but have been given a renewal quote five times the size with an enormous excess, so they’re quitting,” Mr Webb adds.
Key Points
- The Fos limit has risen for the first time since 2012, following an FCA ruling.
- Adviser companies are voicing concerns about increasing the cost of doing business and access to advice.
- The increase has shone a light on the awards process, which some believe is flawed.
Mark Taylor is a freelance journalist
