An increase to the Financial Ombudsman Service’s compensation limit could have huge "unintended consequences" for advisers and their clients, Royal London has warned.
In October the Financial Conduct Authority proposed increasing the Financial Ombudsman Service's compensation limit from £150,000 to £350,000, as part of the regulator’s plans to expand the ombudsman's services to small and medium enterprises (SMEs).
The FCA’s consultation on the matter closes today (December 21).
If implemented the changes will take effect from April 1 2019, and any claims for incidents that took place on or after this date will be eligible for the greater claim limit of £350,000.
If the sale took place before April 1 the compensation limit will be £150,000.
Royal London has warned that the proposed increase could lead to "huge rises" in the cost of professional indemnity insurance (PII), claiming advisers may struggle to meet the growing costs which could lead to increased fees for clients.
Responding to the FCA consultation, the insurer argued the limit change could increase the cost of professional indemnity insurance by £77m - a figure it claimed would more than double the cost of double as it is now.
Royal London also cautioned PII providers may struggle to meet the extra costs associated with claims of increasing value leading to an exodus from the market and making it harder for advisers to access appropriate levels of cover.
Ultimately the insurer warned if PII cover becomes unobtainable, or if the cost of advice increases, it could result in less consumers accessing financial advice at a time when the "need for advice has never been higher".
Steve Webb, director of policy at Royal London, said: “There is a real risk that raising the Fos limit could lead some PI insurers to withdraw altogether and others to hike their prices.
"It is already proving difficult for advisers to obtain affordable cover and this could make the situation much worse. If the result is that fewer clients can obtain affordable advice then it is hard to see how consumers will benefit.
"The FCA itself estimates that there are only a couple of thousand claims each year where compensation would exceed current limits and those who have lost out have other options for redress.
"By comparison, hundreds of thousands of people turn to financial advisers each year and could suffer if the compensation limit is hiked. The FCA must think again about these proposals."
Yesterday (December 20), law firm RPC warned if the FCA were to implement the increase to the Fos' compensation limit, the ombudsman’s process also had to be reformed to ensure a "level playing field for financial services firms and consumers".