Your IndustryMar 23 2023

Fos compensation limit hike risks ‘disorderly exit’ of firms

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Fos compensation limit hike risks ‘disorderly exit’ of firms
The Ombudsman's compensation hike may have implications for disorderly exits. (Pexels/Pixabay)

The decision to hike the Financial Ombudsman Service’s maximum award limit to £415,000 will affect firms’ ability to obtain affordable professional indemnity insurance and will force them to hold more capital.

This is the view of financial planners and policy experts, such as Pimfa's head of public affaird Simon Harrington, who said the trade body had always had "concerns" about lifting the award limit.

From April 1, the Fos award limit will change to £415,000 for complaints referred to it about acts or omissions by firms on or after April 1, 2019. 

I'd like to see the Fos put more power in the clients handsTim Mottram, Grey Parrot Financial Planning

Meanwhile, for complaints referred to it about acts or omissions by firms before April 1, 2019, the award limit has been increased from £170,000 to £190,000.

But Harrington and others are concerned this will affect advice firms and their ability to get PI cover

Harrington said: “When the decision was taken to lift the award limit to £350,000 in 2018, we raised concerns that it would have a significant impact on the ability of firms to obtain affordable professional indemnity insurance and act as a significant barrier to entry for many firms.

“Unfortunately, these concerns have largely played out as we expected.”

He added that the rise will continue to have “a detrimental impact on personal investment firms”.

“[The increase] will force them to hold significantly more capital both to cover what will presumably result in increased excess payments and – in the case of large claims in particular – the cost of the award where firms will be uncertain whether their insurer will even cover the value of a claim,” Harrington said.

“We would be very concerned about the potential this may have for disorderly exits in future and pressure on the Financial Services Compensation Scheme (FSCS) as a result.”

Difficult to negotiate

Some advisers have seen first-hand how PI insurers negotiate Fos compensation with clients.

Tim Mottram, financial planner at Grey Parrot Financial Planning, said from his experience, once an award is made against a firm, their insurance company tends to appoint legal advisers who will negotiate down the offer with the client.  

Mottram said: “We had this experience years ago with a client who was sent an offer letter with a figure half that awarded by the Fos. The client accepted a lower offer than they had been awarded as they were threatened with a long appeal process with scare tactics suggesting that the offer may be withdrawn entirely.