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 PlanningMeanwhile, 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.
“The client accepted on the basis that cash in the bank today, even if lower, is better than the potential of no payment nine plus months down the line.
“I'd like to see the Fos put more power in the clients hands to confidently deal with these tactics from PI insurers and their legal representatives.”
Good news for consumers
But others have said the increase is a welcome move for consumers.
Tahina Akther, Barrister and Co-Founder at Wildcat Law, said it was a sensible move which was long overdue.
“It has always been possible for people to pursue action via the courts rather than the Fos but the costs of doing so can be prohibitively expensive. It also carries a risk of costs if the claim fails.
“Too often ordinary people are cost out due to an imbalance of arms - big companies and insurers can afford to pay for extensive (and expensive) legal representation.
“Raising the Fos limit allows more claims to be examined via this route but it also allows for appropriate levels of compensation, the previous cap left too many people in the situation of only being partly compensated. “
amy.austin@ft.com, jane.matthews@ft.com
