A double whammy to IFAs and their insurers as FOS is given new enhanced powers

On 8 March 2019, the Financial Conduct Authority (FCA) confirmed that, as from 1 April 2019, the Financial Ombudsman Service (FOS) cap will increase to £350,000. The new award limit will come into force at the same time as the extension of the service to small and medium-sized enterprises.

From 1 April, the current £150,000 limit will increase to £350,000 for complaints about actions by firms on or after that date. For complaints about actions before 1 April that are referred to the FOS after that date, the limit will rise to £160,000. Both award limits will be automatically adjusted every year to ensure they keep pace with inflation.

The new award limit will come into force at the same time as the extension of the service to small and medium-sized enterprises (SMEs), not just individual complainants. This will include firms with fewer than 50 employees, annual turnover of under £6.5 million and an annual balance sheet total of under £5 million.

An additional 210,000 SMEs will be able to complain to the FOS.

The news will not be a surprise.  A formal consultation paper was published in October 2018.

The catalyst for the increase was, in the FCA’s words, a desire to “ensure more complainants receive fair compensation when the ombudsman service upholds their complaint against a firm… [For]… these ‘high value’ complaints ..., there was a risk of very significant financial harm to complainants if they did not receive the full amount of compensation the ombudsman service considers due.”

The FCA goes on to make the point that the individuals and businesses who are eligible to complain to the ombudsman service would be unlikely to have the means to pursue firms for unpaid compensation through the courts. 

This article reflects on whether the FCA is likely to achieve that objective, and at what cost.

FOS was set up by parliament to provide a free service to resolve complaints. So, is it like Court? In its own words: “No – it’s very different. We were set up as an informal and free alternative to the courts. To use us, you won’t need to make your case in person. And there’s no “cross-examination”, where both sides ask each other questions.

We’ll sort things out over the phone, by email or post – depending on what suits you.

Unlike a court, you generally don’t need anyone to represent you. If you’d prefer, we can talk to a member of your family, a friend or someone else who you’ve asked to help you complain.”

Not everyone welcomes the widening of the FOS’s net. The news will be a major blow to IFAs. Former pensions minister Steve Webb has described the hike as “shocking” and “counter-productive”. 

Key objections to the changes are:

  1. The quality of the Ombudsman.

The FOS will be dealing with the kind of quantum ordinarily reserved for multi-track, High Court litigation. Is it appropriate for an ombudsman to make “quick and informal” decisions? It will be doing so without hearing oral evidence; without a full and proper presentation of the evidence; without the benefit of training and the qualifications of a judge; and the decision will be made without necessarily even following English law.How can they ensure consistency?

  1. The availability of professional indemnity insurance (PI).

The FOS cap previously acted as a sort of informal indemnity limit for each claim. The professional indemnity market for IFAs is hard at present, but there is room for it to harden further.Many insurers have withdrawn from the market and describe IFAs as unworthy to be touched by a bargepole. Capacity is scarce already, in part due to the Lloyd’s Franchise Board’s review of syndicates. This increase makes the risk even less attractive and so PI even more expensive.Indeed PI prices went up in anticipation of the FOS’ new powers.

  1. It will increase the “advice gap”.

Professional indemnity insurance is compulsory. If advisers cannot get PI, they cannot give advice. Since the Retail Distribution Review of 2013, there has been a marked decrease in the numbers of consumers who receive advice on their investments.Pension transfer advice is the area where there is the greatest need for advice.

  1. It will hurt more people than it will benefit.

On the FCA’s own estimated figures, the new changes will benefit only 500 complainants a year whereas, in a worst case scenario, hikes in professional indemnity insurance costs for advisers could lead to around 1,000 advice firms pulling out of the market for pension transfer advice.


The FOS was originally set up to be a cheap and quick alternative to court. It was not intended to handle high value and complex cases suited to High Court litigation.

If the portrayal in Channel 4’s “Dispatches” in March 2018 (and Richard Lloyd’s subsequent independent review) are to be believed, many of the FOS adjudicators are totally ill-equipped to deal with such claims, having neither the experience nor the training for the job.  Lawyers like me struggle with how any decision from a tribunal can be “fair and reasonable” if it does not follow English law, but regardless, how will the FOS ensure fairness through consistency?  They are accused of institutional bias against advisers, and of churning their caseloads, rather than analysing the issues. Extra training is needed to ensure staff are consistent and fair as well as to restore public confidence in the FOS. 

However well intended, the existence of an Ombudsman has not enabled firms to resolve disputes fairly and early. The reality is that claimants may as well have a go at bringing a FOS claim without sensible engagement in a pre-action complaint process.  After all, they have free access to justice and no cost sanction if they bring a bad claim.  They also do not have to accept an ombudsman’s decision if they do not like it.  Claims management companies and unscrupulous ambulance-chasing firms have sprung up everywhere fuelling a litigation culture that would not exist were it not so easy.

Regulated IFA firms must have professional indemnity insurance cover to protect consumers appropriately. However, the insurance industry is a marketplace, so insurers get to choose whether or not to provide it.

Shopping for PI is more expensive than ever from those insurers still brave enough still to provide cover. Policy wordings are peppered with exclusions and high excesses to make them palatable to insurers. IFAs have gone out of business for want of PI, or have stopped carrying out certain services for fear of claims and/or uncertainty of how they will be dealt with. IFAs are demoralised already for a number of reasons, and leaving the profession in droves. The advice gap is ever widening. 

All of these issues are well ventilated in the financial press and acknowledged by the FCA. It seems strange that the FCA is going ahead in the hope of protecting consumers, yet arguably neglecting its other role: encouraging healthy competition. Competition, both in terms of the availability of advice, and the availability of PI.

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