Following its consultation in late 2018, the Financial Conduct Authority (“FCA”) has published its new policy statement, which confirms that it will increase the limits on the awards that the Financial Ombudsman Service (“FOS”) can require from regulated firms to up to £350,000.
From 1 April 2019, the new award limits will change to:
- £350,000 for complaints about acts or omissions by firms on or after 1 April 2019; and
- £160,000 for complaints about acts or omissions by firms before 1 April 2019 but which are referred to the FOS on or after 1 April 2019.
From 1 April 2020, both award limits will be subject to automatic inflation-linked adjustments. Existing complaints will remain subject to an award limit of £150,000.
Firms should consider their exposure to the increased FOS award limits, together with the simultaneous increase in the FOS’s jurisdiction to larger SMEs.
In October 2018, the FCA published for consultation a review of the FOS’s award limit increase that came into force in 2012.
In this review the FCA made clear that it deemed the £150,000 award limit to be inadequate and that it thought that there was a risk of significant harm to individual consumers and business who were unlikely to have resources to pursue a complaint through the courts.
The FCA originally estimated that there were 2,000 ‘high value complaints’ upheld by the FOS each year. ‘High value complaints’ are those where compensation is recommended by the FOS to exceed their award limit of £150,000 (the maximum firms can currently be required to pay by the FOS). It is, however, noted that this estimate has been revised in the latest policy statement to just 500 ‘high value complaints’ each year going forward.
The FCA confirmed that, having considered the feedback received in over 130 responses, it would implement its proposals as consulted on. The following key issues emerged:
Complex and high-value complaints
It is clear from the feedback received by the FCA that there are a number of concerns as to whether the FOS has the necessary resources or expertise to deal effectively with complex and high value complaints.
Notwithstanding the areas identified in need of improvement by an independent review in 2018, the FCA has maintained that the FOS will have the capability and capacity to make decisions on this type of complaint.
In order to address some of these concerns, the FCA has indicated that the FOS will shortly publish information about additional governance arrangements (including senior oversight) that will apply to high value complaints, together with examples to help firms understand whether a complaint would be better placed in the courts.
Impact on the professional indemnity insurance market
A key area of contention revolved around concerns of PII insurers that the prospect of an increased award limit would likely cause the PII market to shrink and likely necessitate significant premium increases.
Although accepting these views, the FCA emphasised that it did not think that the worst-case scenarios will materialise. The FCA did not provide much comfort for insurers, particularly in relation to defined benefit transfer advice, stating that it believes that the “number of remaining firms would be sufficient to ensure competitive outcomes of consumers”.
The FCA has however said that, in order to assist PII insurers understand key risks going forward, it will continue to publish relevant information about its view of markets that may have conduct issues and are a concern for PII insurers.
The FCA has advised that the firms should focus on the changes that they will need to have in place for 1 April 2019, including but not limited to updating consumer-facing information and ensuring staff training and complaint handling procedures are up to date.
Once details of the additional governance arrangements are made available by the FOS, firms should also give careful consideration to their exposure and procedures to factor in the increased FOS award limit (in addition to the simultaneous increase in FOS jurisdiction to larger SMEs) and ensure that complaints are addressed in the appropriate forum.