The financial regulator, the FCA, has announced that from 1 April 2019, the Financial Ombudsman Service (FOS) can make awards against regulated firms of up to £350,000. This comes into effect at the same time as the extension of the FOS to small and medium sized enterprises (SMEs) which will cover approximately 210,000 UK SMEs.
The new rules confirm that the new award limits will be:
£350,000 for complaints about acts or omissions by firms which took place on or after 1 April 2019; or
£160,000 for complaints about acts or omissions by firms which took place before 1 April 2019 and which are referred to the ombudsman service on or after 1 April 2019; and
£150,000 for existing complaints;
The awards will be inflation-linked regardless of when the complaints was made.
The FOS is an independent tribunal for complaints against regulated firms, such as IFAs, SIPP trustees, insurers and regulated brokers. It is free for complainants to use and is therefore an attractive alternative to pursuing a civil claim in court. The FOS should have regard to the law, but need not follow it. Ultimately, it determines complaints based on what is ‘fair and reasonable’. Currently, the FOS can make awards of up to £150,000, which are binding on regulated firms if the award is formally accepted by a complainant. The FOS can recommend that more than £150,000 is paid, but it cannot oblige payment. The FCA has expressed concern that firms are not paying in excess of the £150,000 award limit in cases where consumers' losses are greater than this, stating that many consumers do not have the resources to pursue court proceedings.
The announced increase to the award limit follows a short two month consultation which ran from October last year, resulting in many financial advice firms and PI insurers querying if the 133% increase in the award limit is sustainable. The FCA itself acknowledged in its October 2018 paper that the increase in PI premiums would be £77 million, although in its announcement it suggests that only 500 existing complainants to the FOS would benefit if they were subject to a higher £350,000 award limit.
The change opens up the FOS as an even more attractive forum for complainants when faced with the alternative of complex, costly, court proceedings. This will have knock on effects for a range of professions.
As of 1 April 2019, regulated firms and their insurers risk facing complaints at the FOS which are both much higher in value and, as a result of the expansion of the service to SMEs, greater in number. The changes will also have implications for insurance brokers who will need to update claims management procedures and may face a greater exposure to claims from SMEs.
For IFAs, it is generally accepted that PI premiums will rise as a result and some IFAs may cease trading rather than pay much higher premiums.
We anticipate that IFAs and insurers will have a particular concern around defined benefit pension transfer complaints which often result in considerable compensation, where upheld. The FCA nonetheless states that it is unlikely to consider it reasonable for a firm’s PI to exclude cover for past business, such as pension transfers. It has said it will monitor these insurance arrangements through its supervision.
Firms and insurers have expressed concern that the Adjudicators at the FOS lack experience to deal with more complex complaints and, in our experience, can take a broad brush approach to the assessment of compensation. The FCA has now said it will publish guidance on additional ‘governance arrangements’ for complex complaints and will explain when it considers that a court is better-placed to determine a complaint. The FCA nonetheless seems convinced of the appropriateness of the FOS’ approach, stating that it has seen no evidence that the FOS adopts a different approach to the courts and that the law, in effect, requires a fairness standard. Many would disagree with this analysis.
For complaints that are headed to the FOS after April 2019, firms and their insurers may want to consider if settlement is a more palatable alternative to the FOS or, if they can avail themselves of jurisdictional arguments set out in the DISP rules section of the FCA Handbook. The FCA has said that in ‘appropriate cases’ the FOS may consider holding oral hearings. Whether that would include proper disclosure of evidence, statements, and expert input remains to be seen.