From 1 April 2019 two significant changes take effect:

  • The jurisdiction of the FOS is extended to cover small and medium-sized enterprises, certain charities and trusts and personal guarantors; and
  • The FOS award limit is increased from £150,000 to £350,000 (an increase of 133%).

These changes follow a short consultation process in late 2018. For more information on the detail of the changes and the FCA responses to the consultation see the FCA policy statement PS19/8 published in March 2019.

Extension of scope to cover SMEs

From 1 April 2019 the jurisdiction of the FOS is extended to cover small and medium-sized enterprises (SMEs), certain charities and trusts and personal guarantors.

Qualifying SMEs will be enterprises that:

  • Have an annual turnover of less than £6.5m (or equivalent in another currency); AND
    • employ fewer than 50 people; OR
    • have a balance sheet total of less than £5m (or equivalent in another currency).

Qualifying charities are those with an annual income of less than £6.5m at the time of the referral of the complaint.

Qualifying trusts are those with a net asset value of less than £5m at the time of the referral of the complaint.

The FOS intends to create a ring-fenced, specialist unit to handle complaints from SME customers.

Increased Award Limit

From 1 April 2019 the award limit will change to:

  • £350,000 for complaints about acts or omissions by firms on or after 1 April 2019
  • £160,000 for complaints about acts or omissions by firms before 1 April 2019, which are referred to the FOS after 1 April 2019
  • For complaints referred before 1 April 2019, the limit will remain at £150,000

The new award limits will automatically be adjusted on 1 April each year to ensure they keep pace with inflation, as measured by the Consumer Prices Index (CPI).

Previously, the FOS could recommend that more than £150,000 was paid, but could only oblige firms to pay up to £150,000. The FCA was concerned that firms were not following FOS recommendations, leaving consumers of higher value claims undercompensated and, in many cases, without the resources to pursue costly court proceedings.

The FCA previously estimated that around 2,000 higher value claims were upheld by the FOS each year with a consequent shortfall in redress of as much as £113 million each year. However, this was subsequently revised down to around 500 claims per year with a value of between £21.6 to £47.6 million.

Such high value claims typically involve insurance protecting consumers from significant loss, advice on long-term investments that provide an income in retirement, or the investments themselves.

Impact on regulated firms and their insurers

These changes are likely to increase the attractiveness of the FOS to potential complainants as a forum for dealing with complex or high value claims. Regulated firms and their insurers now risk facing FOS complaints which are significantly higher in value and, as a result of the expansion of the jurisdiction to SMEs, greater in number.

Insurers (in particular the PI sector) were one of the largest groups responding to the FCA’s consultation process.

As part of the consultation process, regulated firms and insurers raised concerns about the ability and capacity of the FOS to deal with the more complex or high value cases. Respondents drew attention to the fact that the FOS adopts a “fair and reasonable” test and is not bound by legal precedent which – in the view of many respondents – creates significant uncertainty. In addition, the FOS determination process is deliberately intended to be informal and consumer friendly. It is largely paper based, without oral hearings or features such as disclosure of documents or cross-examination of witnesses. There is no statutory appeal process against a FOS decision (other than judicial review, which is a last resort and highly uncertain except in a handful of cases).

In response, the FCA’s policy statement made the following points:

  • Many complainants with high value claims cannot afford to resolve their complaint through the courts; therefore, it is important that they are able to turn to the FOS for proper and full resolution of their claim.
  • The progress by the FOS towards meeting the recommendations on complex complaints made by the recent Report of the Independent Review of the Financial Ombudsman Service should help alleviate concerns about the service’s current and future capacity and capabilities.
  • The DISP rules in the FCA Handbook currently provide that an ombudsman will convene a hearing if it is necessary to fairly determine the complaint.
  • The FOS will shortly publish:
    • Information about additional governance arrangements applying to high value complaints; and
    • Examples to help firms better understand how the FOS would determine whether it would be more appropriate for a complaint to be handled by the courts.
  • As to respondents’ concerns regarding a divergence in approach between the FOS and the courts, the FCA said: “relevant consumer protection and regulatory law requires fair treatment of customers, so the law, in fact, requires a fairness standard. And, while the ombudsman service may depart from settled legal principles when deciding a complaint, it must make its reasons for doing so clear.”

Nevertheless, many regulated firms and insurers are unlikely to accept that these points adequately address their concerns.