The FCA is proposing to more than double the Financial Ombudsman Service’s maximum award limit. The proposal comes alongside an imminent expansion of the Ombudsman’s scheme to cover small businesses and guarantors.
The Financial Conduct Authority (FCA) has published a consultation paper proposing to increase the maximum award the Ombudsman can require firms to pay from £150,000 to £350,000. The new limit will apply to acts or omissions from 1 April 2019 and will automatically adjust in line with inflation in every subsequent year. For acts or omissions prior to 1 April 2019, the limit will increase to £160,000.
This is the first increase since 2012, when the limit was raised from £100,000 to £150,000.
The new limit would represent a significant increase for firms, with the FCA estimating they will pay an extra £113m to complainants if the change is implemented. The FCA believes that the change is necessary to fairly compensate the estimated 2,000 complainants who are recommended for awards over £150,000 each year but do not have the necessary resources to seek the full value of their claims through the courts.
The FCA’s consultation paper performs a cost/benefit analysis of the proposed increase and seeks submissions on specific consequences, such as the potential increase in PII premiums for firms. Submissions can be made via the FCA’s website up to 21 December 2018.
Firms may have understandable reservations about a significant increase in awards given that the Ombudsman does not adopt the legal standards for the protection of defendants that are applied in court proceedings. The Ombudsman is not obliged to hold hearings, for example. It can rely on evidence that is inadmissible in court proceedings, and it does not apply, at least in any rigorous way, Limitation Act provisions which would otherwise time-bar older complaints. It also effectively reverses the burden of proof, thereby requiring firms to prove compliance with applicable rules rather than complainants having to prove a breach.
On the last occasion the award was increased, some firms submitted that the courts are better equipped to consider more complex cases involving large amounts. Others raised concerns over the inflationary effect of an increase. These considerations deserve to be taken seriously.
The FCA has also published near-final rules to expand the jurisdiction of the Ombudsman scheme, allowing it to hear complaints from small businesses and from personal guarantors. Up to now, only individual consumers, charities, trusts and ‘micro-enterprises’ (businesses with less than 10 employees and a turnover or annual balance sheet of less than £2 million) could make complaints to the Ombudsman.
In short, the FCA’s new rules will make the Ombudsman scheme available to:
1. ‘Small businesses’, that is, businesses with annual turnover of less than £6.5 million, and fewer than 50 employees or a balance sheet of less than £5 million at the time of referring the complaint to the respondent; and
2. ‘Guarantors’, that is, individuals who have given a guarantee or security in respect of an obligation or liability of a micro-enterprise or small business.
The maximum income and asset qualification thresholds for charities and trusts will also be raised under the new rules.
Financial services representative bodies had opposed many of the new rules at consultation stage, arguing that many of the newly eligible small businesses would have legal expenses insurance and may even be larger than the firms defending the complaints. Concerns were also raised over the Ombudsman’s ability to deal with more complex disputes. The FCA disagreed with these concerns, citing independent surveys showing that small businesses were unlikely to have access to financial management and legal expertise.
The new categories of eligible complainants will be able to avail of the Ombudsman’s generally faster, less costly and more informal process, rather than having to resolve disputes through litigation. The FCA believes that this will benefit 210,000 additional small businesses that may not currently have access to financial and legal expertise.
The FCA expects that the new rules will be finalised before the end of 2018 and come into force on 1 April 2019. In the meantime, the FCA will formally consider the Ombudsman’s service plans for 2019-2020 to ensure that it has taken the steps necessary to implement the proposals. Once finalised, firms will have to take steps to ensure they are able to comply with the new rules before they come into force.