The Financial Conduct Authority (FCA) is planning a huge increase in the maximum level of compensation the Financial Ombudsman Service (FOS) awards to £350,000 ($461,000, €398,000) in April 2019, a rise of £200,000.
The FOS makes its awards when consumers have lost out through being “deprived” of money that they should have had – or when consumers have lost money because a business has led them to take out an investment or account that wasn’t suitable for them.
Its aim is to ensure these clients are put back into a position they would have been in if the original problem that led to the complaint hadn’t happened.
Expanded business coverage
The compensation change coincides with a detailed consultation exercise in which FOS coverage will be extended to many businesses with under 50 employees.
There are around 2,000 complaints each year where the amount of compensation FOS determines is due is above the current award limit
This comes in the wake of extensive mis-selling by banks to companies of this size, and the FCA looks to have taken the opportunity to propose a massive hike in the maximum amount FOS can award.
From April 2019, FOS’s current £150,000 award limit will rise to £350,000 for acts or omissions by firms on or after 1 April 2019.
For complaints made after this date about acts or omissions that occurred prior to April 2019, the limit will rise from £150,000 to £160,000.
The limit will stay at £150,000 for acts or omissions prior to April 2019 for complaints received by FOS before this date.
The regulator has asked for responses about these changes outlined in CP18/31 by 21 December 2018.
Insufficient compensation
The FCA said its analysis showed there were around 2,000 complaints upheld by the ombudsman service each year where the amount of compensation FOS determines is due is above the current award limit.
It argued that if firms do not voluntarily pay compensation above the award limit, then complainants could be suffering an aggregate financial harm of around £113m per year.
The regulator added: “While the number of these ‘high value’ complaints is relatively low (just over 1% of all complaints upheld by the ombudsman service), there is a risk of very significant financial harm to complainants if they do not receive the full amount of fair compensation the ombudsman service considers is due.
“We consider it unlikely that the individuals and businesses who are eligible to complain to the ombudsman service would have the means to pursue firms for unpaid compensation through the courts.”
Robust process
Kay Ingram, director of public policy at LEBC Group, said: “Ultimately, if smaller firms find it difficult to obtain appropriate PI (professional indemnity) cover, they may need to join a network or merge with a larger firm to maintain PI cover at an affordable price.
“This does not necessarily mean that regulated advice will become more scarce. Indeed, if mergers and networks are able to bring efficiency gains to smaller firms, by investing in technology and achieving economies of scale, it could increase access to affordable advice.
“FOS needs to ensure that its processes are robust, so that it can oversee the settlement of larger complaints, in a manner that engenders confidence in its decisions.”
FOS will now cover SMEs with an annual turnover below £6.5m and fewer than 50 employees, or an annual balance sheet below £5m. The change will also include some charities and trusts.
Under the ‘near-final’ rules published on 16 October, around 210,000 additional UK SMEs will be eligible to complain to the ombudsman service.
The criteria for access to the service have been amended so that SMEs must only meet the turnover test and one of either the headcount or balance sheet total tests, not all three as previously proposed.
That change is also expected to come into force in 2019.
