General Insurance Article - Financial Ombudsman proposed compensation limit increase

The proposed doubling of the Financial Ombudsman Service (FOS) compensation limit is inappropriate and will have a significant detrimental impact on competition in the financial adviser market if implemented without other reforms in order to maintain a sensible balance between the interests of consumers and the industry says RPC, the City-headquartered law firm.

 The FCA is currently consulting on its plans to increase the FOS’s compensation limit to £350,000 in April 2019 – the limit is currently £150,000. The consultation is due to close on December 21 2018.

  RPC says that to ensure a level playing field for financial services firms and consumers
  The FOS decisions should be based on what the law says rather than based on what the FOS considers “fair and reasonable”
  Financial services firms should be able to appeal judgements to the courts (explained in detail below)

 The FOS’s remit is also being expanded to cover a much wider group of small businesses, as businesses with a turnover of up to £6.5m will be able to take their case to the FOS. At present only businesses with a turnover of up to €2m can use the FOS. This move will also lead to an increase in costs for financial services firms and their professional indemnity insurers.

 The FOS is a dispute resolution service for consumers and SMEs making claims against financial services businesses. Many in the financial services community have complained that the FOS' unpredictable and sometimes inconsistent approach means that the cost of compulsory professional indemnity insurance (which might pay for legal fees and to compensate a consumer) is already prohibitively expensive.

 More claims against financial services firms, for larger amounts, would mean even more expensive professional indemnity (PI) insurance. There are already only a limited range of insurers that will provide PI cover to financial services firms.

 Unaffordable PI insurance could mean that more financial services firms are kept out of the market, which would decrease competition at the detriment of consumers.

 The FCA is aware that PI premiums could increase as a result of this proposal. It also acknowledged that for some small firms, PI premiums were already ‘relatively high’ as a proportion of income, meaning future rises could have a ‘significant effect’* on them.

 Rob Morris, Partner at RPC, comments: “The FOS compensation process needs to walk the line of giving a fair deal to consumers and reasonable access to justice for the industry.”

 “Many financial services firms feel that at the FOS the cards are already stacked against them. If the potential awards they face are to go up by such a dramatic percentage then there needs to be some counterweight to help financial services firms."

 Recommended reforms to the FOS

 The FOS award limit is already significantly higher than for any other ombudsman of other professionals (such as solicitors or accountants).

 The existing award limit of £150,000 is arguably already too high, considering the FOS can force a firm (many of which will be smaller than the newly eligible SMEs) to pay such a considerable amount without a full and reciprocal evidential disclosure process, rarely holding oral hearings, without applying the law and without any appeal route if the firm disagrees with the individual Ombudsman's subjective views. For example, although the Pension Ombudsman has no upper limit to the awards it can make, it does have to apply the law and parties do have the right to appeal decisions to the courts.

 RPC says that if the FCA wants to press ahead with its proposed increase to the FOS' award limit, it should only do so after the FOS process itself is reformed (which will require government intervention to amend the statute governing the FOS' jurisdiction). In particular:

 Financial advisors should be able to appeal an FOS judgement

 Currently, an individual is able to choose whether or not to accept a FOS ruling, meaning they can effectively veto any decisions that go in a firm's favour. On the other hand, if an individual accepts a FOS ruling, it becomes final and binding and the firm cannot challenge the decision other than via the very limited mechanism of judicial reviews.

 If the FOS jurisdiction were revised so as to allow firms to appeal FOS rulings through the courts, a higher award limit might be more acceptable to firms and their insurers.

 RPC says that by offering an appeal process to both parties the FOS will be encouraged to make more equitable and consistent decisions.

 The FOS should apply the law to its decisions

 FOS settles cases on the basis of what it considers is ‘fair and reasonable’. The law is taken into account, but is not applied rigorously to cases.

 As the FOS does not apply the law (i.e. precedent setting court decision etc) it is not always predictable and many financial services firms see the service as providing far less favourable decisions to the financial services firm than they might achieve through the courts.

 RPC says that many financial services firms would prefer FOS to judge disputes on the basis of established law and to require full disclosure of evidence. This would ensure that a consistent approach is applied to all disputes. Certainly without the requirement for FOS to apply the law (at least for higher value matters), it is very difficult to justify the proposed (or any) increase to the FOS' award limit.

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