The Financial Ombudsman Service, which arbitrates on disputes between financial services firms and their clients, now has the power to order firms to pay as much as £350,000 in compensation to a wronged client. FS Legal’s Gareth Fatchett explains the impact it will have on firms and consumers
What is the Financial Ombudsman Service (FOS)?
It’s an arbitration scheme for when people have disputes with financial services firms that are still trading. The results of the arbitration are binding on the participants and the FOS charges the firm that has a complaint against it for administering that complaint. The complainant is not required to pay any legal costs. The FCA raised the maximum amount of compensation the FOS can award a complainant from £100,000 to £150,000 in 2012 and recently to £350,000. The scope of the scheme has also been widened to allow small and medium-sized enterprises (SMEs) to bring a claim. It’s a particularly difficult scheme for financial services firms to defend against because, even if they win, they’re still incurring costs to deal with the complaint so they always end up losing.
How does the scheme work?
Initially, the complainant brings their claim to the firm and the firm has eight weeks to respond to it. If the complainant disagrees with the firm’s response, they are entitled to refer the matter on to the FOS, but the referral has to be made within six months. The FOS will collect and look at all the evidence from both parties and adjudicate. If either party disagrees with the decision, they can ask for somebody else to look at it, but that happens inside the FOS. Once it gets to the final decision stage, it’s binding on both parties.
it’s a short-sighted move because it means that firms are now going to face significantly higher bills just to trade.
How do financial services firms foot the bill for FOS awards?
Every firm is required to have insurance. The increase in the award limit to £350,000 is a significant problem for insurers because we are likely to see more claims brought to the FOS, particularly because claimants know that they have nothing to lose, because no one’s going to come after them for costs if their claim isn’t accepted. It’s common for claims management companies (CMCs) to help an individual to bring a claim to the FOS. If the claim is successful, the CMC will charge a percentage of the claimant’s award as a fee. If it’s unsuccessful, they will forego a fee. It’s a typical ‘no win, no fee’ approach. The risk for insurers has increased by more than 100% and that’s going to have to be paid for by somebody. If there is an increase in professional indemnity (PI) premiums, then there will be a knock-on increase in costs for consumers wanting financial advice and that’s not a good thing. In my opinion, it’s a short-sighted move because it means that firms are now going to face significantly higher bills just to trade.
If costs are passed on to consumers, it will open up an advice gap for those who can’t afford to pay. Is there a better model the UK could adopt to narrow this advice gap?
A better model might be what a court would do – so, require a complainant to pay the defendant’s legal costs if the complainant loses – but the problem with that is once you have court costs and lawyers involved, the consumer may be put off bringing a genuine claim by the fact that they might feel worse if they lose and have to pay more costs. The regulators will be thinking that we don’t want to have a situation where genuine complainants are put off for no apparent reason.
Are there any estimates of how much (PI) insurance premiums are going to increase by?
No, because the price is effectively set by the insurance market and the insurance market won’t do that until policies come up for renewal. Insurers may take a different view depending on how they’re feeling and that is a really dangerous thing to do if you’re regulating a market. It’s giving firms that are operating in that market little control over their own destiny. This change is ill thought through because it’s good for consumers, SMEs and general protection in the market, but it’s bad for the firms that have to shoulder the cost, particularly when they can’t control those costs.
Which other countries operate similar compensation schemes and how do they work?
A lot of countries have ombudsman style schemes and they all operate in very similar ways to our own, but ours is different because it has a significantly higher claims limit now. That probably reflects the fact that the UK is a big centre for financial services.
Is there any likelihood of the sector appealing against the FCA’s decision to raise the award limit?
I don’t see that being the case. The increased limit has been in place for complaints brought from 1 April 2019 onwards.