133% Increase in Compensation for Financial Clients
The Financial Conduct Authority have announced plans for the Financial Ombudsman Service to increase the amount of compensation that they can demand a firm pays to a client. It is set to more than double the limit – from the current £150,000 to £350,000 in April 2019. The FCA has recently completed a consultation on the proposals.
This new amount will only apply to transactions that take place from April 2019. However, they are proposing that the amount be increased to £160,000 for claims made about business that took place prior to April 2019. In addition, both limits will increase annually in line with inflation from 2020 onwards.
Why the change?
There are a number of reasons that the FCA believes the changes are necessary. Many clients (which includes those with pension investments) may be set to lose far more than the £150,000 that is currently the limit if an investment goes wrong. Each year, around 2,000 complaints are upheld by the FOS that are above £150,000 in value.[i] Almost 75% of these claims are between £150,000 and £350,000. [ii] Currently, the FOS can request that companies pay the complete amount but cannot enforce any amount above the £150,000. While some companies do choose to accept the larger amount and pay what is requested, this can create a discrepancy between large companies that can afford to pay the extra and smaller companies that may not.
While clients can take companies to court for the larger amount, the FCA points out that many clients may be unable to afford to pursue legal action. In addition, a complex drawn out legal process may not incentivise companies to keep standards high in their interactions with clients. They believe that an easy recourse to compensation through their service is far more compelling in terms of keeping up standards.[iii]
While this increase in the limit may initially appear concerning to financial service companies, it would be a mistake to miss the opportunities that are presented by the change.
The FCA points out that firms that are small or new to the market may be in a better position to compete directly with larger firms. Up until now, many clients are likely to prefer to work with large companies that are familiar to them, in order to feel that their investments are secure. However, with a legal safety net of £350,000, more clients may be inclined to invest with smaller, lesser known companies. [iv]
The FOS requires all firms to have Personal Indemnity Insurance as well as meeting specific requirements of training and competence.[v] Robust training for all team members not only reduces the chances of poor service causing a financial loss but is also an excellent sales point when marketing the services of a financial firm.
Some companies have highlighted the impact this change of compensation limit may have on Public Indemnity Insurance. A trade body for financial advice firms has suggested that smaller financial advice firms may not be able to obtain PII at an affordable price, thus being unable to trade and narrowing the competition in some areas of financial services. [vi]
The FCA pre-empted the concerns with an entire section dedicated to the issue in their consultation. They believe that while PII may be affected, the difference should not be too dramatic, particularly as they suggest that the costs of the additional insurance may be offset by other factors. In addition, they question whether a company’s own risk factors play more of a part in the price of PII than industry wide changes, such as compensation limits.[vii]
While the issue of PII may be a concern, it is worth pointing out that the number of upheld complaints over £150,000 is currently little more than 1%. [viii] Companies can speak to their Insurance Broker, for advice specific to their situation.
What should you do?
Ensure that your team is made up of well trained, qualified individuals, working hard to ensure the best for the companies’ clients. Specialist recruitment agency, Aston Charles, has applications from a wide range of highly skilled candidates, with specialisms in every area of financial planning and advice. Feel free to call us today for discussion or advice on any recruitment needs.
Speak to your insurance broker to ensure PII is up to date with the new compensation limits. Find out what your company may be able to do to keep insurance costs to a minimum by evidencing good practice and minimal risks.
Ensure that processes are in place to identify any potential problems before they arise and to regularly quality check advice. Offer training for all employees, in line with requirements from the FCA.
Highlight the new £350,000 compensation amount. While the new limit may currently be a concern for financial companies, for clients it is a safety net for their hard-earned investments and so it is well worth advertising.
[i] Financial Conduct Authority, 2018. Increasing the award limit for the Financial Ombudsman Service. London: Financial Conduct Authority. Page 10.
[ii] Financial Conduct Authority, 2018. Increasing the award limit for the Financial Ombudsman Service. London: Financial Conduct Authority. Page 12.
[iv] Financial Conduct Authority, 2018. Increasing the award limit for the Financial Ombudsman Service. London: Financial Conduct Authority. Page 10.
[v] Financial Conduct Authority, 2018. Increasing the award limit for the Financial Ombudsman Service. London: Financial Conduct Authority. Page 22.
[vi] Damian Fantato. 2018. FCA to increase FOS compensation limit to £350k. [ONLINE] Available at: https://www.ftadviser.com/regulation/2018/10/16/fca-to-increase-fos-compensation-limit-to-350k/. [Accessed 2 February 2019].
[vii] Financial Conduct Authority, 2018. Increasing the award limit for the Financial Ombudsman Service. London: Financial Conduct Authority. Page 21.
[viii] FCA. 2018. CP18/31: Increasing the award limit for the Financial Ombudsman Service | FCA. [ONLINE] Available at: https://www.fca.org.uk/publications/consultation-papers/cp18-31-increasing-award-limit-financial-ombudsman-service. [Accessed 31 January 2019].