FCA proposes FOS award limit increase to £350,000

The FCA has announced plans for an increase in the current FOS compensation cap. Currently standing at £150,000, the changes would see the limit increase to £350,000, an increase of 133%. It is also proposed that the limit will further increase automatically each year in line with inflation.

In an attempt to "ensure more complainants receive fair compensation when the ombudsman service upholds their complaint against a financial services firm", the FCA has issued a consultation which could see the current FOS binding award limit increase from £150,000 to £350,000.

The change has partially been driven by analysis undertaken by the FCA, which it says revealed that the average compensation for 'high value' complaints (being complaints upheld by the Ombudsman with a compensation recommendation in excess of the existing cap) was £305,000. This was based on a sample of 40 files against an estimated 2,000 such cases being decided each year (based on FOS' estimates).  

The increased limit will only apply to complaints regarding acts or omissions that took place after the date the new limit comes into force (provisionally 1 April 2019). For complaints about acts or omissions before 1 April 2019 that are referred to FOS after 1 April 2019, the limit will be increased to £160,000.

The FCA have also confirmed that the two new award limits will be automatically adjusted going forward from 1 April 2020, to keep in line with inflation.   

At the same time as announcing this new consultation on increasing the FOS award limit, the FCA also confirmed that it will extend access to the FOS to larger SMEs. Currently individual consumers, small charities and trusts, and ‘micro‑enterprises’ (those with annual turnover / a balance sheet of less than €2m and fewer than 10 employees) are eligible to complain to the Ombudsman. Now larger small and medium‑sized enterprises, with an annual turnover of below £6.5m and fewer than 50 employees, will be eligible to complain to the FOS (provisionally from 1 April 2019).

As a consequence of these changes it seems likely that there will be more FOS complaints from larger businesses (possibly meaning more insurance disputes end up before the FOS) together with a greater number of high compensation awards.  (The FCA estimates that increasing the limit will result in £113m more compensation being awarded each year – but that’s before account is taken of the fact that more high value complaints are likely to be referred to the FOS if the limit is increased.)  All of these complaints will be dealt with under the FOS jurisdiction, which does not require it to apply the law, does not involve a rigorous examination of evidence (for example, there is no mutual disclosure process and witness evidence is rarely, if ever, challenged in person) and is final and binding at the complainant's choice without any route of appeal for firms.

These changes raise interesting questions about the role of the FOS.  What was originally intended to be a quick, informal and free service to handle low value complaints has arguably morphed into something it was never intended to be. The FCA believes that 'high value' complaints make up only around 1% of the total volume of complaints resolved by the FOS and argues that there is not necessarily a correlation between value and complexity. However, it seems to us that whilst the FOS jurisdiction of quick, informal justice is justifiable for lower value cases, the inevitable compromise to firms' rights to access to justice is not justified for high value cases.

Beyond this, the change, if implemented, will undoubtedly mean increased PI premiums for financial services businesses. Indeed the FCA has confirmed they estimate an overall increase in insurance premiums of £77m per annum. Nonetheless, they appear to recognise the importance of this issue, as they are calling for detailed submissions on the likely impact of their proposals on PI premiums.  Of course, the biggest impact will be for smaller firms who cannot afford the increased premiums.  The FCA also appear to fail to recognise the risk of insurers pulling out of this market altogether.