The SimplyBiz Group responds to the proposed FOS award limit increase
The SimplyBiz Group has provided its response to the recent FCA consultation; CP18/31 'Increasing the award limit for the Financial Ombudsman Service' and you can read the full response below.
In addition, SimplyBiz Group Chairman, Ken Davy, has produced a statement to the press in relation to this consultation which you can read here: Ken Davy's statement
The SimplyBiz Group response to FCA CP18/31
Q1: Do you agree with our estimate of the volume of high value complaints, including the assumptions we have made? If not, are you able to provide any data to support your view?
We are unable to confirm or dispute these figures. However simply extrapolating numbers and reaching such a figure does not justify raising the level of potential settlements.
Q2: Do you agree with our estimate of the value of high value complaints, including the assumptions we have made? If not, are you able to provide any data to support your view?
As stated above, we are unable to either confirm or dispute these figures.
Q3: Do you agree with our assumptions about the volume and value of high value complaints that might be referred to the ombudsman service by newly?eligible SMEs? If not, are you able to provide any data to support your view?
As stated above, we are unable to either confirm or dispute these figures.
Q4: Do you agree with us that, for the reasons given, the number of high value complaints that are not currently made to the ombudsman service because of the award limit is unlikely to be significant? If not, are you able to provide any data to support your view?
The number may not be significant, however the potential for such a claim to arise on an individual business and the cost of insuring against such a claim is likely to be prohibitive for the majority of firms. The inevitable result will be a serious decline in the number of advice firms and therefore the availability of advice to consumers.
The impact of a higher limit will be highly damaging to the advice market and significantly increase the cost of PII whilst doing nothing to deter the reckless or the criminal advisers or firms from that activity.
Q5: Do you agree with our proposal to increase the ombudsman service’s award limit to £350,000 for complaints about acts or omissions by firms on or after 1 April 2019?
No, we disagree with the proposal. Our view is that it will be detrimental to the advice market, firms and consumers for the following reasons:
- It is more appropriate for larger claims to be dealt with using the legal decision-making processes of the courts based on contract law.
- The primary need for a higher compensation limit is to accommodate the larger claims for SMEs. While we have expressed no opposition to including smaller firms within the protection of the FOS, for larger claims (in excess of £150,000) such disputes are better served by the courts.
- It is questionable if FOS personnel have sufficient knowledge and expertise to deal with larger claims and the additional complexities they require. Levels of redress over the current amount are not appropriate to be dealt with on what is a ‘fair and reasonable’ basis. It is wholly inappropriate for a FOS adjudicator or ombudsman to rule on such redress amounts, especially where the outcome of their decisions are subjective. It is neither fair nor reasonable for either party to be held by such a decision. The amount should remain at its existing level and it must remain for the courts to act as the adjudicator for amounts above this level.
- We have concerns regarding the breadth of cover that PI insurers would be willing to offer. This is based on our discussions with a number of the insurers. Changes to the level of redress will see an increase to both the base premium and levels of excess. It will have a further consequence in that insurers will review whether to remain in the market. New PI insurers will be less likely to enter the market which will directly result in a lack of market competition for advice firms who are required to obtain such cover.
- Without a competitive PI market, it will result in a more selective approach from the insurer. This will undoubtedly leave many advice firms being unable to obtain cover, or where cover is offered, it is likely to be at a considerably higher cost. This in turn will result in higher costs to the customer or firms being placed in a situation where they suffer a restriction of trade from being unable to obtain terms. Either of these unfortunate and unwanted scenarios will see a reduction to the number of authorised firms and a diminished accessibility to advice for the consumer. This is contrary to principles set out in the Financial Advice Market Review.
- We note the argument that firms will be more careful about how they manage their affairs. It is our experience that professional advice firms already take care of their clients and do all they can to ensure they are satisfied with the service and that the products provided are suitable for their needs. The current FOS limit of £150,000 clearly achieves that objective, as the proportion of claims against financial advice firms are very small. Equally, an increase will do nothing to deter the reckless and/or criminal firms.
- The Paper refers to savings made by advice firms as a result of the recent FSCS review, however, the likely outcome from implementation of these proposals would see increased financial pressure being placed on The Scheme as a result of the reduced number of firms paying into it. This would then carry an unfair financial burden to those firms that carefully manage their business and outcomes to its customers. The fact that the burden of funding the FSCS is now shared with providers is absolutely no justification for increasing the cost.
Q6: Do you agree with our proposal to automatically adjust, in line with general price inflation, the ombudsman service’s award limit for complaints about acts or omissions on or after 1 April 2019 every year from 2020 onwards?
It is reasonable to periodically review the threshold level of compensation, and increase (or decrease) it according to the real value of the threshold. However automatically increasing the threshold by the level of inflation (CPI) is ‘lazy’, as the cost of the ‘harm’ in real terms may not have increased at that level.
We would be more in favour of a period review, for example, every five years, as is the nature of the FSCS Deposit compensation limit, rather than ‘automatic increases’.
Q7: Do you agree that the measure of general price inflation used to automatically adjust the ombudsman service’s award limit for complaints about acts or omissions on or after 1 April 2019 should be the CPI?
CPI is a useful measure for inflation, however we do not agree that the limit should be automatically increased on an annual basis. See our response above.
Q8: Do you agree with our proposal for a one?off adjustment, reflecting general price inflation between 2015 and 2019, to the ombudsman service’s award for complaints about acts or omissions by firms before 1 April 2019?
Yes, this seems reasonable.
Q9: Do you agree with our proposal to automatically adjust every year from 2020 onwards, in line with general price inflation, the ombudsman service’s award limit for complaints about acts or omissions before 1 April 2019?
No, we are in favour of a periodic assessment as outlined above.
Q10: Do you agree that the measure of general price inflation used for both the proposed one?off and automatic adjustments to the ombudsman service’s award limit for complaints about acts or omissions on or after 1 April 2019 should be the CPI?
Q11: Do you agree with our assessment of the impact of our award limit proposals on the ombudsman service?
Increasing the award will lead to more cost and staff pressures on the ombudsman service in addition to the need for enhanced levels of competence and business / financial acumen.
Q12: Do you agree with our assessment of the impact of our award limit proposals on the professional indemnity insurance market?
No. Our discussions with PI insurers indicate that raising the compensation limit is likely to cause further tightening in an already difficult market, with higher premiums, increased excesses on contracts, and an unwillingness for insurers to take on further risk. We anticipate that the number of PI insurers will be further reduced and that there will be a dearth of new insurers. None of which will be beneficial to consumers or consumer outcomes.
Q13: Do you have any analysis or evidence to present in relation to how the costs of professional indemnity insurance (PII) might change if the ombudsman service’s award limit is raised to £350,000?
Q14: Do you agree with our assessment of the impact of our award limit proposals on individual firms?
No. Although the majority of financial adviser firms do not experience disputed complaints, the spectre of such a claims and the consequential increase in cost, are likely to be prohibitive and will force individual firms out of the market further limiting the availability of advice for consumers.
Q15: Do you agree with our assessment of the impact of our award limit proposals on the Financial Services Compensation Scheme?
We are unable to substantiate either way, however it should be noted that 80% of claims are currently settled directly by advice firms and/or their insurers without recourse to the FSCS. Should the level be increased to the proposed £350,000 it will not deter the reckless or criminal who mostly create such liabilities, therefore the impact on the FSCS is certain to be significant.
Q16: Do you agree with our decision to rule out having different award limits for different types of complaint or complainant? If not, why do you think there should be different limits?
Yes, this is a sensible approach.
Q17: Do you agree with our view that there should be a limit to the amount of compensation the ombudsman service can require firms to pay to complainants? If not, how – if at all – would the ombudsman service’s approach to dispute resolution need to change for it to be able to require firms to pay any amount of compensation?
Yes, we agree there should be a limit to the level of compensation the FOS can require firms to pay complainants, however as outlined above we do not agree with the substantial increase being proposed.
Q18: Do you agree with our view that the award limits for the ombudsman service and the FSCS should not be aligned?
Yes. These organisations have significantly different purposes.
Q19: Do you agree with the costs, benefits and transfers we have identified? If not, please explain why.
Please see our responses above.