The Financial Conduct Authority (FCA) has announced that it will raise the limit on complaints awards that the Financial Ombudsman Service (FOS) can make from £375,000 to £415,000 from 1 April 2023. This new limit will be adjusted annually in line with the Consumer Prices Index. While this change will benefit consumers who will have access to higher compensation in the event of complaints, it will also impact regulated firms.

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The new FOS awards

 

Regulated firms will face increased financial liabilities as a result of this change, despite the FCA having revised its original estimate of high-value complaints from 2,000 to 500, which reduces the potential value of liabilities from £113 million to between £21.6 million and £47.6 million. This revised estimate should mitigate some of the concerns from professional indemnity insurance (PII) insurers and professional indemnity funds (PIFs) about the impact on the cost and availability of PII.

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That said, the FCA admits that the increase in the award limit could have a material impact on the price and availability of PII cover for activities carried out by the firms that are subject to the £350,000 award limit, such as defined benefit pension transfer advice. Regulated firms could face premium increases of up to 50%, and consumers could see reduced competition in relevant markets, leading to increased prices.

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To mitigate the impact of these premium increases, the FCA has focused particularly on DB pension transfer advice. This is because consumers have a statutory right to transfer a DB pension, and there is a statutory requirement to take advice if they are transferring a cash equivalent transfer value of more than £30,000. Insurers have also indicated much higher potential premium increases for PIFs carrying out significant DB transfer advice business, compared to those who are not.

In a worst-case scenario, PII premium increases of between 200% and 500% forecasted by insurers could lead up to 1,000 ‘higher risk’ PIFs to stop providing DB transfer advice under a £350,000 award limit. However, the FCA does not expect this scenario to materialise.

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Positive Impact on Firm’s culture?

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The increase in the FOS's limit may also have positive implications for firms. For instance, it may encourage firms to take customer complaints more seriously and resolve them in a timely and satisfactory manner. This could help firms to improve their customer service and reputation, leading to increased customer loyalty and retention.

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In conclusion, while the increase in the complaints awards limit will benefit consumers, regulated firms will face increased financial liabilities, which could impact their access to PII cover. The FCA has revised its original estimate of high-value complaints significantly downwards, which should mitigate some of the concerns from PII insurers and PIFs. However, regulated firms could still face premium increases of up to 50%, and consumers could see reduced competition in relevant markets.

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In any case, firms must be prepared and implement the new rules.