Got a complaint against a financial firm? You could be in line for a bigger payout

The maximum compensation the Financial Ombudsman Service can award is increasing, but there may be unintended consequences.

If you have an issue with a financial firm, and that firm fails to handle your complaint satisfactorily, then you can take the issue to the Financial Ombudsman Scheme (FOS).

The FOS is an independent body which will review the facts of the case and then decide whether you were hard-done by, or if the financial firm was right to reject your complaint. It may order the firm to pay some form of compensation to put things right too.

It’s a well-used service too. In 2017/18, the FOS received almost 1.5 million enquiries, the equivalent of around three a minute. In total it dealt with just shy of 340,000 new complaints, and resolved more than 400,000 old ones.

However, according to the FOS there were occasions when it didn’t feel it could do enough to help those normal members of the public like you and me.

And that’s why the Financial Conduct Authority (FCA), the main money regulator, has proposed a massive increase in the levels of compensation the FOS can award.

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What’s changing?

This week the FCA said that it wants to raise the compensation cap for the FOS from its current £150,000 to a whopping £350,000.

In part, this is down to the fact that it is also extending the service to cover SMEs, with the regulator arguing that the existing cap would be too low for these business cases.

However, it also said that there are currently around 2,000 cases a year where the FOS would want to award a higher level of compensation than is currently permitted, and that this higher cap would allow it to offer a more suitable level of redress.

The FCA pointed out that it had been six years since the compensation cap had been increased from £100,000 to £150,000, and argued that as a result  “many existing complainants are failing to receive adequate compensation”.

On the face of it, this seems a sensible move. The regulator ruled out having a separate compensation cap just for SME cases, precisely because there are already complainants who have been wronged and are entitled to much larger payouts than they can currently receive.

Given the significant passage of time since the cap was last increased, if anything this rise is overdue.

However, there are potentially some seriously unfortunate side effects from the increase.

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Cutting small advisers out of the market

According to data from the FCA last year, there are currently around 5,270 financial advice firms operating in the UK, with a total of 25,951 advisers in the market.

Now, some of those advice firms are enormous behemoths, but there are many, many more which are much smaller one-man bands. These small advice firms perform an important service, but there are concerns that this compensation increase could push them out.

It all comes down to the professional indemnity insurance (PII) that these firms have to purchase in order to cover themselves should they make a mistake which leaves a client out of pocket.

The Personal Investment Management & Financial Advice Association (PIMFA) has warned that the increase in the compensation cap will cause those PII premiums to rocket, an additional cost that smaller firms, in particular, may struggle to meet.

Liz Field, chief executive officer of PIMFA, said: “This could reduce the number of firms within our profession and further widen the advice gap. Our profession has an essential role to play in helping to build a culture of savings and investments, and this move could severely impact firm’s ability to be able to provide this vital service to clients.”

It’s really important that the FCA looks carefully at ways to mitigate this side effect. Many people make poor decisions with their money precisely because they don’t make the most of the advisers on the market.

I’m not sure further reducing adviser numbers, and ensuring that only large advice firms can survive, is really the way to address that.

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