The Financial Conduct Authority (FCA) published a Policy Statement (PS 19/8) with new rules that increase the Financial Ombudsman Service (FOS)’s award limit to:
£350,000 for complaints about acts or omissions by firms which take place on or after 1 April 2019; and
£160,000 for complaints about acts or omissions by firms which took place before 1 April 2019 and which are referred to the FOS on or after 1 April 2019. For any complaints referred to the FOS before 1 April 2019, the limit remains at £150,000.
These rules also ensure that, from 1 April 2020 onwards, both award limits are automatically adjusted each year in line with inflation, as measured by the Consumer Prices Index (CPI).
The new award limit will come into force at the same time as the extension of the service to larger small and medium-sized enterprises (SMEs), which are firms with an annual turnover of under £6.5 million, and either an annual balance sheet total of under £5 million, or fewer than 50 employees. This extension could result in an additional 210,000 SMEs entitled to complain to the FOS. The FCA has committed to reviewing the impact of the SME extension within 2 years of the new eligibility criteria coming into force, which will include an assessment of the adequacy of the award limit.
The FCA acknowledged the concerns raised by respondents to the original consultation about a potential material effect on the price and availability of professional indemnity insurance (PII) cover for activities that are captured by the new limits. This could have an impact on competition in relevant markets, and result in reducing choice and increasing prices for consumers. However, the FCA thinks that increases in the PII market will be relatively moderate and proportionate to the increase in consumer protection due to the higher award limit. Therefore, consumers will ultimately benefit if average quality rises
across the market, even if prices also rise.
Concerns were also raised about the perceived lack of confidence in the FOS’s ability to handle complex cases. The FCA mentioned that many believe only the courts should be able to award compensation between £150,000 and £350,000, with ‘highly forensic processes’ and full guarantees of due process rights. However, the FCA only generally address these points, by stating their disagreement with this view, on the basis that no evidence was provided by respondents from their past engagement with the current system.
There was an independent review of the FOS in 2018, prepared by Richard Lloyd, former executive director of consumer rights organisation Which. Mr Lloyd found no evidence to support claims of unfair decisions to consumers, however he made a number of recommendations to improve the service, including shifting the focus from the process itself to the quality of the outcome. In the previous months, Ms Nicky Morgan, who is the Chair of the Treasury Committee, raised concerns on internal investigations, after receiving more than 150 complaints about the FOS since the beginning of 2018.
The FCA is satisfied that the FOS has taken the recommendations from the review forward and reported on the progresses in its recent plan and budget consultation. This is why the extension of the FOS’s service jurisdiction has been confirmed. The ultimate outcome the FCA aims to deliver is greater consumer protection levels and fairer financial services that should improve trust in financial services and lead to greater participation in the market. Firms and other financial businesses covered by the FOS’s Compulsory and Voluntary Jurisdictions should now re-think their internal arrangements to handle customer complaints, with a view to improving their conduct (e.g. behaviour and product governance). In particular, by 31 March 2019 they must:
Update consumer-facing information about complaint handling procedures;
Ensure they use the correct recent version of the FOS explanatory leaflet;
Ensure staff with complaint handling responsibilities are aware of the new limits.
Shortly after the new rules come into force, the FOS is expected to publish information
about additional governance arrangements that will apply to high value complaints; and examples to help firms better understand how the FOS might determine for a complaint to be more appropriately handled by the courts, although it is acknowledged that the court system is too expensive and too slow for complainants.
The FCA will publish a table on their website for firms, complainants, and organisations representing businesses and consumers to see which limits apply at any time. From 2020 onwards, this table will be updated at the beginning of March each year.
It is clear that consumers, firms, and public organisations will closely monitor the new process, to determine whether the FOS is actually able to manage complex cases and to ensure public confidence in its services.