The Financial Conduct Authority (FCA) has revealed mortgage brokers could face professional indemnity insurance increases of 25% as a result of increasing limits to Financial Ombudsman Service (FOS) claims.
The FCA also revealed that the likely benefit of increasing the limit was not as big as it first expected, with only 375 extra cases expected to be covered each year as a result of the increases.
However, despite many responses from the industry about the potential impacts on PII cover, and the cut to the anticipated benefits, the FCA decided to keep the increases it proposed in October.
From 1 April, the current £150,000 limit will raise to £350,000 for complaints about actions by firms on or after that date.
For complaints about actions before 1 April referred to the FOS after that date, the limit will rise to £160,000.
And both award limits will be automatically adjusted every year by the consumer prices index measure of inflation.
The Association of Mortgage Intermediaries (AMI) strongly opposed the significant increase to fee limits and expressed deep concerns about the plans to include larger businesses under the FOS.
Up to 25% increase
In its PS19/08 policy paper, the FCA said 130 responses to its consultation on the subject were received, with the substantial volume focused on the PII impact.
The biggest concerns about rising PII cover originated in the pension advice and provider spaces, particularly around defined benefit scheme transfers.
Personal investment firms (PIFs) who have undertaken a significant number of DB transfers could face increases of up to 50% the regulator said.
However, the issue was also raised by other members of the financial services community.
And where mortgage and insurance brokers were concerned, it added: “other PIFs and other retail intermediaries, such as general (non-investment) insurance intermediaries and mortgage brokers, could face increases of up to 25%.”
Further analysis of claims data led the regulator to significantly cut its estimate of the number of high value complaints likely to be received each year from around 2,000 to around 500.
“We estimate that around three quarters of these 500 high value complaints will be covered by the £350,000 limit,” the regulator said.
“Taking these revised estimates into account for our cost benefit analysis, we find that both the costs and the benefits of the policy are lower, with a reduction in net benefit from £36m to between £11.8m and £15.2m.”
It added that as this resulted in significantly lower additional liabilities it thought the revisions “should help mitigate some of the concerns” about PII cover.
In an attempt to mitigate the impact and clarify how the system will operate, the FCA added that shortly after the rules come into force, the ombudsman service will be publishing:
- information about additional governance arrangements that will apply to high value complaints;
- examples to help firms better understand how the service would determine whether it would be more appropriate for a complaint to be handled by the courts.
Extend to SMEs
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).
An additional 210,000 SMEs will be able to complain to the FOS.
FCA chief executive Andrew Bailey said consumers and small businesses struggle with the cost and time to take firms to court, so it was essential they could receive fair compensation from the FOS when things went wrong.
He added: “We have listened carefully to the feedback we have received and believe our approach is right and will bring benefits to both the consumers and micro-enterprises currently eligible for the ombudsman service and the small businesses who will become eligible in April.”