Increasing the award limit from the current £150,000 would "ensure more complainants receive fair compensation when the ombudsman service upholds their complaint against a financial services firm", according to the FCA's consultation, which closes on 21 December 2018. However, an increase would also affect the way firms conduct themselves, both generally and in response to complaints, according to contentious financial regulation expert Jonathan Cavill of Pinsent Masons, the law firm behind Out-Law.com.
The FCA has also confirmed the extension of the jurisdiction of the FOS so that it can hear complaints from SMEs, charities and trusts of a comparable size and personal guarantors of certain loans. It has published near-final rules in the form of a policy statement, following on from its previous consultation of January 2018. Final rules will follow later this year, with the intention that they come into force on 1 April 2019.
"This latest FOS update is a consequence of the FCA's objective to ensure that the markets operate well and that customers are properly protected," said Cavill. "Ultimately, the aim is to ensure that customers receive fair compensation for their complaints, but it is undeniable that the new £350,000 limit is a material increase which firms will not be able to ignore."
"The obvious upshot is the increased redress which may be awarded from a FOS decision. However, the more subtle consequence is the impact the increased limit will have on the way firms conduct themselves, both generally and in response to complaints. For example, some firms may feel that if the changes go through, then their existing business processes leave them exposed to a level of redress which they are not willing to accept. Firms may also be more willing to deal with complaints when they are first made to the firm, rather than run the FOS' 'fair and reasonable' gauntlet," he said.
The FOS is an independent body which deals with complaints by the customers of financial services companies which cannot be resolved through that company's own procedures. It can require firms to compensate their customers so that they are back in the financial position that they would have been in had the problem that led to the complaint not occurred. Currently, the maximum amount that a firm can be required to pay by the FOS is £150,000. The FOS may recommend a higher value award, but it cannot compel a firm to pay anything above the cap.
The FCA has now proposed increasing the award limit from 1 April 2019. It intends to increase the limit to £350,000 for complaints about acts or omissions that occurred on or after that date. A new award limit of £160,000 would apply to complaints made after 1 April 2019 about acts or omissions that occurred before this date. The consultation also proposes that, from 1 April 2020, the award limit should increase on an annual basis in line with the Consumer Prices Index (CPI) measure of inflation.
Each year, only around 2,000 'high value' complaints where the award limit applies are upheld by the FOS, or just over 1% of the total number of complaints it upholds each year. However, the FCA is concerned that those who are affected risk "very significant financial harm", worth a combined £113 million annually. As the same time, the individuals and businesses which are eligible to complain to the FOS are "unlikely" to have the means to pursue firms for unpaid compensation through the courts.
Under the current rules, the FOS can only hear complaints brought by individual consumers, small charities and trusts, and the smallest businesses. The FCA now intends to extend access to the FOS to a larger category of small and medium-sized enterprises (SMEs), provided that their annual turnover is under £6.5m and they either have fewer than 50 employees or an annual balance sheet total of under £5m. In its January consultation, the FCA had proposed that businesses must meet all three tests in order to be eligible.
The new rules will also introduce broadly equivalent eligibility criteria for charities and trusts, and introduce a new category eligible to complain to the FOS: personal guarantors of loans to a business that they are involved in. The FCA intends for the changes to come into force on 1 April 2019, once it has scrutinised preparations made by the FOS in anticipation of its increased remit as part of its draft business plan and budget for 2019-20.
"The extension of the FOS's jurisdiction to SMEs, charities and trusts of a comparable size, and personal guarantors of certain loans, means that firms are not only exposed to greater redress values, but also a larger cohort of potential complainants," said Cavill. "There is also the obvious impact on PI insurance, particularly for smaller firms who will need such protection from the larger pool of complainants and the increased quantum of potential redress."
"These changes lend themselves to ensuring that firms have the appropriate culture and mind-sets, as the exposures come from what the FOS thinks is fair and reasonable under the circumstances and not whether rules or laws were followed strictly. Changes such as these have the potential to shake up the way which firms carry out their business just as much as new rules which directly tell firms what they should do and how they should do it," he said.