Maximum FOS award could rise to £200,000

22 July 2010 | By Samuel Dale

Independent financial advisers could be at risk if the maximum award handed out by the Financial Ombudsman Service could double to £200,000 warns City law firm Reynolds Porter Chamberlain LLP.

RPC says that the FSA recently contacted a sample of financial services firms to analyse how much redress they have been paying through FOS and court awards during the last year.

The communication, which is part of the cost benefit analysis for an FSA’s Consultation Paper to be published on September 1, suggests the FSA is likely to increase the FOS’s maximum award from £100,000 to £150,000 or even £200,000.

Jonathan Davies, partner at RPC, says: “Increasing the Ombudsman’s maximum penalty by this kind of amount would put many IFAs at risk of closure. In the past IFAs have found it difficult to get professional indemnity cover and a big increase in the Ombudsman’s maximum award could make it very difficult for IFAs to get insurance cover.

“The FSA requires firms to hold professional indemnity insurance including cover for Ombudsman’s awards. PI insurers may however be very reluctant to provide cover for large awards by the Ombudsman. If firms cannot obtain cover, they must cease trading or set aside additional capital.

“Even if insurers do still provide cover to IFAs, they may decide not to cover the increased FOS awards. Or insurers may increase premiums for the additional cover.”

RPC says that uniquely under UK law, claims handled by the FOS are not subject to a maximum time limit so this change could expose IFAs to large compensation claims from activity that took place more than 15 years ago, by staff who might have left the company years ago.

Davies adds: “That means IFAs could constantly face the risk of antique claims.”

He points out that claims handled by the Ombudsman are dealt with through written submissions only and that financial services firms will be concerned about getting a full and fair hearing.