FCA proposes to raise award limit for Financial Ombudsman Service

Maria Nikolova

The FCA believes the current £150,000 award limit is no longer adequate, and that it should be increased to £350,000 for new complaints.

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A steep hike in the award limit for the UK Financial Ombudsman Service may be in store, as the Financial Conduct Authority (FCA) has earlier today published a consultation paper setting forth its proposals for such a hike.

Currently, the UK ombudsman service can require firms to pay awards of up to £150,000 to complainants. This is known as the ombudsman service’s award limit. If the ombudsman service considers fair compensation requires payment of a larger amount, it can recommend that firms pay the balance to the complainant, but it cannot require them to. The FCA reviews the ombudsman service’s award limit from time to time to ensure that it continues to provide appropriate redress for complainants who are unable to resolve their complaints with firms themselves, and who would typically struggle to pursue these through the court system.

The UK regulator last increased the ombudsman service’s award limit in January 2012, when it rose from £100,000 (the limit when the service was set up in 2001) to £150,000. In the Consultation Paper published today, the FCA explains why it believes that a £150,000 award limit is no longer adequate, and why it should be increased to £350,000 for new complaints.

The limit of £350,000 would apply to complaints about firms’ acts or omissions that happen on or after the date the new award limit comes into force, provisionally April 1, 2019. For all other new complaints (those about acts or omissions prior to April 1, 2019), the FCA proposes to increase the current limit to £160,000.

The UK regulator also envisages changes allowing both limits to be automatically adjusted in line with inflation in future. Under the proposals, from April 1, 2020 onwards, both award limits should be automatically adjusted on 1 April, using the CPI for the preceding January. The inflation‐adjusted limit would be rounded down to the nearest £5,000.

For any complaints referred to the ombudsman service before April 1, 2019 the limit will remain at £150,000.

The FCA provides an analysis, indicating that a substantial number of complaints – around 2,000 – are made to the ombudsman service each year that result in compensation above the award limit. Such complaints account for just over 1% of all complaints made to the ombudsman service that result in money awards. Accordingly, the FCA estimates that, if it did not increase the ombudsman service’s award limit to £350,000, more than £113 million of compensation recommended by the service may currently be voluntary for firms.

The proposed new award limits for the ombudsman service will be significantly higher than the Financial Services Compensation Scheme’s (FSCS) compensation limits, except for the limit for temporary high bank balances, which is £1 million. For some activities covered by FSCS – insurance business and general insurance advice and arranging – there is no compensation limit.

However, the Paper notes that there is a key difference between the FSCS and the ombudsman service. The FSCS is a compensation scheme of last resort. It acts as a backstop and requires active firms to pay compensation for failed firms, whereas the Ombudsman requires active firms to pay compensation to their own customers for their own failings. It is therefore not obvious that the limits for the two schemes should be aligned.

The FCA expects comments on this Consultation Paper by December 21, 2018.

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