The new FOS limit is an abuse of power
Regulatory update for Financial Advisers & Paraplanners
27 Mar 2019
The increase in the FOS limit is a profound abuse of power
In December, the FCA issued a consultation paper CP18-11 in which they proposed to expand their upper limit from £150,000 to £350,000. In Libertatem’s response to the consultation paper which was personally delivered to the FCA, it was suggested that instead of raising the limit, the FOS should instead reduce the amount to £25,000.
The recommendation obviously fell on stony ground with news of the upper limit hike being announced last week.
The Ombudsman is able to impose this level of penalty without due process, proper evidence and without any right to appeal from the regulated firm’s perspective.
In contrast, until recently the maximum fine that a magistrates' court could impose was £5,000 – and that could only be inflicted after due process with proper evidence and the defendant able to appeal should they disagree with the final verdict.
Meanwhile, here at Libertatem, our inbox regularly reveals a high degree of incompetence in all aspects of the FOS operation. There is significant staff discontent and a high staff turnover. Both market and technical knowledge is often embarrassingly poor and much of this was recently exposed by Channel 4’s documentary Dispatches.
I note the FCA’s ignorance of the workings of the PI market and their inability to cope with simple maths following today’s announcement regarding their FOS ideas. This is an utter outrage. I cannot believe their arrogance in ignoring PI market warnings about cost increases and saying they think it will be less. Do they not understand who even sets the PI prices? This will prevent a significant number of firms getting cover, which stops them trading, puts them out of business and puts more and more onto the FSCS, resulting in fewer and fewer surviving firms.
We also have evidence that when faced with claims – such as Connaught – that have the potential to become a regulatory embarrassment, the FOS can be depended upon to use its powers to absolve the FCA from any blame.
The overwhelming perception of advisers caught up in the process is that once FOS believes there is a claim, it looks around for someone to pay. As far as the ombudsman is concerned, any claim is regarded as a tail in need of a passing regulated donkey. It is simply their job to attach it. Advisers are now super-sensitive to FOS and its processes because, unlike the directors of most other distributions, they face losing private assets by its actions.
Both the FCA and FOS appear (in the eyes of the insurance market at least) to have taken the concept of consumer protection to illogical extremes whereby insurers are expected to blindly reimburse the cynical investor who knows his/her way through the complaints system. Such facts/motivations are often exposed in the course of conventional litigation (and thereby a valuable ‘sanity check’ to liability for insurers) but FOS has decided all claims must be inherently valid, even when evidence exists to the contrary and they bend over backwards to find for the claimant.
Insurers are not a convenient repository into which an unwelcome financial burden can be off-loaded as seems to be the raison d’etre for the FSCS who, in turn, just ratchet up their levy the next year. If the PI market is to survive beyond the next few years (and there exists a distinct danger it won’t) and instead possibly develop and even thrive, then the FCA must introduce a ‘long-stop’ on liability plus a mechanism by which FOS decisions and, dare I say, the FCA’s own ‘reviews’ can be quickly and professionally sanity-checked. A failure to recognize this and instead reduce insurers’ exposure to uncertainty will see its rapid demise and a whole different set of problems for the next incarnation of the FCA. Guaranteed.
We are now urgently seeking meetings with the Treasury, the FCA and the FOS (which has just been confirmed) to discuss further the impact of the revised upper limit and are in the process of putting together a steering committee of industry professionals to advise the regulator on the true cost of these changes.
Only time will tell if we will be successful in at least getting a rethink, but to sit back and do nothing is not an option. By highlighting the very real dangers created by the £350,000 upper limit and the arbitrary decisions made by FOS, we will at the very least be ensuring the sector does not buckle under the fiscal pressure without a fight.
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