FOS cunning plan to destroy smaller IFA firms

Panacea comment for Financial Advisers and Paraplanners

9 Nov 2018

FOS cunning plan to destroy smaller IFA firms.

The Financial Ombudsman service announced, on the 16th October, it was proposing that on 1 April 2019, yes, now just 4 months away, “the ombudsman service’s £150,000 award limit should increase by 133% to:

  • £350,000 for complaints about acts or omissions by firms on or after 1 April 2019
  • £160,000 for complaints about acts or omissions by firms before 1 April 2019, and which are referred to the ombudsman service after that date

They also propose that, from 1 April 2020 onwards, both award limits should be automatically adjusted on 1 April to ensure they keep pace with inflation, as measured by the Consumer Prices Index (CPI). For any complaints referred to the ombudsman service before 1 April 2019 the limit will remain at £150,000”.

They said that “proposed changes to the ombudsman service’s award limit will ensure more complainants receive fair compensation when the ombudsman service upholds their complaint against a firm”.

We believe that this will see the end of smaller IFA firms due to impossible capital adequacy requirements caused by higher excesses to deal with £350k claims. It will be the end of anyone looking to start a new firm.

It will mean that PI premiums will get so high that only the largest firms could afford it.

And, you guessed it, more firms falling into FSCS default with fewer firms being left to pay the increasing calls for cash.

Truly, this is the industry, sorry profession, that will destroy itself.

Our survey findings, carried out since the announcement, have been passed on the the FCA as part of the consultation, the TSC has thrown up some interesting and disturbing repercussion facts if this happened and our survey has been sent to Nicky Morgan MO, who heads up that committee..

122 responded to the survey, here are the results along with some heartfelt comments that we would advise are taken seriously by the FCA.

Would it be fair and reasonable for the FOS to increase the maximum award from £150k to £350k, some 133%? 91% say no.

I would leave the industry

A totally ridiculous & unwarranted increase! 

It could be fair if advisers had a legal right of appeal on FOS decisions.

One cannot look at this in isolation. the fact that there is no longstop or independent appeal mechanism means that the supposed balance is unnaturally tilted toward the complainant

My understanding was that the previous limit identified that larger cases were more appropriately dealt with by the civil court system, where both parties can be represented, and both have the right of appeal. with the level of claim justifying the additional cost involved

How many RI’s does your firm have?

50% had one

36% hade between two and three

14% had between four and ten

How many AR’s does your firm have?

All had between one and three 

What is the current cost of your PI?

The lowest was £25,00, the highest £50,000 with £12,000 as an average

When does it renew & who is it with?

There was a good spread of dates with most being mid to late next year, Collegiate were the most used insurer, Liberty Mutual came second.

What is the excess? 

Most carried £5,000 excess, one had splits of £10,000 for DB work, £5,000 for investments and £2,500 for protection

Have you claimed on your PI? If yes, how many times? 

None had claimed 

Have you ever been declined PI renewal?

Only one

Have you ever been offered special terms?

Only two. Some had seen a reduced excess on the first claim and some had seen £10,000 excesses for endowment claims

How long have you been trading? 

13% had been trading for less than two years, 9% for two to five years

32% for six to ten years

46% for over ten years 

Would a £350k FOS award cause you difficulties? If yes, how?

96% said yes

As your article predicts, higher PII costs and Cap Ad requirements are likely to create an unreasonable financial burden and a restriction is our ability as a small firm to trade. The additional burden of more businesses folding and higher FSCS costs only adds to this burden. 

Especially if it adds to the capital adequacy rules, we are carrying £20-K now as a one-man band! 

I would immediately cease trading and consider whether to follow HB’s solution if I am to be made destitute by a system which puts me outside the law.

To be honest any award is likely to exceed my capital resources so my business would fail. At present if my PI insurer picked up claims I could pay for 2 excess claims before I’d breach my cap ad requirements 

Would a £350k FOS award cause you to increase your fees to clients? 

87% said yes.  

A no respondent said No I would probably look to exist the industry

PI would increase even further so this would have to be passed onto clients. Our fees fund the FOS and they make awards knowing that their own salary is paid each month. We have no way of covering this without charging more.

Do you transact DB transfer business?

Exactly a 50%/ 50% split

I have done in the past but I have now withdrawn from this market due to the risk and added PII costs.

You’d have to be mad to do so if you were a sole trader or partnership and it’s not a lot better as a Ltd company

Is now the time to have a product levy or a consumer transaction tax? 

82% said yes

Increasing the FOS limits would make remaining a small independent firm even harder and inevitably drive up client costs. A fair FOS with a mutual right of appeal and a return to the fines levied being used to partially fund the FSCS would create a less hostile environment for small firms, firms that generally have a closer relationship to their clients and tend to cause less client detriment.

Of course, it is the right time, in fact it should have been levied years ago we have been shouldering the burden on our own for far too long 

Why hasn’t this been sorted yet? A product levy would be the simplest method of addressing FSCS funding. The problem is that IFAs don’t have a united trading body that can lobby for them. IFAs are a divided bunch and the FCA know it, which is why they don’t give two hoots what they do to IFAs. They’ve never liked small IFAs and have done their damnedest to get rid of us. They only like larger firms so that it’s easier for them to point the finger at one or two individuals.

If you have not done so, you only have until the 21stDecember to respond to their consultation. You can email your responses to or write to: James Tallack, Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN

Sadly, experience has shown that ‘a consultation’ in regulatory speak is simply a notification that the decision is already made and this is just a polite, box ticking ‘heads up’.

Over a considerable number of years ‘Consumer detriment’ has been seen because the regulator has noted flaws in product design, marketing or understandings of outcome and purpose- and yes you have guessed it, all with the benefit of hindsight.

Regulation should be about being smart and not wise after the event. It should be about utilising experience when things going wrong to make sure mistakes and failures do not happen twice.

To licence a product as fit for purpose, with that purpose clearly defined, as part of the process is the single most effective consumer benefit a regulator could put in place.

Some have suggested that the resource needed would result in a huge increase in fees, perhaps the contra view that because products are licenced there would be fewer failures to fund might be more appropriate.

The FCA’s solution is to put up the compensation amounts, rather than addressing how foresight based upon hindsight built up over so many years could remove the problems that result in a pay-out.

Just a thought.