Does FOS compensation limit hike justify a surge in PI bills?

By Hope William-Smith

Go to the profile of Money Marketing
Mar 26, 2019

Change will benefit fewer than 500 consumers, but resulting premiums rise could force small firms to stop providing advice

The FCA’s decision to increase the Financial Ombudsman Service’s compensation limit from £150,000 to £350,000 from 1 April continues to receive significant backlash from industry bodies.

The knock-on effects will impact the long-awaited evaluation of both the RDR and the Financial Advice Market Review.

Advisers seeing bills increase have criticised professional indemnity insurance providers for hiking premiums, but insurers say even higher premiums will be needed to stump up for claims under the higher FOS limit.

The new limit will benefit some consumers, but experts say advisers have already felt more than enough pinch from PI insurers asking for more money.

The FCA’s own estimates show only 500 complaints will require compensation above the old £150,000 limit but below the new £350,000 limit.

This is down on an original estimate of 2,000 the FCA reached last October when it first announced its plans to increase the FOS limit.

Of the 500 who would require compensation, the regulator estimates only around 375 complaints would be upheld and subsequently covered by the new cap.

However, under its worst-case scenario, the FCA says advisers’ PI bills could increase by as much as 140 per cent due to the new cap, and that insurers themselves had forecast PI premium increases of between 200 per cent and 500 per cent.

Royal London policy director Steve Webb says PI insurance has already risen in anticipation of changes to the FOS limit and would most likely continue to increase.

“PI insurers have already been hiking premiums in anticipation of the change, but the regulator is pressing on regardless.

“It is a shocking decision and if even fewer members of the public are unable to access advice then this will be counter-productive, and consumers will lose out as a result.”

FCA data shows advisers paid out more than £300m for PI in 2017, with the average around £17,540 per firm.

When looking at average premiums paid as a proportion of regulated revenue, small firms generally pay a higher percentage than larger firms.

But while only 500 new claims could arise, the FCA notes this could result in £47m more compensation, and £37m in additional PI-underwritten liabilities.

Money Marketing spoke with PI provider PolicyBee which says insurers’ claims that their costs are justified remain fair.

Head of service Kerri-Ann Hockley says: “It can be really difficult to explain increases to clients, especially when they have not had any changes to business or any issues. And, of course, it’s insurers increasing premiums to reserve enough so that when claims do arise, that they can reasonably expect would, they need to know they have the money to pay for those claims.

“Specifically, in the financial sector, there will always be hikes and changes, but they are always linked to a specific incident which causes insurers to need a re-look at how they rate a certain group – for example, financial advisers – and often find they are exposed to something they did not expect to be and have to increase premiums when that comes to light.”

Hockley says any changes in premiums will also follow general market trends. That includes the number of insurers across multiple occupational groups that are dwindling.

She says: “Providers that are left will then put their premiums up because they are not fighting for the business in the same way and that is the right thing to do because many more insurers can be shut down by the claims that are coming in and not being able to pay those out.”

The FCA did release some data on PI returns in the advice sector last June, but has been unable to provide a full breakdown of the information advisers input into the Gabriel reporting system.

The impact on advisers The FCA admits that the PI bill hike resulting from upping FOS compensation limits could even push small businesses out of the market despite efforts to increase competition to ensure a healthy market.

The regulator’s worst-case scenario outlined in its 8 March policy statement estimates more than 1,000 “higher risk” advisers could stop providing defined benefit transfer advice under a £350,000 award limit because they would be unable to afford PI cover.

Personal Finance Society chief executive Keith Richards says a limit increase affecting so few claims is a “reckless” move from the regulator that leaves PI insurers between a rock and a hard place.

He says: “The market continues to harden with increased costs being experienced across the sector and this latest move will serve to compound the issue and can only be described as reckless [and] has already left many advisers facing increased premiums, increased excesses and, in some instances, no ongoing cover.”

Advisers can only hope PI is addressed adequately in the full review of FAMR this year. Richards adds: “What is most surprising is that the FCA is alert to the issue and included PI within its FAMR review of Financial Services Compensation Scheme funding, and yet this latest move seems to ignore the wider public interest agenda.”

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