The Financial Conduct Authority (FCA) has proposed increasing the award limit for complaints submitted to the Financial Ombudsman Service (FOS) from £150,000 to £350,000.
In a consultation paper published this morning, the regulator proposed that the new limit, referred to as 'L2', would relate only to complaints about advice given by firms that take place on or after 1 April 2019.
The FCA suggested the new limit would mean that in around three quarters of the 2,000 complaints estimated to be above the award limit each year, the claimant would receive the full amount of compensation the ombudsman considers due.
The regulator highlighted that the average compensation for Sipp complaints in the sample of 40 high value complaints reviewed by the FOS was around £241,000. However as £150,000 is currently the maximum amount the FOS can award, consumers currently miss out on receiving all the compensation they are due.
In some cases the ombudsman will ask a regulated business to pay more than £150,000 but it has no power to enforce this.
The paper note: '[Of] 214 cases of alleged pension transfer fraud reported to Action Fraud in 2017, around a third reported losses of over £150,000, with a median loss of around £230,000.'
However, the FCA expressed concerns about the 'indirect impact' of its proposals on individual firms due to increase professional indemnity insurance (PII) premiums.
'For some small firms, where PII premiums are already relatively high as a proportion of total income, a material increase in PII premiums could have a significant effect on the individual firm.
'This could include the firm deciding to withdraw from certain markets, such as pension transfer advice. If widespread, this may weaken competition in those markets.'
The FCA assumes an an overall increase in insurance costs of £77 million, based on an estimated shortfall of £113 million between compensation recommended and that paid because of the award limit.
The regulator has subsequently requested detailed responses from firms on this issue, particularly the relative influence of various factors on insurers' pricing decisions.
The FCA also intends to make a one-off, inflation-based adjustment to the existing limit (L1) in January 2019, increasing it from £150,000 to £160,000. Complaints about any act or omission committed before 1 April 2019 will fall under this limit.