The new FOS regime is here - what YOU need to know

The Financial Conduct Authority (FCA) has confirmed that with effect from today (1 April 2019), the scope of the Financial Ombudsman Service (FOS) will be extended to permit SMEs access to the regime. The amount of compensation which may be awarded will also increase substantially. This will be of great interest to both SMEs and regulated entities who will likely see an increase in FOS complaints as a result.

Eligibility 

Access to the FOS regime was previously limited to complaints by individuals and small businesses. However, from today, SMEs with an annual turnover of less than £6.5 million and either fewer than 50 staff, or an annual balance sheet total of less than £5 million will also now be able to refer complaints to FOS. In addition, the definition of charities and trusts who are eligible to make a complaint has been extended to allow larger organisations access. The FCA estimates that 210,000 more businesses will have access to FOS as a result of this change.

Award limit

The maximum amount of compensation that FOS could require regulated entities to pay following a complaint was previously set at £150,000. From today, this will more than double to £350,000 for complaints about acts or omissions by firms after this date and to £160,000 for complaints about acts or omissions by firms before this date, but which are referred to FOS after 1 April 2019. Complaints referred to FOS before 1 April 2019 will remain subject to the current limit of £150,000.

The FCA estimates that historically there have been up to 500 complaints each year where the amount of compensation that FOS determines is due is above the previous £150,000 limit. However, to date FOS has had no jurisdiction to award more than £150,000. Therefore, the FCA hopes that the increase will “ensure more complainants receive fair compensation”.

Impact of changes

1. Cost savings.  Pursuing a claim through the court is expensive and litigation is often not economically viable. Increasing the award limit will mean that more complaints can be brought under the FOS regime which may otherwise have been pursued through the courts. However, whilst FOS is a cheaper alternative, any legal costs incurred in this process are not recoverable, unlike in court proceedings where they may be recovered from the losing party. On the other hand, there is no risk of adverse costs with the FOS regime. Further, the FOS regime is designed to be utilised by consumers and therefore professional advice and assistance is not always necessary.
2. Increase in Professional Indemnity (PI) premiums.  The upcoming changes to the FOS regime are likely to lead to more claims against regulated firms and, to account for this, PI companies may increase premiums. The PI market is relatively small making it vulnerable to fluctuations in market conditions. There are concerns that the increase will risk pushing more insurers out of the market which may impact the availability of cover.
3. Complexity of disputes.  Under the current regime, the majority of the claims referred to FOS involve consumer issues; however the increased award limit may mean that the FOS will now be asked to consider more complex business issues, such as considering the terms of a Commercial Combined Insurance policy. These types of business issue will not be something FOS will have regularly come across and there are concerns over whether it has the expertise to deal with such issues.
4. Appeal process.  Judicial review is the only mechanism to challenge a FOS decision; however the route to judicial review is not an easy one and can be expensive. In circumstances where FOS may make decisions based on what is ‘fair and reasonable’ (as opposed to applying legal principles) judicially reviewing such decisions may be even more difficult. This issue has recently been recognised by the court and, in allowing an application for judicial review in Aviva Life v FOS [2017], Mr Justice May commented that the FOS’s fair and reasonable jurisdiction occupied an “uncertain space outside the common law and statute”. It remains to be seen whether a change to FOS’s ability to decide matters on a ‘fair and reasonable’ basis and / or a revised appeal process will be considered by the FCA.
5. Application of the law.  Whilst there is an obligation on FOS to take into account relevant law and regulations in theory, FOS can ignore long established principles of law if they consider it ‘fair and reasonable’ to do so. This approach can be problematic and will likely result in unprecedented and unpredictable outcomes.

Conclusion 

The changes to the FOS regime have been designed with the aim of increasing access to justice for small to medium businesses and ensuring more complainants receive fair compensation; this is obviously positive news for SMEs and those businesses who don’t have the resource to take regulated firms to court. However the changes also present increased risks to regulated firms including uncertainty and increased insurance premiums. Firms should ensure that they are prepared to respond to an increased number of FOS complaints, which can be expected be more complex in nature with the potential for greater pay outs.

Katie Byrne and Stephanie Reeves are Financial Services dispute lawyers at Irwin Mitchell LLP

From 1 April, the current £150,000 limit will increase to £350,000 for complaints about actions by firms on or after that date. For complaints about actions before 1 April that are referred to the Financial Ombudsman Service after that date, the limit will rise to £160,000.

The FCA has also confirmed that both award limits will be automatically adjusted every year to ensure they keep pace with inflation.

The new award limit will come into force at the same time as the extension of the service to larger small and medium-sized enterprises (SMEs). These are firms with an annual turnover of under £6.5 million, an annual balance sheet total of under £5 million, or fewer than 50 employees. An additional 210,000 SMEs will be able to complain to the Financial Ombudsman Service.”