In recent years, an ever-increasing number of complaints have been brought by users of financial services to the Financial Ombudsman (FOS). In 2017/18, there were nearly 340,000 new cases. Many of these – just over 186,000 - were PPI-related but that still leaves around 150,000 complaints on other issues. The FOS’ latest prediction for 2018/19 is that there will be an uplift to over 400,000 new complaints – about an 18% rise.
Many financial services providers already have a full-time job in dealing with FOS cases, and have teams specifically created for that specialist task.
But changes coming into effect from 1 April are likely to have a further significant impact, increasing both the number of cases and the maximum financial redress that can be awarded. It is vital that providers, whether in insurance, banking, pensions or broking, are aware of these and begin thinking now about how they may be impacted.
The first change sees a much greater number of SMEs able to bring cases to the FOS. Currently, only businesses in line with the EU definition of a ‘micro-enterprise’ can bring complaints to the FOS – with the Ombudsman estimating it has received around 4,000 cases a year from them. These micro-enterprises are classed as businesses with 10 employees or fewer and a turnover of €2m or less. But from April, eligibility will be expanded to include businesses with up to 50 employees and a turnover of up to £6.5m (as well as larger charities and trusts and a new category of personal guarantors). This means that an additional 210,000 businesses will be able to bring a complaint to the FOS. The FOS anticipates around 1,300 complaints being brought by such businesses in 2019/20 – but of course this is an estimate and actual take-up remains to be seen.
Certainly, these bigger businesses may be expected to bring bigger claims than micro-enterprises. Insurance claims for business interruption, cyber incidents or employer liability issues, for example, can be expected to be proportionally larger than for very small concerns.
The second change sees an in increase the maximum award the FOS can make from £150,000 to £350,000. This is a considerable uplift and could increase financial service providers’ costs significantly if claims are successful. While many FOS cases are for small amounts, it is not unusual for insurance claims in particular – such as life policies, health or buildings insurance – to be much larger. The new maximum will also be linked to the Consumer Prices Index, meaning that it could rise over £400,000 and beyond in only a few years, depending on how inflation fares.
Taking a complaint to the FOS is often an attractive option to individuals and businesses because it is free; there are no costs to pay even if the case is lost; the FOS can make its own ruling based on what it deems is ‘fair’ – regardless of the actual wording in policies or other legal standpoints; and the financial services provider has no right of appeal if it loses. The complainant, meanwhile, retains the option of going down a legal route if their claim is dismissed.
Increasing the maximum award that can be made will only boost these attractions, for the general public and now for 210,000 SMEs.
Providers need to brace themselves for FOS cases becoming more expensive and more numerous. They should be examining their portfolios and complaint histories to assess what the impact could be. For example:
- How many cases in recent years could have had an award above £150,000 if that had been possible?
- What might the cost of these have been?
- Are there any product areas where a significant stream of SME claims can be expected, and how strong will your argument be against them?
- How much might be claimed?
My advice to providers is to think through the likely impact of the changes on their own business and consider what mitigations may be possible. It will also be important to make sure that senior leadership is aware. They won’t welcome the surprise if FOS costs increase unexpectedly with no remediation plan in place.
At Bevan Brittan, we have a long track record of advising and representing insurers and other players in FOS cases.