As most of you are aware, there were two significant changes in how the Financial Ombudsman Scheme or FOS operates, these are now in effect from 1 April 2019 for new claims after that date. (the old FOS limit has been increased to £160,000 for any errors and omissions made before 1st April now being claimed against.)

Firstly the jurisdiction of FOS was extended to cover small and medium sized enterprises, some charities and trusts and personal guarantors.  That means you too!

Secondly and perhaps more of a concern is the increase of the maximum potential FOS award from £150,000 to £350,000.

If FOS make a decision and the consumer accepts it then it is legally binding, meaning that an upheld complaint and award by FOS is non-negotiable and must be paid, or challenged in the high court.  see this

Your Professional Indemnity (PI) policies covered, amongst other things, claims upheld against advisers with FOS up to a limit of £150,000. Obviously now those policies have a shortfall, a potentially significant one too.

Back in October 2018 when the FCA issued the consultation and in effect put the industry on notice of an impending increase, it was hoped that the PI insurers would begin contingency to accommodate the increase when it came in, subsequently on 8th March 2019 the FCA issued a definite policy statement that the increase would go ahead.

After talking with several, smaller advisory firms, it is evident now that some of the PI Insurers may still not have update their terms to cater for this regulatory increase (as that is exactly what this is) and are advising some customers that they are shortly to issue some form of statement regarding this…..that is rather unhelpful to the many small advisers trying to do business in an already complicated regulatory world.

What, as a smaller adviser should you be doing in the wake of this change and increase in potential risk for you?

There are two options :

1. You can set aside an additional £200,000 in assets, typically in a deposit based account to call upon in case of a successful claim from FOS against you.
2. You can call your PI insurer/broker and ascertain what they have done to accommodate this increased liability in your PI risk.

Option 1 is for most firms, highly impractical as it is hard to imagine that a small firm has a spare £200,000 simply lying around gathering dust!

Option 2 is probably the only choice open to small firms. 

With Option 2, it is suggested that you immediately call your PI insurer and get a response urgently from them as to what they will do to amend your policy terms and conditions to protect you from this increased cover requirement. 

You will know by now that you have only five days to report to the FCA if your PI policy is not compliant with the new limits and if so what action you are taking to address any shortfall, time is sadly ticking.

If they cannot give you an answer, then perhaps you should consider a different insurer? Not that it is advisable to "jump ship" as it were but if your insurer cannot give you an answer to this important question or if they have not yet worked out what they are going to do about it, perhaps they are not the insurer for you?

We at IFAC have already learned that Liberty Speciality Markets has issued a statement confirming that the new FOS limits will apply to their PI policies, though it will not cover Defined Benefit transfers!

We are hoping that all PI insurers do the same to avoid uncertainty, as this is one of the single biggest causes of problems in our industry today and let’s be frank, none of us likes that feeling.

So what this means for all advisers is that they must:

• Check their PI policy, does it cover only up to £150,000 for FOS complaints?
• Call their PI insurer if it doesn't and get clarification as to what they will be doing to ensure the policy is compliant?
• If they decide not to call their insurer then they should set aside a further £200,000 to cover the potential policy shortfall.

Don't get caught out! if your cover is not enough, call your insurer today and get their answer for what they are going to do to make sure your policy cover is adequate.

Niel F Gavin

T&C Director 

IFAC phoned Howden brokers about this article....

1.Some policies have an inner limit for FOS jurisdiction, some do not.   Find yours out!

2.For instance generally Liberty policies DO have inner limits, but they have ALSO stated publicly that they will cover this increased limit with the exception of DB cases.