The Financial Conduct Authority’s (FCA) plans to raise the maximum Financial Ombudsman Service (FOS) compensation award to £350,000 from April 2019 may stop small firms obtaining professional indemnity (PI) cover at a viable economic rate, shrinking the number of IFA firms, the Personal Investment Management & Financial Advice Association (Pimfa) has warned.
Pimfa chief executive Liz Field said the rise could increase the advice gap.
She said: “Pimfa is deeply concerned that this proposed move could act as a barrier to entry for smaller firms because this will impact a firm’s ability to obtain professional indemnity insurance at a viable economic cost. This could reduce the number of firms within our profession and further widen the advice gap.
“We will be responding to the consultation paper and raising our concerns with the FCA. Our profession has an essential role to play in helping to build a culture of savings and investments, and this move could severely impact a firm’s ability to be able to provide this vital service to clients.”
Advice gap
Other IFAs have suggested that the best place for complaints of this scale is in the courts.
Scott Gallacher, director at Rowley Turton Private Wealth Management, said: “This is terrible news. I understand FOS was intended for those unable to get justice, i.e. for smaller claims, when going to court was impractical. If you’ve got a £350,000 claim then surely court is the place. The claims management companies will be rubbing their hands with glee for 35 per cent of £350,000.”
“The downsides will be to significantly increase PI costs and/or reduce the number of PI insurers, further increasing the cost of advice and worsening the advice gap. It could potentially force some lower margin adviser firms to the wall and reduce investment in adviser firms.”
