Ombudsman move to add £50,000 to maximum could increase judicial reviews

Insurers will have to pay out up to £50,000 more to wronged customers from next year, following a decision by the Financial Ombudsman Service to raise the limit on the maximum award.

The FOS move means that the maximum binding award for a wronged customer will increase from £100,000 to £150,000 at the start of 2012.

The increased cap will have a big impact on the insurance industry because life insurance, medical insurance and building contents cover make up a large proportion of the higher value claims referred to the ombudsman.

The decision has prompted concerns that there will be more judicial challenges. Jonathan Newbold, a specialist in financial services and dispute resolution at law firm Browne Jacobson, said: “Now that more money will be at stake, when the FOS determines complaints there are likely to be more attempts to judicially review its decisions.”

He added: “Many firms are regularly frustrated by the quality of decision-making of adjudicators and ombudsmen. The FOS is free to uphold complaints that would not succeed in a court of law if the ombudsman considers another outcome is ‘fair and reasonable’.

“How a decision that will result in a binding award of £150,000 can be said to be ‘fair and reasonable’, when a court of law cannot reach the same outcome, remains a sore point for those in the firing line.”

In a separate development, the ABI has warned the Treasury that it must guard against the FOS assuming regulatory power alongside the Financial Conduct Authority, the successor to the FSA.

The ABI believes the FOS should stick to its role of handing over complaints that pose a wider regulatory threat to the FSA, or to the FCA when it takes over.

The Association has written to financial secretary to Treasury Mark Hoban expressing its concerns.

An ABI spokesman said: “We see the FOS as an independent adjudication service to provide impartialcomplaints resolution. We want to make sure it does not get blurred with that of the regulator.

“It is not that we want to see its adjudication powers clipped – because it does a good job – but to ensure that its powers do not overlap with that of the FSA or the FCA.”

• The 35th most complained about company in the FOS’s insurance bracket, PPI provider Wilmslow Financial Services, has just collapsed into administration, adding to the need for the FSCS for funds.

We say ...

- The increase in the FOS cap should not be too damaging to insurers' balance sheets. Last year there were only 300 cases hitting the maximum cap limit of £100,000.
- Financial regulation is complicated enough without the FOS getting involved. The ABI is quite right to express its desire for the FOS to remain completely out of regulation affairs.