The FCA’s Controversial Increase in FOS Award Limits

The recent decision by the Financial Conduct Authority (FCA) to increase the Financial Ombudsman Service (FOS) maximum award from £150,000 to £350,000 has sparked intense outrage among financial advisers. The change is intended to reflect the growing size of compensation claims linked to Defined Benefit (DB) pension transfers, but many in the industry believe it could effectively kill the transfer market altogether.

The burden of this increased liability falls almost entirely on professional indemnity (PI) insurers. As a result, advisers may no longer be able to afford insurance, and clients may be unwilling or unable to pay the fees necessary to cover the adviser’s PI costs. Some believe that this is precisely the FCA’s intended outcome—to shut down DB transfers by making them uninsurable.

Why DB Transfers Are a Special Case

The controversy surrounding DB pension transfers stems from the sheer size of potential losses. Unlike most financial advice claims, where clients may lose a portion of their savings, DB pension transfers often involve life-changing sums of money. If a client is misadvised, they may lose a guaranteed, risk-free income stream, which is difficult to replace.

This creates a legal barrier to going to court, as many claimants lack the free capital to fund litigation. This is precisely why ombudsman services exist—to provide an alternative to costly and complex legal proceedings in cases where claimants might otherwise have no recourse.

However, there is an argument that high-value transfers should be handled by the courts, not an ombudsman, particularly in cases where the decision to transfer was based on finely balanced economic analysis rather than obvious malpractice.

The Limits of FOS in Complex Cases

The Financial Ombudsman Service was designed to handle clear-cut cases of egregious misconduct or fraud. However, many DB transfer cases involve complex financial modelling, where the advantage or disadvantage of a transfer is not obvious.

Traditionally, this type of assessment was the exclusive domain of actuarial consultants, given the sophisticated mathematical models required. Even actuaries, however, often fail to apply the stochastic or simulation-based modelling necessary to compare a risk-free DB pension with a partially risky drawdown portfolio.

Without these quantitative tools, both the FCA and FOS rely on broad assumptions and protective instincts, which do not always lead to fair outcomes. This raises serious concerns about whether the ombudsman system is the right venue for assessing such high-stakes financial decisions.

The Principle of ‘Rough Justice’ and Its Breach

Society generally accepts that ombudsman services provide rough justice—a process that favours efficiency over precision. However, this trade-off is only acceptable when the financial stakes are relatively low. By tripling the compensation cap without consultation, the FCA has fundamentally altered the balance of the system, exposing advisers to much greater risks without providing an appropriate legal framework to challenge unfair decisions.

A potential solution could be to allow advisers the right to take high-value cases to court, on the condition that they cover the claimant’s legal costs even if the claim is unsuccessful. However, this would require significant legal reform, and it is unclear whether such an approach would be practical.