In brief - Significant increase in compensation cap for investment disputes
As of 1 January 2012, the Financial Ombudsman Service (FOS) will be increasing its maximum award amounts. The compensation cap for investment disputes is increasing from $150,000 to $280,000 for complaints lodged on or after that date. It is likely that more disputes will be referred to FOS and fewer to the courts.
Terms of reference of FOS
FOS is an external dispute resolution (EDR) body that has jurisdiction to accept and adjudicate a number of financial, insurance and related disputes.
Under its terms of reference, FOS has the power to award a monetary sum for compensation if it determines that a complainant has proved that a financial or insurance service provider has breached a statutory or common law duty and that this breach caused them loss or damage. The monetary sum is limited to certain amounts under what FOS refers to as its "compensation cap".
Up to 31 December 2011, the compensation cap will continue to be limited to $150,000 for investment disputes, $100,000 for general insurance broking disputes and $280,000 for all other disputes.1
Increase in compensation cap from January 2012
From 1 January 2012, FOS will be able to award increased sums for each of the above complaints. The new limits will be:
- $280,000 for investment disputes
- $150,000 for general insurance broking disputes
- $7,500 per month for life insurance income stream disputes
- $280,000 for all other disputes within the terms of reference of FOS
Jurisdictional limit of FOS still $500,000
The terms of reference prevent FOS from entertaining complaints that are above the value of $500,000. This limit will remain the same. Under term 5.1(o), any disputes over that value must be excluded; this term notes that this is a type of dispute that "the Service may not consider".2
Term 5.1 contains 16 circumstances in which a dispute cannot be entertained. This includes:
- certain fee disputes
- confidentiality issues
- some general insurance complaints
- where the dispute is already being dealt with in a court or other jurisdiction
FOS has announced that where a complainant has a complaint valued at, say, $550,000, it may be open for the complainant to abandon part of his or her complaint in order to fit within the jurisdictional limit. Based on this announcement, it is unclear whether the complainant would be required to drop just that part of the value of the claim which exceeds the $500,000 limit (which here is equal to $50,000), or whether they would have to drop a specific component of the complaint.
Nonetheless, we note that once a result is reached at FOS and the complainant accepts that result, he or she cannot then seek to recover any additional amount, even if that amount was dropped from the claim to fit within the jurisdiction of FOS.3
FOS may split complaints into discrete components
For investment disputes in particular, FOS now has a significantly increased monetary award power, from $150,000 to $280,000 per complaint. Financial service providers must be mindful that FOS has divided complaints into discrete parts in the past. That possibility still exists.
For example, FOS may divide a complaint into parts depending on the number of advice documents rendered. This includes (but is not limited to) Statements of Advice, Statements of Additional Advice and Records of Advice.
Let us assume for the purpose of argument that an adviser has issued a Statement of Advice recommending an initial investment of $250,000, followed by a Statement of Additional Advice recommending a supplementary investment of $250,000. There is a possibility that FOS will treat this as two individual complaints.
Assuming FOS finds both advice documents to be inappropriate or defective, or finds that they give rise to liability in some way, the old limit would restrict any compensation to $300,000, even though the complaint was for $500,000.
Under the new compensation cap, it is theoretically possible for FOS in this example to make an award to the complainant for the full $500,000. However, as noted, for complaints above $500,000 there will be a restriction on recovery.
More complaints to go to FOS, fewer to be referred to courts
The change to the FOS compensation cap will have its main impact on claims which involve a single advice document and which are over $150,000. Under the old limit, complainants were limited to a maximum award of $150,000, dependent on the success of the complaint itself. This had a deterrent effect on slightly larger "single-advice" complaints.
This change will allow FOS to adjudicate a larger number of complaints which may previously have been referred to another jurisdiction due to the compensation cap. Furthermore, it will require greater and more in-depth consideration of complaints by both financial service providers and insurance firms.
It is anticipated that the increased cap will open FOS to a larger number of complainants seeking full compensation in complaints up to and around $280,000. This is likely to give rise to a greater reliance on FOS, rather than the courts, to resolve disputes at this level.
Financial service providers and insurance firms should continue to monitor all complaints at the EDR level carefully and seek to tighten their internal dispute resolution processes in order to arrive at an early and satisfactory resolution of complaints before they are referred to an EDR body.
1 Under the present rules, there is also a cap of $6,700 per month for a life insurance income stream claim and $3,000 for uninsured third party motor vehicle claims. The limit for motor vehicle claims will disappear after 1 January 2012 and seems to be limited to the standard $280,000 cap.
2 Financial Ombudsman Service Terms of Reference (as amended 1 July 2010) are available online. However, please note that they may be further amended in 2012.
3 Term 8.8 requires the complainant to release the financial or insurance services provider from all liability arising from the complaint, and will be bound by that release.
This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.