Consumers will be able to claim up to £350,000 in compensation from financial services companies that have wronged them from April 2019, after the financial regulator more than doubled the previous limit from £150,000 on Friday.
But critics said rising insurance premiums could put some financial advisers out of business as a result.
From April the Financial Ombudsman Service will be able to force companies to pay significantly higher compensation to customers whose complaints it upholds following a Financial Conduct Authority consultation in October last year.
Customers with complaints relating to incidents on or after April 2019 will be able to claim up to £350,000. Anyone with a complaint relating to incidents before April 2019, but reported after that date will also be see the limit rise to £160,000.
Both award limits will be automatically adjusted every year to ensure they keep pace with inflation. For any complaints referred to the ombudsman service before 1 April 2019 the limit will remain at £150,000.
The FCA said last year that complainants could collectively be missing out on as much as £113m a year due to the award limit. A new limit was necessary due to the number and size of “high value complaints” above the £150,000 cap handled by the ombudsman service, which it said could total as many as 2,000 a year.
However on Friday the FCA reduced this number to 500.
Critics warned that the new rules could raise the cost of financial advice and potentially drive some advisers out of the market, due to the rising cost of professional indemnity insurance.
The FCA acknowledged on Friday that the cost of professional indemnity cover for financial advisers could rise as a result of higher compensation payouts and said in a “worst case scenario” almost a thousand firms could stop providing pension transfer advice as a result.
Royal London director of policy Steve Webb said: “This is a shocking decision. If far more members of the public are unable to access advice then this will be counter-productive and consumers will lose out as a result.”
The FCA also said on Friday the service would be extended to apply to larger small and medium-sized companies, as mooted last year. This means an additional 210,000 small businesses would be able to complain to the FOS.
The regulator acknowledged there was a risk that “multiple limits could increase the likelihood of disputes about when an act or omission took place” but said such disputes were “an acceptable price to pay” to achieve higher compensation.
Andrew Bailey, chief executive of the FCA, said: “Consumers and small businesses struggle with the cost and time needed to take firms to court, so it is essential they can receive fair compensation from the Financial Ombudsman Service when things go wrong.”
The new rules follow revelations in January that the case backlog at the ombudsman was 10 times longer than before the organisation restructured in 2016.