The Treasury’s response to its consultation on reviewing the Financial Ombudsman Service (FOS) has been published this morning alongside the FCA’s response and finalised guidance to modernise the redress system.
Following the government's consultation, the FCA and Financial Ombudsman Service are seeking views on proposals to modernise the redress framework, to better serve consumers and give firms greater certainty to invest and innovate.
The government's consultation found that, "in a small but impactful minority of FOS cases, some stakeholders were concerned that the role of the FOS had expanded beyond its original remit. This gave rise to a lack of certainty around the regulatory standards that firms are required to meet, concerns about the predictability and consistency of FOS decisions, and a lack of alignment between the FOS and the FCA".
"This potential for tension can... result in the FOS acting as a quasi-regulator", the consultation paper concluded.
Proposals include an updated framework for dealing with mass redress events, a new FOS case process that will streamline case handling, and a time limit of 10 years for bringing complaints to the Ombudsman.
The FCA and the FOS will begin implementing changes from today, where they can – delivering improvements in advance of the legislation that will be needed to implement the government’s proposed reforms.
The FCA is also seeking views on further changes possible within the existing framework, including proposed updates to the fair and reasonable test and to the dismissal grounds. The Financial Ombudsman is also seeking views on the introduction of a complaints registration stage to ensure that all complaints referred to the Financial Ombudsman are within its scope and ready to be investigated before being allocated a caseworker and businesses are charged.
The proposals seek to ensure that the Financial Ombudsman can resolve complaints more quickly and informally, leading to faster and more consistent resolutions, reduced delays and improved outcomes for all parties. The proposals will also encourage earlier proactive resolution of issues by firms.
Emma Reynolds MP, economic secretary to the Treasury, commented: "The financial services landscape has evolved over the last 25 years since the FOS was established, with the introduction of new financial products, digitalisation and a shift towards outcomes-focused regulation which seeks to set high standards of care that firms must provide to consumers. For years, stakeholders have consistently raised concerns that some elements of the redress framework can generate problems and lead to inconsistent outcomes for consumers and uncertainty for firms. This has suppressed investment and innovation in UK financial services, which can lead to firms offering fewer, less innovative products for consumers due to concerns about potential future redress.
"It is therefore right that the government reviews the redress framework to ensure that it continues to fulfil its intended purpose in an effective way. Today, I am setting out a package of proposed policy reforms to address these concerns and restore the FOS to its role as a simple, impartial dispute resolution service which can quickly and effectively deal with complaints against financial services firms – ensuring that it is no longer acting as a quasi-regulator."
Charlotte Clark, director of cross-cutting policy and strategy at the FCA, said: "We’ve reached a significant milestone in our joint work with the Financial Ombudsman Service and the Government to modernise the redress system so that consumers get fair outcomes quicker and firms have greater clarity about how issues will be handled.
"We’re delivering change at speed by acting now within our current powers, with a focus on improving how the system works in practice. This includes a new registration stage for complaints, updated dismissal grounds and clearer guidance on the fair and reasonable test.
"Throughout, our aim has been to improve alignment, predictability and early engagement across the system – while maintaining strong and effective consumer protection."
James Dipple-Johnstone, interim chief ombudsman at the Financial Ombudsman Service, commented: “The financial sector has changed significantly since the Financial Ombudsman was set up 25 years ago, which is why we are driving forward changes to transform the redress system. We are laying the foundations for an agile, responsive and modern service which is fit for the future and has the confidence of consumers and firms alike.
“Building on improvements we have delivered already these new measures will further modernise our operations to ensure we remain a service which keeps pace with a changing sector in delivering our vital service for consumers and supporting confidence in UK financial services.”
Phil Smith, head of redress at financial services consultancy Broadstone, added: “The government’s response marks an important step towards bringing greater clarity and consistency to the UK’s redress framework. Ensuring that the Financial Ombudsman Service places greater weight on firms’ compliance with FCA rules should provide much-needed certainty for firms, while the proposed referral mechanism between the FOS and FCA could help resolve areas of regulatory ambiguity and inconsistency.
“A time limit of 10 years for bringing complaints to the FOS may enable firms to improve future planning and increase investment. The exceptions flexibility is important especially for longer term financial products where the cause for complaint may take longer to be established, particularly for cases with less financially aware consumers.
“Recent large-scale cases such as PPI, and the motor finance investigation, highlight why a more structured framework for mass redress events is needed. A system that allows issues to be identified and resolved earlier should benefit consumers through faster and more consistent outcomes, while also helping firms manage costs and avoid problems escalating into industry-wide redress programmes.
“Greater transparency through thematic reporting and a clearer structure for FOS decision-making should also help firms better understand how complaints will be assessed. Taken together, these reforms aim to strengthen confidence in the redress system by making it more predictable, more transparent and better aligned with the UK’s regulatory framework.”
