The FCA and Financial Ombudsman Service (FOS) have announced new proposals to modernise the financial redress system "to help prevent it becoming overwhelmed, delaying consumer compensation".
The regulator says "high volumes of complaints on specific or novel issues can jam the system and cause significant delays".
The changes will help firms identify and resolve issues before complaints escalate and aim to give greater predictability, so businesses have confidence to invest, innovate and support UK growth.
In a statement today, the government said: "The Financial Ombudsman Service will be returned to its original purpose as a simple, impartial dispute resolution service which quickly and effectively deals with complaints against financial services firms under today’s reforms instead of acting as a quasi-regulator, with its decisions more closely aligned to the Financial Conduct Authority’s rules. This takes action on a key business complaint about the unpredictable and inconsistent nature of redress action, boosting firms’ confidence to invest and innovate."
The proposals include:
• Improving how the FCA and FOS work together to ensure consistency in the interpretation of regulations. This includes a new referral process to improve transparency about regulatory alignment and a lead complaint process to look at novel and significant complaint issues as they emerge.
• Clearer guidance for firms on reporting issues to the FCA sooner, alongside good practice examples to help identify and resolve complaints.
• Guidelines to help the industry assess and trigger the need to resolve a situation with wider implications that could spike complaints.
• Changes to the way the Financial Ombudsman processes complaints to ensure they are well-evidenced and ready before an investigation begins.
The changes complement new government proposals to modernise how FOS assesses consumer complaints. The consultation includes plans to:
• Adapt the Financial Ombudsman’s ‘fair and reasonable’ test.
• Give the FCA more flexibility to manage mass redress events, including pausing complaints handling without industry consultation.
• Introduce a formal mechanism for FOS to refer issues that arise through its casework to the FCA on the interpretation of the FCA’s rules, where there is ambiguity in how they apply.
• Allow firms and complainants to refer an issue to the FCA, for clarity on its rules, before the Financial Ombudsman issues a final decision.
• Introduce an absolute time limit for bringing cases to the Financial Ombudsman of 10 years, subject to exceptions, for example, for longer-term products.
The changes come as the Financial Ombudsman proposes to further modernise its processes by, later this summer, consulting on the introduction of different levels of case fees for financial services firms, depending on the circumstances of a complaint, to make the system fairer and support early resolution.
The Financial Ombudsman has also confirmed that, following feedback from stakeholders, it will be changing the interest rate it applies to some awards it directs businesses to pay, from 8% to track the Bank of England’s base (average) rate +1%. Awards will still reflect any actual losses the consumer has suffered, as now.
Last month, a report from the House of Lords Financial Services Regulation Committee argued that change is needed to how UK regulators operate, including the FCA and Financial Ombudsman Service. The report found a significant degree of ‘mission creep’ among UK regulators, noting that FOS has evolved into a "quasi-regulator".
Sarah Pritchard, deputy chief executive at the FCA, said: “When something goes wrong, it is right that people are compensated. But a lack of certainty in the financial redress system can hold back investment and innovation. Our changes will help create a system that is more predictable for firms and gives consumers quick and fair compensation where they’re owed it, supporting UK growth.”
James Dipple-Johnstone, interim chief ombudsman at FOS, commented: “These reforms mark a significant step in modernising the UK's redress system, making it more agile and responsive and a much better fit for today's economy. Our changes will bring consistency and predictability for businesses and consumers, enabling us to better focus on our core purpose - resolving individual disputes quickly and with minimum formality."
Simon Robinson, senior consultant and actuary at financial services consultancy Broadstone, added: “This change from the Financial Ombudsman Service will be welcomed by the financial services industry and is long overdue. The use of the 8% interest rate to apply to compensation awards was overly generous, particularly given long periods of low interest rates.
“The 8% rate had not been changed in over two decades and does not reflect the modern macroeconomic environment. This new rate structure, while still in excess of most savings rates, will more accurately reflect the time value of money for consumers.
“The review of the Financial Ombudsman Service is aiming to create a more coherent framework between it and the FCA. A lack of certainty in the redress framework has historically led to uncertainty for firms and unpredictable outcomes for consumers which harms confidence in the system from all parties.
“There is particular focus on mass redress events, which is timely given the imminent Supreme Court ruling on motor finance. The hoped-for outcome appears to be the creation of a more flexible approach that can react with agility and speed with greater involvement from the FCA to create consistent and speedy outcomes.”
