For the full consultation response, see ‘Review of the Financial Ombudsman Service, Consultation Response’.
On the same day, the Financial Conduct Authority (FCA) and the FOS jointly released their consultation paper and policy statement, CP26/9, “Modernising the Redress Scheme”.
Subsequently, the Financial Services and Markets Bill (FSM Bill) was introduced to Parliament, along with its Explanatory Notes.
Taken together, these developments represent a fundamental shift in the UK’s financial redress scheme.
Why was the reform considered necessary?
HMT recognised the FOS as a cornerstone of the UK financial services regulatory framework. However, it observed that the FOS has gradually evolved into a quasi-regulator. This shift has created tensions between FCA rules and the FOS's interpretation of them, reducing certainty for firms and predictability for consumers seeking redress.
The vast majority of respondents supported HMT's proposal to bring more predictability and certainty for firms and consumers who interact with the FOS.
These changes will be made by a combination of primary legislation (FSM Bill) and updates to the FCA sourcebooks (DISP, COMP and SUP).
Changes made under the FSM bill
The FSM Bill provides the first insight into what the FOS reforms will look like. The FSM Bill improves the predictability of the FOS and increases alignment between the FOS and the FCA.
The key changes to be aware of are:
"Fair and Reasonable" test
Currently, under the Financial Services and Markets Act 2000 (FSMA), the FOS decides complaints using a broad “fair and reasonable” test. In practice, this gives the FOS wide discretion. The result is a regime where today’s standards can be applied to historic conduct.
The FSM Bill seeks to narrow that discretion. It reframes the “fair and reasonable” test so it aligns more closely with FCA rules. Where a firm has complied with applicable laws and regulations in force at the relevant point in time, the FOS will be required to assess complaints on that basis.
In cases where FCA rules are absent, the FOS must assess what is “fair and reasonable” in all the circumstances.
Introduction of a referral mechanism between the FOS and the FCA
The FSM Bill introduces a formal referral mechanism under which the FOS may refer matters to the FCA where:
• a complaint raises the prospect of a mass redress event; or
• the FOS identifies uncertainty or ambiguity in the application of FCA rules.
To ensure efficiency, there will be a 30-day window in which the FCA must respond.
Although referrals may be requested by firms or consumers, the decision whether to make a referral will remain with the FOS.
Amendment to the handling of Mass Redress Events (MREs)
The FSM Bill gives the FCA greater flexibility to respond quickly to potential MREs.
Under the proposed reforms, the FCA will be able to direct firms and the FOS to pause complaints handling without prior consultation. The FCA will also be able to require unresolved FOS complaints that fall within the scope of an FCA-led redress scheme to be referred back to firms for resolution.
Importantly, consumers will retain the right to complain to the FOS about a firm's compliance with the relevant redress scheme.
Other significant changes
Introduction of an absolute 10-year limit for bringing complaints. This reform is intended to improve the efficiency of the FOS by reducing both the time and cost associated with complaints. Longer-term financial products, such as pensions, are expected to be subject to a bespoke limitation period.
A new Chief Ombudsman role will be created within the FOS. The Chief Ombudsman will have oversight of all determinations and will be tasked with strengthening internal governance. The appointment will be subject to approval by HMT, with the Chair of the FOS becoming a government appointment.
The FOS and the FCA will begin producing thematic reports. These reports will provide regular insights into the performance and operation of the FOS.
What's next?
The FSM Bill is currently progressing through Parliament and may yet be amended before receiving Royal Assent.
Further detail is also expected later this year, when the FCA and the FOS publish their policy statement on the reforms to various sourcebooks (DISP, COMP and SUP).
Together, these developments will determine the final shape of the most significant overhaul of the UK's financial redress framework in more than two decades.
This article was co-authored by Daniel Cotton, Trainee Solicitor at MFMac.
