HM Treasury, FCA and FOS consult on reforms to the UK financial ombudsman and redress system

The Financial Ombudsman Service (FOS) has faced widespread criticism in recent years for its current approach that many argue exceeds its original mandate – with the impact of its decisions making it a "quasi-regulator" and a significantly increased case-load that has lead to delays and increased costs for firms.

In July, two significant consultations on the operation of the FOS opened. HM Treasury (HMT) launched a consultation on the FOS and proposed reforms of the legislative framework in which it operates. HMT's consultation followed the UK economic secretary's review of the FOS, which focused on refining its role as "a simple, impartial, dispute resolution service".  

The Financial Conduct Authority (FCA) and the FOS also launched a joint public consultation on modernising the redress system to make it more robust in the face of "high volumes of complaints on specific or novel issues" causing jams and significant delays.  The consultation also outlines how the FCA and FOS intend to respond to the HMT proposals ahead of any planned legislative changes, including potential changes to its Dispute Resolution: Complaints (DISP) Sourcebook of the FCA Handbook.

An additional consultation opened on 13 August by the FOS on changes to its case fee structure has proposed two options: case fees varying by the stage at which they are resolved and case fees varying depending on whether the complaint is upheld or not (or a combination of both).

All three consultations close for comments on 8 October this year, with a policy statement expected in first quarter of 2026, confirming the changes decided upon and the implementation periods.

Need for change

Acknowledging the need for change, the consultations seek to improve how the FCA and the FOS work together so that complaints are resolved in a timely and effective manner and consumers are quickly and fairly compensated when compensation is due. They also seek to address the need for improving the certainty of the redress regime for all stakeholders, whether consumers, firms or investors and, therefore, to help attract investment and support innovation for the benefit of the wider economy.

The consultations should also be read in the context of the introduction of a £250 case fee,  from 1 April this year,  for professional representatives (including claims management companies) submitting complaints to the FOS (and differentiated case fees for firms depending upon whether or not it upholds those complaints). They should also be read in the context of last month's announcement of FOS on changes to compensation interest levels – following a separate consultation – that, from 1 January 2026, it will award interest on any awards at a rate of 1% above the Bank of England base rate (replacing the previous long-standing rate of 8%, which far exceeds the cost of customers being out of pocket due to the issues for which they complain).

FCA and FOS alignment

Fair and reasonable test

At present, the FOS determines the outcome of complaints based on what it deems to be "fair and reasonable in all the circumstances of the case" that take into account "(1) relevant (a) law and regulations; (b) regulators' rules, guidance and standards; (c) codes of practice; and (2) (where appropriate) what he considers to have been good industry practice at the relevant time."

HMT proposes retaining the fair and reasonable test, but adapting it by requiring that, where the conduct complained of is in scope of FCA rules and the firm has complied with those rules, in accordance with the FCA's intent for what those rules should achieve at the time the alleged misconduct took place, the FOS should automatically consider the firm to have acted fairly and reasonably.  Part of the purpose of this adaptation is to ensure that there can be no retrospective application by the FOS of contemporary FCA rules, resulting in more consistent and predictable resolution of complaints for consumers and firms.

Formal referral mechanism

To support the FOS's interpretation of FCA rules, HMT has proposed the introduction of a formal referral mechanism. This requires the FOS to request a view from the FCA on its interpretation of its rules where ambiguity or room for interpretation exists.  Similarly, where the law is of relevance, which has not been addressed by FCA rules or guidance, and the issue has the potential to result in wider implications for consumers or firms, the FOS will be required to refer the issue to the FCA for consideration (and, if the FCA considers it would be beneficial to obtain legal certainty on the application of that law, the FCA will be empowered to refer the matter to the courts as a test case). Acknowledging HMT's proposal, the FCA has noted it will seek to provide an initial response within 30 days of receiving a request from the FOS.

HMT has also proposed that firms and complainants should be able to request that the FOS refers an issue to the FCA at the provisional determination stage.

Connected to that is the possibility of placing a statutory requirement on the FOS to publish a quarterly "lessons learned" document, outlining at a thematic level, the types of cases investigated and how the FOS thinks the relevant FCA standards apply to such cases, rather than simply publishing final determinations as it currently does. The FOS is currently considering how it could implement such an approach ahead of any legislative change. 

Mass redress events

It is proposed that a mass redress event (MRE) is defined as an event that:
•    Affects a high number of consumers.
•    Has a significant impact on individual consumers, including those in vulnerable circumstances.
•    Is likely to lead to a high redress bill.
•    Results in a significant number of firms being unable to meet their redress liabilities.
•    Leads to a high number of FOS complaints.
•    Is driven by a systemic or repeatable failing that damages confidence in the financial system.

Once a potential MRE has been identified, it is proposed that the FOS should be obliged to refer issues to the FCA, which must consider those issues, having consulted its statutory consumer and industry panels. In those circumstances and similar to what it has done in the context of motor finance commission complaints, the FCA would expressly be given the ability to pause firms' complaint handling requirements. This would include suspending the eight-week deadline for a firm's final response, until the FCA delivers a regulatory interpretation or decides to take regulatory action. The express powers would require no consultation and would include the ability for the FCA to require the pausing of complaints that have already reached the FOS.  

It is also proposed that the FCA is given the power to direct the FOS to refer complaints back to firms for resolution under any implemented redress scheme, where no or limited work has been carried out on the case. Alternatively, the FOS could be given an additional dismissal ground giving the FOS the discretion to refer cases back to firms for resolution where a regulatory intervention is confirmed.  In those circumstances, the FOS would be directed not to charge, or to charge a reduced, case fee.

This would enable the firms or the FOS to determine complaints in accordance with the terms of any FCA firm-led redress scheme and to apply those terms to complaints referred to the FOS but not finally resolved. As part of that, it is proposed that the strict test in section 404 of the Financial Services and Markets Act 2000 that must be satisfied before the FCA can implement a statutory consumer redress scheme should be relaxed with more proportionate tests. For example, the requirement could be removed for the FCA to identify loss suffered by consumers that would be subject to a remedy in court proceedings. This would extend the power to a breach of the Consumer Duty, for example, in order to give the FCA greater flexibility and allow it to act more speedily.  

Again, firms and complainants will be able to request that the FOS refers an issue to the FCA at the provisional determination stage.  

The FCA have provided draft guidance for its FCA Handbook clarifying when firms should report the identify of issues causing foreseeable harm or systemic issues, including criteria to help assess if an issue is a MRE or has  wider implications.  

Complaints process proposals

Time limits

Part of HMT's proposals includes the introduction of a 10-year longstop date (from the conduct complained of) for bringing complaints to the FOS, alongside limited powers for the FCA to make exceptions to this, allowing extensions only in exceptional circumstances. If this proposal is taken forward the FCA is expected to work with HMT to identify these potential exceptions, for example, for longer-term products such as pensions, mortgages and long-term investments.

The 10-year longstop date aims to address the current uncertainty surrounding the FOS's application of the referral time limits, particularly the three-year extension from the complainant's knowledge of cause for complaint, which often means that complaints can be brought to the FOS long after the events in question and long after they could reasonably be brought before the courts.

FOS ability to dismiss cases

HMT is also proposing to reinstate the FOS's ability to dismiss a case without considering it on the merits, if it would be more suitably dealt with by a court, arbitration or another complaints scheme.

Lead complaints process

The FCA and FOS proposals outline a new process for firms to work collaboratively with both bodies to help resolve emerging issues more efficiently. Firms would be able to apply for the FOS to consider a representative sample of lead complaints against both "novel" (involving new products and services or potentially requiring new interpretation of regulation) and "significant" (likely to generate large volumes of complaints or redress) criteria. The FOS would then investigate the representative sample and apply their findings to resolve any similar "follow on" complaints.

The proposals would allow firms to pause consideration of related complaints while the FOS investigates the sample, potentially reducing case fees, which (it suggests) will also allow for more consistent outcomes between similar complaints.

Registration stage

The FOS' new charging model introduced on 1 April is for personal representatives (such as claims management companies) making claims on behalf of consumers. This is aimed at reducing the volume of poor-quality claims submitted. None of the consultations reconsult on case fees for personal representatives.  

However, building on this, the FOS and the FCA propose to implement a new "registration" stage to the complaints process. This would require represented complaints to pass a checklist, including meeting minimum evidential standards, before proceeding to investigation and the charging of the FOS case fee. This checklist aims to stop inadequately prepared and poor-quality complaints moving forward and becoming chargeable, allowing the FOS to handle MREs more strategically.  

Changes to the FOS' case fee structure

Consistent with the introduction of a "registration stage" for claims brought by personal representatives, the FOS's preferred option for changing the case-fee structure is to differentiate case fees for businesses according to the stage at which the case is resolved, with businesses paying less for complaints which are resolved earlier in the investigation process. This is on the basis that complaints that are closed later in the process require more work. The differentiation of case fees is proposed to be split into three stages: cases resolved during the FOS's "proactive settlement" 14-day window; cases resolved before the FOS issues a provisional determination; and cases resolved after the FOS has issued its provisional determination. The FOS provides illustrations of what those case fees could look like.

The other proposed option for differentiating case fees is for them to be higher if the FOS finds in favour of the complainant, but lower if the FOS finds in favour of the firm. This is based on the "polluter pays" principle and is similar for unrepresented complaints to the differentiated case fees for firms depending upon outcome that was brought in in April this year for complaints brought by personal representatives. Again, the FOS provides illustrations of what those case fees could look like.  

The consultation also puts forward two proposals intended to simplify the billing processes and support the implementation of the differentiation of case fees, including replacing free cases with a monetary allowance and changing billing timing and the time for disputing a case fee charge.

 Osborne Clarke comment

The reforms proposed represent potential positive steps towards addressing some of the biggest issues associated with the current redress system and the FOS as an entity more broadly.

However, some will feel that the proposals do not go far enough. Responses to the consultations by industry bodies, for example, called for much more fundamental reform of the FOS, and it does not appear that many of the proposals put forward in the responses will be taken forward. Examples of this include a requirement for the FOS to apply the law and regulation rather than proceed with the fair and reasonable test taking into account the law and regulation; the ability to appeal a FOS determination to the court, as opposed to the remedy being limited to judicial review only; and the levelling of FOS case fees applicable to personal representatives bringing complaints – including claims management companies –  with those payable by firms.

Further, some of the proposals as made go too far, for example the proposal that the test for introducing a section 404 redress scheme should be lowered and simplified.  

While issues arising from the interplay between these proposals and other upcoming reforms remain (the recent changes to the interest rates referred may lead to a glut of complaints before 1 January 2026, for example, and the proposals to include a long-stop limitation period of 10 years may well do the same), the real test for the proposals will be in the implementation.

Finally, firms would do well to review the examples of good and poor practice on complaints and root-cause analysis, and the further guidance provided in annex 4, which is designed to help firms better understand how they can proactively identify and resolve issues, and comply with the DISP and Principles for Businesses, or PRIN, requirements of the FCA Handbook. 

Ben Hills, a senior paralegal at Osborne Clarke, contributed to this Insight.