HM Treasury responds to the Financial Ombudsman Service reform consultation

HM Treasury has published its response (on 16 March 2026) to its consultation on reforming the Financial Ombudsman Service (the FOS).

The consultation sought views on a wide range of proposed changes to the FOS's legal framework, governance structure and relationship with the Financial Conduct Authority (FCA).

The response confirms a significant, though not completely transformative, package of legislative changes to be delivered via a forthcoming Financial Services Bill. 

What are the key changes, what has not been taken forward and what are the implications?

What will change?  

Adaptation of the 'fair and reasonable' test 

The change: The government will legislate to adapt the FOS's core decision-making test so that, where a firm has met its obligations under relevant FCA rules, the FOS will be required to find that the firm acted fairly and reasonably in relation to that element of the complaint. The FOS will apply FCA rules consistently with the FCA's purpose for those rules, taking into account relevant FCA materials such as guidance and policy statements.

Significance: This is the single most significant substantive reform. For decades, the "fair and reasonable" test has been a source of profound tension between firms and the FOS: the FOS's broad discretion has allowed it to reach conclusions that go beyond what firms understood the applicable regulatory standards to require at the time of the conduct complained of.

By anchoring the FOS's assessment to FCA rule compliance, the government is substantially narrowing the scope for the FOS to act as a standards-setter. However, as discussed further below, this reform does not eliminate discretion entirely: it redirects it.

Introduction of a formal referral mechanism to the FCA

The change: The government will legislate to require the FOS to seek a view from the FCA where there is ambiguity in FCA rules which needs to be resolved for the FOS to deal with complaints effectively. It will also be obliged to refer issues with potential wider implications to the FCA. The FCA will be required to respond and to consider seeking the views of its statutory panels.

Significance: This is the most structurally novel element of the reforms. It creates a formal communication channel between the FOS and the FCA for the first time, addressing the absence of any mechanism by which the FCA's own views on the scope and intent of its rules could be obtained and applied consistently across complaints.

Critically, the reforms also link this mechanism to the FCA's enhanced Mass Redress Event (MRE) framework, meaning that a wider implications referral can, in principle, trigger a chain of events culminating in a section 404 statutory redress scheme (a consumer redress scheme under the Financial Services and Markets Act 2000).

Simplified test for FCA Mass Redress Event schemes

The change: The conditions the FCA must satisfy to implement a statutory consumer redress scheme under section 404 of FSMA 2000 will be simplified. The existing test, which requires the FCA to establish widespread or regular failure, demonstrable consumer loss, and the availability of a judicial remedy, will be replaced with a test linked to the FCA's operational objectives.

Significance: This is potentially the most consequential change for financial services firms in terms of financial exposure. The old test contained concrete structural conditions that acted as real constraints on the FCA's ability to trigger a mass redress scheme. The new test, aligned to the FCA's broader consumer protection and competition objectives, is materially more flexible. It enables the FCA to act more quickly once a potential MRE is identified, but the trade-off is a lower evidential threshold. 

The recent motor finance issue has already demonstrated the political and institutional pressures that can build around a perceived consumer redress matter once it becomes public, and this reform lowers the legal barrier to the FCA responding to those pressures with a full statutory scheme.

Absolute 10-year time limit for bringing complaints 

The change: The government will legislate to introduce an absolute 10-year longstop for complaints brought to the FOS. Under the current framework, complaints can in principle be brought indefinitely, provided they are brought within three years of the complainant becoming aware (or when they reasonably ought to have become aware) of the event complained of.

Significance: This is a meaningful and long-sought protection for firms. It prevents the indefinite extension of liability for historical conduct that has been a feature of the uncertainty for firms in the FOS complaint framework. This also reduces the potential scale of any future mass redress event by capping how far back consumer complaints can reach.

Enhanced governance and accountability for the FOS

The change: The government will vest overall responsibility for FOS determinations in the chief ombudsman, and will legislate to make the appointment of the chief ombudsman subject to HM Treasury approval. This brings the role into the same government approval framework as the FOS chair.

Significance: This is the most significant intervention in the FOS's governance since its establishment. Making both the chair and the chief ombudsman subject to government appointment or approval signals that the government views the FOS as a state institution whose leadership must be publicly accountable, not merely an independent dispute resolution body operating at arm's length.

Centralising responsibility for determinations in the chief ombudsman should also produce more internally consistent decision-making over time. The accountability framework depends, however, on the FOS board retaining genuine capacity to oversee performance.

New registration stage and revised case fee structure

The change: The FOS will introduce a new registration stage for complaints. Complaints that do not meet minimum evidential requirements will remain at the registration phase and will incur either a reduced case fee for firms or none at all.

Significance: This is a targeted but practically useful reform, particularly for firms that face high volumes of poorly-evidenced claims brought by claims management companies (CMCs). By reducing the financial incentive for CMCs to submit speculative claims in bulk, the reform should improve the quality of the complaints that the FOS actually processes, and reduce the cost burden on firms.

Thematic reports and clarification on precedent

The change: The FCA and the FOS will be required to produce regular thematic reports explaining the FOS's approach to types of complaints it receives, with illustrative case examples. The government has also confirmed explicitly that individual FOS determinations are not intended to have any precedent-setting effect, and that the database of final determinations should not be used as a guide to the FOS's approach to complaint types.

Significance: These changes address two longstanding sources of frustration for firms. First, they resolve a structural ambiguity that led many firms to treat individual FOS decisions as de facto binding standards. Second, thematic reports will give firms much greater advance visibility into the FOS's approach to emerging complaint types, enabling firms to assess risk more accurately before complaints crystallise.

What will not change  

A formal appeals mechanism from FOS decisions 

The government was not persuaded to introduce any form of appeals route from FOS final determinations. Its position remains that any such mechanism would be fundamentally at odds with the FOS's role as a quick, simple and cost-effective dispute resolution service.

A direct court referral mechanism for points of law 

The government has not adopted calls for a mechanism enabling parties to refer points of law to the courts for clarification where a complaint has wider implications.

This is a material gap, given the divergence between some FOS conclusions and concurrent civil litigation findings (for example, on issues such as motor finance commission disclosure).

Making compliance with the law a complete defence

Firms that comply with applicable laws will remain exposed to FOS findings of unfairness in areas not addressed by FCA rules.

Structural changes to resolve the Consumer Duty uncertainty 

The government will adopt a power to specify that particular rules (including principles-based rules such as the Consumer Duty) are not included in the adapted "fair and reasonable test" or are dealt with differently, but how the Consumer Duty will interact with the test remains unresolved for now.

The FOS will not become a subsidiary of the FCA 

Following consultation, the government rejected the model of making the FOS a subsidiary of the FCA, preserving its institutional independence.

Osborne Clarke comment

'Fair and reasonable' test

The modification to the "fair and reasonable" test is a significant and welcome step, but it does not fully eliminate the scope for divergence between FOS decisions and FCA standards. Outcomes-based principles such as the Consumer Duty will still apply, and determining whether a firm has met the intent of the rules allows for subjectivity and for ombudsmen to reach differing conclusions.

Where any relevant law is not addressed by FCA rules or guidance, ombudsmen will retain discretion to take that into account, and they will now need to determine complaints consistently with the purpose that the FCA rules seek to achieve, rather than strictly interpreting and applying the law as a court would. This leaves open the risk of the FCA's purpose being determined retrospectively and, perhaps, inaccurately. The changes tighten, without removing, ombudsman discretion.

Referral to FCA

The referral mechanism is one of the most structurally significant elements of the reform package, but whether it will succeed in eliminating discrepancies is uncertain. Resource constraints on the FCA might mean it is overwhelmed, particularly as many referrals might have wider implications for other firms and customers.

Further, the FOS will act as gatekeeper for referrals, and there is no mechanism for consumers or firms to make a referral directly.

Finally, although the intent behind the change is to prevent the FOS retrospectively interpreting the FCA's rules, the FCA may in practice do that itself when responding to a referral. The mechanism should reduce systemic divergence over time as questions are answered by the FCA, but it is unlikely to eliminate discrepancies entirely.

Simplification of the section 404 MRE test 

This is perhaps the most consequential point for the financial services industry. On its face, the proposals are not designed to increase the frequency of mass redress events but to make it easier for the FCA to act when one is identified.

However, by linking the new test to the FCA's broader objectives, it is significantly more flexible than the previous one. In the case of motor finance, the FCA found itself caught between the need to provide consumer redress and the financial stability implications for lenders. A referral mechanism and MRE framework that feeds issues to the FCA more quickly could place it under greater political pressure to act decisively once it has formally identified a potential issue. A contested complaint on a novel point could, if the FOS considers it to have wider implications, initiate a chain of events culminating in a full-scale industry redress scheme.

Governance

HM Treasury's ability to appoint the FOS chair and require government approval for the chief ombudsman role signals that the government views the FOS not merely as an independent dispute resolution body, but as a state institution whose leadership must be accountable.

The decision to vest overall responsibility for FOS determinations in the chief ombudsman, and simultaneously to make that appointment subject to HM Treasury approval, should upgrade how the FOS is run and its leadership held to account. The government has threaded a careful constitutional needle: making the FOS chair a government appointment, in line with the FCA's own chair and CEO, while rejecting the FCA subsidiary model. This preserves the FOS's operational independence while bringing its leadership within the same accountability architecture as the UK's principal conduct regulator.

However, the responses to the consultation raised legitimate questions about concentrating such a high level of responsibility in one person within the FOS, and those concerns have not been fully answered by the accountability framework proposed, which relies on effective oversight and performance management by the FOS board. While government approval of the chief ombudsman's appointment is welcome, practitioners will want assurance that the board retains genuine capacity to manage performance and, where necessary, to act.

Outstanding structural concerns 

Overall, the reforms represent a meaningful step forward, although they fall short of fully addressing some of the deepest structural grievances of the financial services industry.

In particular:

• The absence of a formal appeals route means that firms remain exposed to FOS determinations that they believe are wrong in law, with judicial review being the only external check (a remedy that is costly, slow, and available only on limited grounds), while it remains open to consumers to simply reject a FOS determination and take court action.
• Further, without adequate mechanisms enabling complainants and respondents to seek a view from the courts on points of law, conflicting interpretations may continue to develop between FOS complaints and civil litigation.