This analysis was first published by Professional Advisor on 19 February 2025, and is republished with permission. The original article can be accessed here (sign-up required).

The FCA and FOS joint call for input on modernising the redress system (CFI), which closed at the end of January 2025, represents a genuine and significant opportunity to rethink the way that complaints are resolved in UK financial services.

In the CFI, the FCA and FOS asked a series of wide questions about reform, fuelling an already vigorous debate.  FOS had already consulted on, and announced its intention to implement, case fees on claims management companies and other professional representatives.  The CFI invited further views on that topic and others of key importance, such as what FOS should take into account when reaching its decisions, and whether there should be reforms to some of its procedures. 

It does not seem coincidental that recent changes to FOS' senior leadership occurred shortly after the closing date for the CFI.  Some of these issues are controversial.  It may also be that evidence submitted in response to the CFI has brought home the strength of feeling among many that the current system does not work well, especially in the biggest and most complex cases.

From a consumer's perspective, the current system does not always provide the right outcomes or do so in a timely way. From the perspective of firms, it is open to abuse and lacks an appropriate set of safeguards, especially in the most complex cases, and those with wider implications for the market.  Controversial FOS decisions have led to considerable and unexpected liabilities for financial services firms over the years, after FOS has followed an adjudication process that was designed to be less formal than the Courts.

These issues are, however, not just for FOS and FCA.  They are issues of system architecture, important to policy makers, government and ultimately Parliament, which created the current system by enacting the Financial Services and Markets Act 2000 (FSMA).  Just as there were vigorous debates over the right approach to regulation at the time, and the FSA and FOS were part of the government's response, so the government is entitled to look again at that system architecture now.

It is entirely legitimate for the government of the day to consider the impact that the current system has on economic growth, and on the attractiveness of the UK as a destination for financial services business.  A system for dealing with mass consumer complaints that can appear to its users as arbitrary and unpredictable, and that can create large liabilities without granting those affected by them a right to a hearing on the merits, or a right to an appeal (which judicial review is not) puts the UK out of line with international peers.  The government, and if need be Parliament, should look at that again.

Incremental developments in law and regulation since FSMA was enacted have led FOS to carry out a role beyond the one for which it was originally envisaged.  There is real concern that FOS has effectively taken on a role of making regulatory policy which many would argue is properly the role of the FCA.  Better safeguards are also needed for system users, especially in the most complex and controversial of cases, and those with the widest implications.

Some disputes between consumers and firms in financial services will always need final resolution by an external party.  There are different ways of doing that.  Policy choices must be made.  Fundamentally, FOS was designed for, and has been most effective at, resolving low value, one-off complaints between consumers and financial services institutions with minimum formality.  Cases that may matter deeply to the parties involved, but do not involve significant sums and do not have wider implications for the market, do not justify the expense and formality of the Court system.  All stakeholders benefit from what should be a speedier final resolution than the Courts, at the expense of procedural formality, detail and accuracy.  This is where FOS is most valuable to all stakeholders.  Many would welcome FOS being returned that original role, particularly if its costs were more evenly distributed among all system users.

It is, however, entirely legitimate to question why an ombudsman service is an appropriate solution for cases with complex issues and evidence, and those which could create potential liabilities running into the billions.  These justify much closer scrutiny.  Firms affected by 'lead' cases at FOS, which in practice often involve major regulatory policy choices and risk allocation decisions, should be entitled to detailed review with procedural safeguards and proper rights of appeal.  

Further, Parliament created the FCA and PRA – not FOS – to be regulators, giving them statutory objectives but also subjecting them to legal safeguards, such as a requirement in many cases to consult publicly before making new rules and guidance.  Where a 'complaint' requiring decision is fundamentally a request to make or clarify regulatory policy, it is reasonable for the system architecture to have the regulators, not FOS, provide the answer subject to the legal protections that Parliament has already conferred.

Reform is needed, and it need not take a long time.  The current system might be improved in a series of ways without primary legislation.  The FCA's dispute resolution sourcebook, which creates many of FOS' procedural rules, could be amended after public consultation.  FOS might implement a different and more rigorous process of adjudication.  A system could be developed for taking the most significant cases away from FOS and allowing them to be dealt with by a Court instead.  Processes could also be implemented by which the FCA, not FOS, regulates in cases requiring policy decisions, for example, by pausing FOS' resolution of complaints with wider implications whilst the FCA considers the matter and makes any new rules needed.  

Whilst FOS and FCA will no doubt have their own views on these issues, it is also an opportunity for government and, if need be, Parliament, to look again at the architecture of the current system and consider how well it is serving the UK.  It remains to be seen whether the CFI will result in reforms to the current architecture for resolving financial services complaints in the UK.  It is, however, a genuine and significant opportunity for reform.