The Finance & Leasing Association (FLA) has thrown its weight behind calls for fundamental reform of the Financial Ombudsman Service (FOS), following a hard-hitting report by the House of Lords Financial Services Regulation Committee which warns that the FOS’s current role as a de facto regulator is threatening the UK’s competitiveness and constraining financial sector growth.

Commenting on the report, published last week, Stephen Haddrill, Director General of the FLA, said: “The Committee has produced an incisive report that sets out the problematic dynamic between the Financial Conduct Authority and the Financial Ombudsman Service with regards to the consumer redress framework.

“Having examined this issue from a competitiveness and growth perspective, their findings add yet more weight to the call for fundamental change on how the FOS operates.”

Growing pains: clarity and culture change required

The Lords committee concluded that the FOS is exerting an undue regulatory influence by setting precedents in its case decisions without the formal accountability or alignment required of a statutory regulator like the Financial Conduct Authority (FCA).

It warned that this ambiguity in the regulatory environment is creating uncertainty for firms and investors, contributing to a “risk premium” on UK financial services, and reducing the appeal of the UK as a global financial centre.

In particular, the committee criticised the FOS for straying from its original remit of swift, informal dispute resolution into the territory of regulatory interpretation — often in ways that can retrospectively penalise firms despite their compliance with FCA rules.

“The FOS’s remit must be brought closer to its original mandate… it cannot continue to function as a quasi-regulator,” the report stated.

Peers also criticised the FCA for failing to distinguish sufficiently between wholesale and retail market participants, and for maintaining “cliff-edge” regulatory thresholds that place disproportionate burdens on growing firms. They urged the FCA and Bank of England to review their approach to encourage proportionality and innovation.

Recommendations

Among the committee’s key recommendations were:

• A review of the precedent-setting impact of FOS decisions, particularly in mass redress cases;
• Allowing the FOS to pause decisions in instances where FCA guidance is pending on complex regulatory matters;
• Legislative changes to clarify and constrain the FOS’s remit.

The FLA has echoed these concerns, saying it supports potential legislative reform to realign the FOS’s function with its intended purpose.

“The FOS must provide timely redress for individual consumers—not act as a proxy regulator on major, complex issues,” Haddrill added.

The Government has indicated it will consider legislative changes if necessary, following the committee’s recommendations. The FCA and FOS are now under pressure to present a joint plan addressing the concerns raised and ensuring regulatory clarity and consistency moving forward.

The implications of the committee’s findings are particularly significant for the motor finance sector, which has faced increasing scrutiny and rising volumes of complaints linked to historic commission arrangements.

Industry leaders argue that FOS decisions in this area have, in effect, introduced new interpretations of regulatory expectations—despite firms having operated within the rules set out at the time. The FLA and others have warned that unless the FOS’s role is clearly delineated, sectors like motor finance risk prolonged legal and financial uncertainty that could deter investment and hamper innovation at a critical time for the industry.

Growth agenda

The FLA’s support for reform is also closely tied to the wider growth agenda outlined in the Lords report. Peers argued that regulatory clarity is essential not just for consumer protection, but for fostering the conditions necessary for long-term economic expansion. The report highlighted that the Financial Services and Markets Act 2023 gave the FCA and PRA a new secondary objective to support UK growth and international competitiveness—yet found little evidence this is being meaningfully applied.

The FLA echoes this concern, warning that the current redress framework, particularly the FOS’s unaccountable precedent-setting role, risks deterring investment and stifling innovation. For the financial sector to effectively contribute to national growth, regulators must provide a stable, predictable environment—something the FLA believes requires urgent cultural and structural change within the redress system.