The Finance & Leasing Association (FLA) has issued a warning about the growing misalignment between the Financial Ombudsman Service (FOS) and its original mandate, calling for reforms to address regulatory uncertainty, rising costs, and the unintended consequences of FOS decisions on the financial services industry.

In its response to the government’s call for input on modernising the redress system, the FLA argued that the FOS has strayed from its intended role as an alternative dispute resolution body.

Instead of simply resolving individual complaints, the FOS now adjudicates based on what it deems “fair and reasonable in all circumstances of the case.” This approach allows the FOS to reinterpret the Financial Conduct Authority’s (FCA) rules, often disregarding the original intent of those rules or how firms complied with them at the time.

FCA’s Call for Input

Source: FCA, Modernising the Redress System

Regulatory uncertainty

The FLA highlighted that this reinterpretation of rules has led to significant regulatory uncertainty. Even firms that fully comply with FCA rules can find themselves embroiled in mass redress events, driven by FOS decisions. This uncertainty has created fertile ground for claims management companies (CMCs) to thrive, while also introducing additional risks to market operations and increasing the cost of finance for end customers. According to the FLA, these factors collectively hinder economic growth.

Adding to the complexity, FOS decisions have increasingly become precedent-setting over time. Firms are often required to implement new, uncosted measures across their businesses to align with these decisions, further straining resources and creating inefficiencies in the market.

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Call for alignment

Stephen Haddrill, Director General of the FLA, emphasised the need for alignment between the FOS and the financial services industry. “At a bare minimum, FOS and firms must use the same rulebook. Anything else is unacceptable and an open invitation to further CMC activity, increased costs, and continuing uncertainty,” he said.

Haddrill also stressed that incremental changes to the FOS’s remit and approach would not be sufficient. “The necessary changes to improve how the Financial Ombudsman Service operates will not be achieved by tinkering at the edges. We need a fundamental review of its role in the regulatory architecture,” he added.

Proposed reforms

The FLA has put forward a series of recommendations aimed at addressing these issues, which it believes should be implemented by Summer 2025 following an expedited consultation process. Key proposals include:

  1. Revising the “Fair and Reasonable” test: The FOS should be required to apply laws, regulations, rules, and guidance that were in place at the time of the act or omission. Outcomes should be determined by the standards applicable at the time, without retrospective effect.
  2. Removing the precedent effect of FOS decisions: FOS decisions should no longer set precedents that force firms to implement new measures across their businesses.
  3. Introducing a right of appeal: Firms should have the right to appeal FOS decisions, either in place of or in addition to judicial review.
  4. Aligning interest rates with commercial standards: The FOS should adopt the courts’ approach to interest rates, using commercial rates rather than the current 8% simple annual interest.

Implications

If implemented, these changes could significantly reduce the regulatory uncertainty that has fueled CMC activity and driven up costs for both firms and consumers. However, achieving these reforms will require a fundamental rethink of the FOS’s role within the broader regulatory framework — a move that the FLA believes is essential for the long-term stability and growth of the financial services industry.