A further milestone in modernising the redress system: the Government’s overhaul of the Financial Ombudsman Service

HM Treasury’s paper records that there was a significant response to its consultation, with over 600 submissions from a wide range of contributors.  In summary, there was broad backing for many of the reforms it had proposed, paving the way for some of the most significant reforms to the FOS in its history.

The core reforms that the UK Government intends to make include:

• clarifying the ‘fair and reasonable’ test so that, where firms have met their obligations under relevant FCA rules, they must be found to have acted fairly and reasonably by the FOS; 
• introducing a formal referral mechanism requiring the FOS to seek the FCA’s view on matters of interpretation where the FOS considers that there is ambiguity in the rules or an issue has wider industry implications.  Service users, including firms, will have the ability to request that the FOS makes a referral to the FCA, but the decision will rest with the FOS;
• establishing a 10 year ‘absolute’ time limit for bringing complaints, subject to FCA determined exceptions; 
• create a new role of Chief Ombudsman with overarching responsibility for FOS determinations in order to promote greater consistency between decisions, together with tightening the FOS’s institutional governance.  The Chair of the FOS will become a government appointment, and appointment of the FOS Chief Ombudsman will be subject to government approval;
• improving transparency and predictability by requiring the FOS and the FCA to publish regular joint thematic reports covering how complaints - particularly those involving FCA regulated issues - will be assessed; and 
• updating the framework for mass redress events, ensuring the FCA has the tools to respond effectively to situations involving widespread consumer harm.

The consultation also sought views on whether the FOS should become a subsidiary of the FCA, and on appeals processes from FOS decisions.  The Government concluded that the wider reforms were sufficient to meet its objectives and these proposals will not be taken forward.

The Government has recognised that these reforms will require changes to primary legislation and has indicated that it will legislate on the above matters ‘when parliamentary time allows’.

At the same time that HM Treasury published its consultation response, the FCA and the FOS published a joint consultation paper of their own (CP26/9), setting out the results of their own previous consultation, and seeking views on a number of further proposals.  In summary, these are more operational matters where reform may be possible within the existing legislative framework, and would involve in particular changes to the existing section of the FCA’s Handbook governing complaints handling (DISP) and the FOS’s operational approach. They are nevertheless significant to the way the FOS operates.

In particular, the FOS is further consulting on key changes including:

• introducing a new pre-registration stage for complaints when they are first received. Complaints would be subject to an early stage assessment and triage to ensure that they are within the FOS’s jurisdiction, have sufficient evidence, and are ready to be investigated before complaints are allocated to a caseworker for full investigation.  Cases that are not ready for investigation may be passed back to firms and/or further information may be gathered from the complainant before they are allocated out to caseworkers;
• expanding and modernising the FOS’s grounds for dismissing a complaint without consideration.  Existing grounds on which the FOS may do this in DISP may be materially expanded, for example where the complainant has acted vexatiously, abusively or otherwise unreasonably in engaging with the FOS; and
• amending rules on the application of the “fair and reasonable” test within DISP 3, in particular to remove reference to the FOS considering ‘good industry practice’ as a relevant consideration when determining what is fair and reasonable.  The aim of this is to make clear that only the regulatory standards applicable at the time of the act or omission complained of should be taken into account.

There is a deadline of 11 May 2026 to provide responses to these points.

Elsewhere in CP26/9, the FCA and the FOS provide feedback on their previous consultations and the FCA sets out its policy following earlier consultation.  Other reforms here include: 

• a new definition of ‘mass redress event’ connected with new FCA powers to intervene at an earlier stage, and proposed amendments to the criteria by which the FCA may make a s404 redress scheme;
• an intention from the FCA to reconsider, in the future, the operation of the current ‘read across’ rules in DISP – a package of rules which, in short, require firms to take into account past FOS decisions when handling complaints, and in some cases to provide redress to complainants affected by a systemic issue but who have not complained.  The FCA has indicated it will return to this issue once other aspects of the reform programme are further progressed;
• strengthened guidance in the chapter of the FCA Handbook concerning notifications to the regulator (SUP 15), to set out additional notifications in relation to emerging redress events; and
• reforms to formalise the ‘lead complaint’ process at the FOS, including provisions enabling firms to pause (subject to safeguards) complaint handling whilst the FOS reviews a ‘lead’ case, and other clarifications intended to improve the FOS’s operational efficiency for example in obtaining and handling information from firms.

Although the proposed reforms are highly significant, there are a number of areas of considerable practical importance where details are currently limited.  These will need to be the subject of further work (particularly by HM Treasury, the FCA and the FOS) and include:

• exactly how the ‘fair and reasonable’ test will be amended, and how the new ‘FOS to FCA’ referral mechanism will work (for example, any new statutory criteria for such referrals will be particularly important).  These matters could be affected by political debate as the reforms progress through the Parliamentary process;
• when the proposed new 10 year time limit for bringing complaints to the FOS will start to run, and how any exceptions from it will be defined.  While HM Treasury’s proposals recognise that a longer time limit may be appropriate for complaints about longer term financial services products, such as pensions, it seems likely that defining the exceptions will become the responsibility of the FCA;
• how the new pre-registration stage for complaints will affect the application of FOS case fees.  CP26/9 recognises that there was a wide range of consultation feedback on this issue, and that the new stage is likely to have an impact on the way in which FOS applies case fees in the future.  This is, however, to be subject of a further consultation by the FOS later in 2026; and
• if and to what extent existing ‘read across’ rules in DISP will be reformed.  Again, these are of significant practical importance, as they are critical to how firms respond to ‘lead’ cases at the FOS.

Like many respondents to the consultations, we broadly support the package of changes to the FOS that are currently proposed. 

A fundamental concern among practitioners in our field is that, over time, the FOS has evolved a long way beyond the role originally envisaged for it (as a quick, cost effective and impartial means of resolving higher volume and lower value complaints).  In some cases, the FOS had, as the UK Government recognised at an earlier stage in the consultation process, in effect become a quasi-regulator, taking decisions with significant regulatory and cost impact without the same procedural safeguards that apply when the FCA makes rules and/or a matter is decided by the Court, and without the same accountability.  This evolution created uncertainty and unpredictability, risked undermining the FCA's core function as a regulator, and negatively impacted service users’ legal rights.  Many of the proposed reforms would address these concerns and are to be welcomed.

Further, the wide discretion given to the FOS by virtue of the ‘fair and reasonable’ test, coupled with the limited possibilities of challenge by way of judicial review, have in the past undoubtedly led to inconsistent decision-making and, in some cases, unfair outcomes which have added significant cost and regulatory burden on firms.  We consider that it is also right that these issues be addressed, and the role of a Chief Ombudsman to promote consistency is likely to benefit all users of the service.

A number of the proposed reforms are, however, capable of creating new issues of their own.  In particular:

• changes to legal test for industry-wide consumer redress schemes (s404 FSMA) could be problematic if they are redrawn at too low a level.  By definition, such schemes have a wide impact and safeguards are needed to ensure an appropriate balance of rights; and
• the FOS will in practice need to use the proposed new referral mechanism to the FCA in cases for which it is intended.  Were the FOS not to do so, this could potentially become a source of litigation.

It is important that these and other issues should remain under review as matters progress.