Modernising The Redress System: Fair And Reasonable Changes?

As the Government's growth and competitiveness agenda continues to drive change in the regulatory framework, we examine the impact on the Financial Ombudsman Service (FOS) and complaints handling – recent consultation papers suggest a willingness to consider significant change.

As part of the Government's broader 'Leeds Reforms' package, the Chancellor, Rachel Reeves, announced that HM Treasury is consulting on long-awaited reforms to the FOS. These reforms are set out in more detail in the Treasury's consultation paper published on 15 July 2025.

In addition, the Financial Conduct Authority (FCA) and the FOS published a complementary consultation paper, CP25/22, entitled 'Modernising the Redress System', which should be read alongside the Treasury's consultation. The closing deadline for responses to both is 8 October 2025.

These papers build upon the FCA and FOS's earlier Call for Input (CFI) published in November 2024, which we considered in more detail here. While we will reserve judgment until the detail of the proposed changes is published, many of the key issues we identified previously appear to have been addressed, albeit firms may want to take this opportunity to push for further helpful measures whilst we have the Government's focus.

In this post, we consider the details of the proposals as outlined in the consultations and their possible implications for the financial services industry.

The fair and reasonable test

In a finding likely to chime with many regulated firms, the Treasury has recognised that 'there is not always coherence between the regulatory approach set by the FCA as the financial conduct regulator and the approach used by the FOS to settle complaints between consumers and firms', and that this can, in some cases, lead to the FOS acting as a 'quasi-regulator', effectively setting its own regulatory standards.

In response, the Treasury is proposing to amend FSMA to clarify the scope of the FOS' 'fair and reasonable' jurisdiction to require the FOS to find that a firm's conduct is 'fair and reasonable' where it has complied with what is termed 'relevant FCA rules, in accordance with the FCA's intent for those rules', as they existed at the time of the events in question (deliberately framed to avoid retrospective application of contemporary rules). Similarly, where FCA guidance exists in relation to a law material to the complaint, the FOS will be required to take this into account. The Treasury paper also helpfully clarifies that the test requires the FOS to consider what is 'fair and reasonable' for all parties, and not just the complainant. The intention is that the approach of the FCA and the FOS should be more closely aligned, to ensure that consistent standards are applied across the UK regulatory system. These changes would be a very significant step towards setting clear standards and will likely be welcomed by firms. This will help to reduce uncertainty in the UK financial services sector, furthering the Government's wider growth agenda.

However, we note that aspects of the Treasury consultation suggest that the requirement to follow FCA rules may be tightly framed. An FCA rule will be relevant to a matter where it is 'material to the resolution of a complaint' and that the proposed new approach to FCA rules should apply 'where conduct complained of is in scope of FCA rules'. Given the scope of the FOS' compulsory jurisdiction, this suggests that an FCA rule may only be considered 'relevant' where it directly addresses the matter complained of and is material to the overall resolution of the complaint. It remains to be seen how the FOS will deal with interpreting compliance with FCA Principles and 'high-level standards', which are, by their nature, not prescriptive in their requirements.

Further, the Treasury has not proposed to amend the position in relation to the law more generally, where it is not the subject of FCA guidance. This leaves the FOS in the current position of only needing to 'take that law into account', rather than follow it, with the Treasury stating the view that requiring the strict application of law would not be desirable as it would duplicate the role of the courts. Whilst this leaves open the possibility of inconsistency, this is mitigated by the proposals:

(i) that where the FOS applies the law in a way which would have wider implications for consumers and firms, this would be referred to the FCA for consideration; and

(ii) for the FOS to be able to dismiss individual complaints on the grounds that their complexity or centrality of a disputed requirement of law means that the courts are a more appropriate forum.

These measures are examined below.

Referrals to the FCA

The Treasury also proposes introducing a mechanism that would require the FOS to refer certain questions to the FCA.

Regulatory interpretation

The first situation involves questions around the interpretation of FCA rules and would require the FOS to request a view from the FCA where there is ambiguity in how the rules apply to a particular complaint. This would not involve the FCA making a determination on the complaint itself, but rather offering its views on the intended purpose of the rules, which the FOS would then take into account when reaching its decision.

There may be an issue where the FOS does not consider there to be any ambiguity and therefore it would apply its interpretation of FCA rules (just as it currently does). Therefore, a mechanism is also proposed whereby the parties to a complaint can request that a referral to the FCA is made on a point of interpretation. The proposals envisage a stage prior to a determination being made where the FOS presents their preliminary assessment of the case to both parties. Should a party be concerned about the application of the FCA's rules to the facts, an FCA referral can be requested at that stage, provided that:

(i) the FCA rule is material to the complaint;

(ii) the application of the rule is ambiguous; and

(iii) the FCA has not previously given the FOS a view on the interpretation of those rules.

The FCA will have 30 days to provide a response to the FOS, if requested to do so, unless the FCA considers that the complexity of the case requires longer, at which point they can notify the FOS of this and extend the timetable.

These proposals look positive to us, pending sight of the detailed rules around when such referrals can be made. Whilst, inevitably, there will need to be some parameters around this to prevent an unmanageable number of referrals being made to the FCA, equally the referral rules cannot be so narrow as to preclude their effective use.

Wider implications

The second proposal is for the FOS to refer individual cases to the FCA where the subject matter of the complaint raises issues that may have wider implications for other consumers/firms. The Treasury believes that for the "small minority" of cases where this occurs, it is a regulatory matter rather than one for the FOS to deal with. Accordingly, the FOS will be obliged to refer the issue to the FCA and the FCA will be obliged to consider it. The parties to the complaint will also be able to request this.

In reaching its view, the FCA will be obliged to consult with its statutory consumer and industry panels. Options open to the FCA will be:

(i) giving a view to the FOS on the interpretation of any relevant FCA rules;

(ii) seeking clarity from the courts on an issue of law – for example through a test case;

(iii) changing FCA rules or guidance; and

(iv) invoking a mass redress event – see further below.

Still gaps?

Although limited in scope, greater regulatory and judicial input into FOS decision-making should also help to ensure consistency in the system and for certainty to be obtained in relation to the most important cases. However, there is still room for further improvement in relation to two specific points:

• There will still be scope for the FCA to retroactively decide what a rule meant at a particular time, even if this would not have been apparent from contemporaneous guidance. We have seen this in relation to the FCA's approach to the ongoing motor finance issue (albeit there, as in other contexts, the FCA denies that this is the case). If it continues, this approach will not provide firms with clarity at the point at which the relevant decisions are being taken and it risk standards effectively being imposed years later, when complaints come through the system. At the very least, in the outcomes-focused world we are operating in post-consumer duty, it will be crucial that the FCA makes clear that there is not necessarily just one 'right way' to satisfy its rules.
• The FOS would still only need to take law that is not addressed by FCA rules or guidance 'into account', on the basis that requiring something more rigid would replicate the role of the court. However, this means that the risk of FOS decisions that conflict with the approach at law remains, with the uncertainty and inconsistency this entails.

Role of the Courts

Since 2015, when the UK passed the Alternative Dispute Resolution for Consumer Disputes (Competent Authorities and Information) Regulations 2015 to comply with then-applicable EU legislation, the FOS has been unable to dismiss a complaint without considering its merits on the ground that it was more appropriate for adjudication by the courts. The Government intends to replace this legislation in Spring 2026, which will permit the FOS greater flexibility in dismissing complaints and instead leaving them to be handled by the courts.

The Treasury's consultation, however, rejects the idea that the FOS should be more tightly entwined with the court or tribunal system and has not taken forward suggestions that the FOS should have a right of appeal to the courts for both parties.

This preserves the current imbalance whereby consumers are free to reject the outcome of the FOS process and take their case to the courts, whereas firms are bound by the FOS's determination (subject only to the narrow grounds of judicial review). In the Government's view, giving firms a right of appeal on the substance of a complaint would run counter to the purpose of the FOS of providing an informal dispute resolution procedure. However, with careful design, this need not be an inevitable consequence of introducing a route of appeal. Whilst the mechanisms described above for referral to the FCA and potentially the courts soften the position to some extent, it may be that there needs to be a further look at this issue. This could perhaps be done in combination with reconsidering the money award limit which, at £430,000, is significantly higher than when the FOS was first established. This means comparatively high-value cases are eligible for determination on a less formal FOS basis. One key issue to be addressed would be the difference in legal tests being applied in the event that the 'fair and reasonable' approach is not further amended to include consistency with the law. Another issue would be a mechanism to ensure that the appeal route is not over-used.

Mass redress events and 'lead complaints'

A key plank of the proposed reforms focusses on so-called 'mass redress events' (MREs). The Treasury has noted that stakeholders agree that the FOS is not equipped to deal with MREs and existing tools and processes are inadequate, leading to delay, uncertainty and inconsistency in approach.

As a starting point, the FCA has proposed the following criteria for identifying an issue giving rise to an MRE:

• affects a high number of customers;
• has a significant impact on individual consumers, including those in vulnerable circumstances;
• is likely to lead to a high redress bill;
• results in a significant number of firms being unable to meet their redress liabilities;
• leads to a high number of FOS complaints; and
• is driven by a systemic/repeated failing that damages the financial system.

On their face, these seem to be reasonable factors and, sensibly, the FCA is not proposing to set rigid thresholds for triggering these criteria, or to require a certain number of criteria to be met before an issue is treated as an MRE. While no single factor is likely be sufficient to warrant a matter being treated as an MRE, it is readily apparent that MREs will take many forms and access to the FCA's proposed tool kit should not be barred by taking an overly prescriptive approach.

The Treasury and the FCA are proposing the following changes to improve effective management of MREs:

• amending FSMA to exempt the FCA from the usual requirement to consult before pausing the handling of complaints, allowing a swifter regulatory response in the interests of affected customers and firms;
• permitting the FCA, upon determining the existence of an MRE, to direct the FOS to halt work on complaints of that nature, facilitating early intervention and consistent treatment of widespread issues;
• granting the FCA new powers to pause the handling of complaints already submitted to the FOS when a potential MRE arises, helping to reduce inconsistent outcomes; and
• simplifying the requirements for imposing a section 404 FSMA redress scheme, so that they are more likely be useful in practice.

In a separate, but thematically adjacent, proposal, the FCA and the FOS propose introducing a 'lead complaints' process to deal with 'novel' and 'significant' (as in high levels of redress or volumes of complaints) cases which emerge. If the FOS accepts a firm's request to use this process, consideration of these complaints by the FOS would be paused while a lead complaint is investigated. The FOS' determination would then give a precedent for dealing with the rest of that category of complaints. This already occurs to some extent in practice, but would have a more formal basis.

The Treasury consultation also explicitly notes that the Government is interested in considering further tools that the FCA could use to help 'stabilise a potentially disruptive situation for consumers while an MRE is being investigated'.

While infrequent, MREs can present a detrimental liability to firms (and to the industry more generally) when they appear. Previous issues, such as payment protection insurance redress, and the developing issues in the motor finance sector, highlight the potentially considerable adverse effect for firms and consumers that can arise from MREs.

With careful design, a process which leads to swifter identification and resolution of such events when they do occur is likely to be beneficial for the industry as a whole. However, the proposed changes primarily place the burden on firms to identify the issues by adding additional guidance to SUP15 (the rules for notifying the FCA). It is questionable whether this will make a difference in practice, given the various, extensive obligations on firms to inform the FCA of issues (as discussed in our previous blog). The proposals in the CFI to place the onus on 'Professional Representatives', who would provide a new source of broad market data, appear to have been abandoned.

Further, the removal of the requirement for the FCA to identify loss that would be subject to a remedy in court proceedings may represent a significant widening of the FCA's powers to require redress through a widespread scheme (especially while we await the Supreme Court consideration of the FCA's powers in relation to individual firms in the BlueCrest case).

Claims management companies and other 'professional representatives'

The FCA and the FOS acknowledge, in their consultation, some of the concerns that claims management companies (CMCs) and other 'professional representatives' often bring meritless or poorly evidenced complaints, with only 25% of cases brought by professional representatives being upheld by the FOS, in comparison to an average rate of 37%.

This places a significant time and resource burden on regulated firms, who may face overwhelming numbers of poorly substantiated cases which ultimately are not upheld by the FOS. While a move in the right direction, the new FOS referral fee regime for CMCs introduced on 1 April 2025¹ is unlikely to act as a material deterrent to the more unscrupulous CMCs. There is then a knock-on impact when these unmeritorious complaints are referred up to the FOS after being rejected by the relevant firm.

The FCA and the FOS now propose to introduce a further 'registration' stage between a complaint being referred to the FOS and it being investigated, to ensure that a complaint merits further consideration by the FOS. Complaints would only proceed to the investigation stage where:

(i) a final response letter has been received (or the deadline to receive one has passed);

(ii) there are no fundamental objections on the grounds of admissibility or jurisdiction;

(iii) there are no regulatory or litigation-related reasons for the case to not proceed; and

(iv) the complaint meets a minimum evidential standard.

It is intended that this reform would allow the FOS to more effectively manage its caseload, and prevent poorly evidenced complaints (often submitted by professional representatives) from advancing through the process, unchallenged, as they currently do.

Time limits

Currently, DISP 2.8.2R provides that the FOS will not consider a complaint brought more than '(a) six years after the event complained of; or (if later) (b) three years from the date on which the complainant became aware (or ought reasonably to have become aware) that he had cause for complaint'.

These rules differ from the Limitation Act 1980 for claims to be made to the courts in that there is no long-stop to bringing complaints. This means that the FOS, on occasion, can determine complaints in relation to matters which occurred many years previously, where the passage of time might mean that documents and information are no longer available and memories are stretched. These challenges are exacerbated by data protection considerations requiring the deletion of information. Proposals to introduce a long-stop have been raised on numerous occasions over the years and met with stout resistance. However, the Government now proposes introducing an absolute ten-year time limit, beyond which the FOS will be unable to consider a complaint. This will apply to all new complaints brought to the FOS (with the previous time bar rules applying for complaints already referred to the FOS).

This is a welcome change, but it will need to be reviewed in detail as the FCA will have some flexibility to make exceptions to this rule in DISP, in particular for long-term products where the Treasury recognises that a longer limit may be appropriate. We have also previously advocated for the six- and three-year time limits to be reviewed - given the informal nature of the FOS process, there seems no reason why individuals should be allowed to wait for so long, even after being aware of their cause for complaint.

FOS interest rate

On the same day as the Chancellor's' speech, the FOS announced that it would change the interest rate applied to certain awards, from a flat 8% to a tracker rate of the (average) Bank of England base rate plus 1%. The applicable Bank of England rate will be the average from the date on which loss occurred to the date redress due is paid. Given recent interest rate levels, this will operate to reduce the interest applied to FOS awards. The new interest rate will be effective from 1 January 2026 and it will only apply to cases referred to the FOS from that date. The FOS has also reserved the right to charge the flat 8% as a penalty where firms fail to pay redress on time.

In the consultation earlier this summer, it was proposed that the variable interest rate would not apply to interest as part of a money award (e.g. where a consumer has overpaid interest on a loan). It is not currently clear whether that element of the proposal has been carried through.

Increased accountability and transparency

Statute currently provides that the responsibility for making FOS determinations lies with the individual ombudsman on the FOS's panel. The Government intends to change this, proposing that ultimate authority for making determinations would lie with the Chief Ombudsman, who can delegate the exercise of this function to others in the FOS. The effect of this would be that the Chief Ombudsman is responsible for ensuring consistency across the determinations that are made. The intention is to enforce a level of consistency that is currently felt to be missing from FOS decisions.

The Treasury's consultation also proposes that FOS publish a quarterly 'lessons learned' document outlining how it would expect the FCA's rules to apply to particular types of cases, either in place of, or alongside, the publication of its decisions. The Government seeks the industry's views on these transparency arrangements, particularly on whether the document ought to be a joint publication between the FOS and the FCA, or developed by the FOS and published with the FCA's approval only.

Folding the FOS into the FCA

With regards to long-term institutional arrangements for the FOS, the Treasury's consultation raises the possibility of a fundamental reform in how the FOS operates. While, at present, the Government only seeks views on such potential reforms, it raises the possibility of folding the FOS into the FCA entirely.

The Government says this would involve the sharing of central management functions such that information could be shared more easily between the two institutions and the FCA would be more alive to the need for early regulatory intervention for industry issues. However, it could compromise the perceived independence of the FOS as an impartial adjudicator.

It is interesting that the Government is entertaining this possibility in light of its underlying concerns around the prospect of the FCA being over-involved in the determination of disputes where a referral is made. In our view, a separate, independent, FOS is preferable, as long as there are open lines of communication with the regulators to enable co-ordination as required, which the Treasury proposals already look to strengthen.

Conclusion

Whilst from a customer perspective, the FOS can be said to serve its purpose in providing cheap and easy recourse for individual complaints, the inconsistency in decision-making and delays in dealing with issues has created an uncertain environment for firms operating in the financial services sector generally.

Against this backdrop, any improvements are to be welcomed and it is encouraging that both the Government and the regulators are making proposals which go beyond previous attempts at reform over the years. Overall, the proposals do represent a significant shift aimed at improving fairness, consistency, and efficiency across the system. However, they are in some respects quite high-level and the devil will inevitably be in the implementation detail before we can conclude that they will indeed be effective.

When tested against the four requirements we identified in our earlier blog as necessary to achieve the goal of greater predictability (clarity of expectation on firms; early identification of emerging issues; prompt and orderly action; and confidence in the decision making process), there is room to go further. Given the momentum for change is stronger than ever, and perhaps unlikely to be repeated in the near term, it may be worth pushing for further measures in the consultation responses, as this will be the best chance of achieving meaningful change that we are likely to see for some time.

Footnote

1 CMCs can submit 10 complaints per year free of charge, after which they are charged £250 for each subsequent complaint submitted, with £175 being reimbursed if the complaint is upheld.

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