Modernising the Redress System – 10 key changes which should be implemented

The Chancellor's Mansion House speech (14 November 2024) made clear that the Government views the UK's approach to consumer redress through the Financial Ombudsman Service as a cause of material uncertainty for the financial services industry which acts as a drag on investment.  The Chancellor declared that she wants changes to be implemented "to significantly improve the rules governing how the Service operates."  

Alongside this desire for greater clarity and predictability is a concern that the current system is weighted too heavily in favour of consumers, particularly in the case of mass redress events such as PPI, bank charges and motor finance, leading to huge compensation bills and as a result is undermining the competitiveness of the UK financial services system.  A Call for Input (Modernising the Redress System, 15 November 2024) seeks views from the industry on how to achieve the appropriate balance between protecting consumers and promoting investment.  

Here are 10 changes I would like to see introduced to the Financial Ombudsman Service (FOS) regime that will help to achieve this balance and deliver on the Government's objectives:

1. Time limits: New time periods should be set for filing complaints to firms. Complaints should be submitted within one year of the complainant becoming aware of having cause for complaint, with a long-stop period of (a) three years after the event complained of, or (b) if later, in the case of complaints relating to financial products, a year after maturity of the product. Where a complaint is not made to the firm within these periods, the complainant must go to court instead if he or she wishes to seek compensation. These time limits still provide ample time for complainants to raise issues with the firm and get them resolved appropriately. They will also have the effect of materially reducing the financial burden for firms in relation to historic redress cases where reliable evidence of what actually happened will often not be available, and compounding interest calculations significantly increase the financial toll on the industry.
2. Maximum awards: The maximum award per individual case should be re-set at £50,000. If a complainant seeks more than £50,000 a legal claim should be made instead. This is still a significant amount of money and would be a more sensible maximum award for an informal, non-judicial, system such as the FOS.
3. Response times: Firms should be given the ability to extend the eight-week period for responding to complaints where they have multiple complaints on a specific issue and require additional time in which to assess each complaint. This will have the effect of reducing referrals to the FOS as a result of firms not having the resources to manage a sudden influx of complaints on an issue.
4. FOS duty to apply relevant regulatory requirements: In determining what is fair and reasonable in all the circumstances, the Ombudsman should be required to apply relevant regulatory requirements and standards.
5. Managing misalignment between FOS and FCA interpretation: The defendant firm should be given the right, prior to final determination of a complaint by the Ombudsman, to require the Ombudsman to obtain the FCA's view on applicable regulatory requirements and standards in relation to the matters complained of – and then to pay due regard to the FCA's interpretation.
   
   These two changes to the FOS process are critical to address the concerns raised in the FCA/FOS paper concerning the current misalignment of industry standards between the FCA and the FOS, and build on the changes to para 23(b) of the updated Memorandum of Understanding between the two bodies. In my view it is wrong that the FOS is in practice the arbiter of industry standards for consumer finance, when firms have fixed their processes by reference to FCA rules (and frequently in consultation with the regulator). The FCA is accountable for setting and policing industry standards and yet is currently unable to intervene when the FOS takes a different view. Indeed this misalignment has been the material cause of a number of historic mass redress events such as PPI, and these changes will operate to minimise this misalignment.
6. Early identification of potential mass redress events: A duty should be imposed on regulated firms, the FOS and claims management companies to alert the FCA to potential mass redress events when they are identified. Early involvement of the FCA in potential mass redress events is critical to their efficient resolution, and the FCA itself needs to ensure it is adequately equipped to identify issues and take appropriate action at an early stage.
7. FCA override of FOS in potential mass redress events: Where the FCA identifies that a potential mass redress event may occur, the FCA should be given the right to suspend (temporarily or permanently) the determination of any pending complaints before firms or before the Ombudsman on a particular issue to allow the FCA to investigate the issues and oversee the implementation of an appropriate proactive redress scheme. This will put the FCA in the driving seat for putting in place appropriate compensation exercises and will free up resource at the FOS to handle the remainder of its caseload more expeditiously.
8. Broader application of s404 schemes: The preconditions for a s404 FSMA consumer redress scheme should be modified to allow the FCA to require a single firm or multiple firms to put in place a redress scheme where compensation is reasonably expected to become due to a minimum number of consumers (say, 500) either as a result of regulatory breaches or pursuant to Ombudsman awards as a result of the same matter. The scope of the s404 consumer redress scheme would not be constrained by the same limitation periods as those applying to complaints to firms.
9. s404 scheme to supersede pending complaints: The effect of a s404 FSMA consumer redress scheme is to supersede any pending or future complaints to the firm(s) concerned or to the Ombudsman in respect of the matter complained of.
10. s404 scheme to supersede pending s138D claims: A further effect of a s404 FSMA consumer redress scheme is to supersede any pending or future legal causes of action against the firm(s) concerned under s138D FSMA in respect of the matter complained of.
    
    These changes to s404 consumer redress schemes will deliver much greater levels of finality for the industry while facilitating faster compensation payments to affected consumers.

In addition to the introduction of new fees to discourage use of claims management companies for FOS referrals, implementation of these changes would ensure that consumers receive prompt and proactive redress in appropriate cases, and at the same time would significantly reduce the occurrence and detrimental impact of mass redress events.  As a result they will minimise the uncertainty that currently exists and facilitate greater levels of investment into the industry.

The FCA/FOS Call for Input closes on 30 January 2025 and next steps for implementing changes are to be published by 30 June 2025.

Please get in touch if you would like to discuss the changes that you feel need to be made to achieve the objectives set by the Government.