FOS at a crossroads – material reforms aim to end quasi-regulatory role

The Financial Ombudsman Service (FOS) was established under the Financial Services and Markets Act 2000 (FSMA) to provide a simple and impartial mechanism for resolving complaints between consumers and financial services firms. However, concerns have been raised about the FOS’s role, particularly its perceived function as a quasi-regulator, its handling of Mass Redress Events (MREs) or issues with wider implications, and the lack of alignment between its determinations and FCA rules. At times, these issues have created regulatory uncertainty, inhibited innovation, and led to inconsistent outcomes for consumers and firms.

The long-simmering concerns around the operation of FOS have reached a crescendo. In November 2024, the Chancellor used her Mansion House speech to signal a bold new direction for financial services regulation, highlighting the need for reform in how consumer disputes are handled. This was swiftly followed by a joint call for input from the FOS and the FCA. Shortly thereafter, HM Treasury announced a formal review, underscoring the seriousness of the issue and FOS published a consultation on the interest rate applied to compensation awards. Now, with two consultation papers published on 15 July 2025 and a Policy Statement by FOS on application of interest rates (see our flash update), the landscape is shifting rapidly.

These developments mark the beginning of a once-in-a-generation transformation of the FOS – which are intended to usher in a new era of fairness, transparency, and accountability in financial redress, whilst attempting to return FOS back to its roots – a simple, impartial dispute resolution service which quickly and effectively deals with individual complaints.

Key Proposals for Reform

Government proposals

The Government has proposed a comprehensive package of legislative changes aimed at delivering far-reaching reforms to FOS. They include proposals to:

• Adapt the ‘fair and reasonable’ test to align with the FCA’s regulatory approach: Compliance with FCA rules, in accordance with the FCA’s intent, will mean a firm has acted fairly and reasonably. This approach is intended to ensure that there can be no retrospective application by FOS of contemporary FCA rules.
• Create a process requiring FOS to seek the FCA’s interpretation when FCA rules are ambiguous: This mechanism is intended to ensure that the FCA provides timely guidance on how its rules should apply, without it considering, or influencing the outcome of individual complaints. Parties to a complaint will also be able to request such referral after seeing FOS’s provisional assessment on the determination of the complaint. The FCA must respond within 30 days, unless more time is needed for complex or wider implications issues.

• Require FOS to refer issues with wider implications to the FCA, which the FCA must then consider: This is distinct from the interpretation referral process referred to above and FOS will conduct its assessment at the review stage. Parties to a complaint will also be able to request such referral after seeing FOS’s provisional assessment on the determination of the complaint. When making its assessment, the FCA will have to consult its statutory consumer and industry panels, who will be able to contribute views. The FCA will then respond, which may include giving a view to the FOS on interpretation of any relevant FCA rules or law, seeking clarity from the courts, or changing FCA rules or guidance. If the complaint may be part of a MRE (see below), the FCA will be able to direct that FOS pauses the complaint and other related complaints.

• Create an absolute time limit of 10 years for bringing complaint to FOS: The FCA will have limited flexibility to make exceptions to this, where longer timeframes are justified in exceptional circumstances. Consumers will still have the right to bring cases to the courts outside of the long-stop, subject to any existing rules and statutory time limits.

• Give the FCA greater powers to investigate and respond to MREs, most notably lowering the bar for the FCA to instigate a consumer redress scheme under s404 FMSA: Currently the FCA can only introduce a scheme under s404 is there has been a “widespread” or “regular” failure by firms which has led or may lead to loss for which there would be a remedy available through the courts. The Government proposes to remove these requirements, such that the FCA may introduce a consumer redress scheme where it considers that such a scheme would be appropriate to respond to an MRE in a way which is necessary to meet any of its statutory objectives. Other proposals include:

• Enabling FOS to determine complaints in accordance with the terms of a firm led redress scheme and to apply to complaints already referred to FOS (but not finally resolved)
• Enabling the FCA to direct FOS to refer cases back to firms for resolution
• Giving the FCA more flexible powers to pause the DISP timescale

• Reinstate FOS’s power to dismiss complaints without assessing their merits if they are better suited for a court, arbitration or other complaints scheme: This power was removed as a result of the UK implementing EU Directive 2013/11/EU. The government intends to remove FOS from the scope of resulting legislation in Spring 2026.
• Amend the statutory basis for FOS so that the Chief Ombudsman holds overall responsibility for all FOS case determinations: Currently, determinations can be made by any ombudsman, without a single point of overarching responsibility. The proposed reform would assign formal authority for all determinations to the Chief Ombudsman, who could delegate this function to their team within defined parameters.
• Improving transparency: FOS may be required to publish quarterly thematic guidance documents (with input from the FCA) on how particular types of cases are investigated and how FOS would expect to see the relevant FCA standards applied.
• Institutional Arrangements: One proposal includes making FOS a subsidiary of the FCA, so that both organisations become part of the same corporate group.

Additional proposals by FOS and the FCA:

In addition to the Government’s proposals, FOS and the FCA have set out some additional proposals for change including:

• Introduction of ‘Lead Complaints’ process: Firms will be able to apply for FOS to consider a representative sample of lead complaints. FOS would investigate these and use the findings to guide resolution of similar ‘follow-on’ complaints. During this process, firms could pause consideration of related complaints at FOS. The FCA/FOS will consider at a later date whether any amendments to DISP are necessary to implement this new process.
• Introduction of decision frameworks: FOS will introduce decision frameworks for its caseworkers to improve consistency and transparency. Rollout will be gradual, with small-scale testing starting in H2 2025.
• Improving the quality of complaints: A new registration stage in between the existing referral and investigation stages would serve as a checkpoint to assess whether a complaint is appropriate to proceed to investigation stage. Cases closed or paused before registration may incur no fee or a reduce fee, while a larger case fee would apply only once a complaint is formally registered (broader reforms to introduce differential charging are being considered).
• Collection of data: The FCA is currently consulting on changes to complaints reporting rules, which if implemented, would mean firms report complaints on a six-monthly basis. But a specific process is proposed so that firms report potentially systemic or recurring issues as early as possible. Clarificatory guidance will be included in SUP 15.3.8G, highlighting situations where the FCA clearly expects firms to notify it.

What is unlikely to change?

• No appeal mechanism: The Government has decided not to introduce a formal appeals mechanism to the courts for FOS determinations, considering that it would undermine the FOS’s role as a quick and impartial dispute resolution service and place unnecessary strain on the court system. While consumers can reject FOS decisions and pursue court action, firms cannot appeal, though judicial review remains an option for both parties. Instead, the Government will allow FOS to dismiss cases better suited for court and enable the FCA to seek court views on important points of law that have wider implications.
• No extension of eight-week deadline response: The FCA/FOS do not believe it would be appropriate to extend the eight-week deadline for responding to complaint.
• No plans to reintroduce 2-stage procedure: FOS/FCA will instead focus on giving more clarity to firms through the new referral mechanism and providing guidance where needed.
• No further changes to the professional representatives charging regime are planned, however, the case feel level remains under ongoing review.
• The FCA will continue to not have a role in settling individual complaints. The FCA’s role is to ensure it supports the ability of FOS to apply a correct understanding of FCA rules to the circumstances of each complaint.

• There will not be any further changes to the Wider Implications Framework (WIF):
  
  • There are no plans for the Prudential Regulation Authority to become a member of the WIF. The WIF will continue to invite other organisations for input if needed.
  • The WIF will continue to publish the issues log, as well as executive and chair-level meeting minutes. However, it will not expand this to include director or working level meeting minutes because the discussions often include market sensitive information.

Next Steps

Both consultations remain open until 8 October 2025. Thereafter, the Government intends to implement the necessary legislative changes when parliamentary time allows. As to the reforms proposed by the FCA and FOS, they intend to publish a Policy Statement in H1 2026, confirming any changes and the implementation periods.

As above, FOS has announced that it will change the interest rate applied to compensation awards from 8% to the Bank of England’s base (average) rate +1%. See our Flash Update for further detail. This change is likely to be introduced for all new complaints referred to FOS from 1 January 2026.

Comment

The reforms are likely to be greeted with cautious optimism by the financial services industry who have raised long-standing concerns about the FOS’s role and approach and put forward suggestions for reform. Whilst the Government’s intent to create a more predictable, transparent and balanced system for resolving financial disputes – one that better serves both consumers and firms – will be welcomed, the detail of the proposals draft rules and legislation will not be available for scrutiny until H1 2026.

The absence of proposals for a route of appeal from FOS to the courts is likely to disappoint those who have long called for reform. Further, many will feel that the Government has underappreciated the key role that the courts may play in MREs, in not addressing calls from the industry for modification of the test case provisions within DISP that would enable complainants and respondents to seek clarification from the courts on points of law, where complaints have wider implications. There is likely to be concern as to in what circumstances the FCA would seek an opinion from the courts on matters of legal interpretation. Absent adequate mechanisms that enable complainants and respondents to seek a view from the courts on points of law, it is foreseeable that conflicting interpretations will continue to develop between complaints on the one hand and litigation on the other, leading to uncertainty for firms and consumers – as has happened in the case of disputes concerning motor finance commission.

The Government’s proposed changes to s404 FSMA, potentially represent a significant expansion of the power of the FCA to instigate consumer redress schemes and firms will be keen to scrutinise the detail of Government’s proposals (and any checks and balances on the FCA’s powers) when further details are published.

Contact:

Eversheds Sutherland has extensive experience in advising clients on matters involving the FOS and the regulatory landscape. If you would like more information about the proposed reforms, or require assistance in preparing a response to the ongoing consultations, please get in contact with our team.