UK Financial Services Oversight to be Reformed, Ombudsman Powers Curtailed

The UK Treasury is planning significant reforms to the handling of consumer complaints within the financial services sector, aiming to curb the powers of the Financial Ombudsman Service (FOS). The proposed changes seek to address concerns that the FOS has been deterring investment and acting beyond its intended role as a dispute resolution service.

Key Changes Proposed by the Treasury

The reforms, to be introduced through legislation when parliamentary time allows, include:

• Reduced Discretion for the FOS: The changes will limit the ombudsman’s flexibility to rule against companies that have already complied with existing regulations.
• 10-Year Time Limit for Complaints: A new 10-year limit will be imposed for consumers to submit complaints, replacing the current system of six years from an event or three years from discovery.
• Clarified Fairness Test: The test for determining fairness will be adapted to explicitly state that companies meeting their regulatory obligations should be considered to have acted fairly and reasonably.
• Increased FCA Oversight: The FOS will be required to seek a view from the Financial Conduct Authority (FCA) if there is ambiguity in its rules or if a case has broader implications for the industry.

Rationale Behind the Reforms

City minister Lucy Rigby stated that the plan aims to “make redress clearer, more consistent and easier to navigate,” restoring confidence in the system for both consumers and businesses. The Financial Times reports that the move is part of a broader governmental effort to stimulate economic growth by easing regulations.

The reforms follow increased scrutiny of the FOS, particularly after rulings related to alleged mis-selling of car finance contributed to a financial scandal expected to cost lenders over £11 billion. The Treasury stated that during a public consultation, it repeatedly heard that the FOS was “creating uncertainty for consumers and businesses that was holding back investment.”

Simon Morris, a financial services partner at law firm CMS, commented that the ombudsman had “for too long been a loose cannon, firing out random decisions that firms have had to treat as quasi-precedents.”

Criticism of the Proposed Changes

Consumer groups have voiced concerns about certain aspects of the plan. James Daley, head of Fairer Finance, argued that the FOS plays a crucial role in maintaining consumer confidence in the financial services sector and should not be subject to “short-term political whims of government.” A key concern is the proposed shift in appointing the FOS chair from the FCA to the Treasury.

Recent Changes to FOS Operations

Prior to the proposed legislation, the FOS has already implemented changes to streamline its operations and potentially reduce the volume of complaints. These include:

• Lowering the interest rate applied to compensation.
• Introducing fees for claims-management companies.
• Implementing a pre-registration stage to filter out weak complaints before they are assigned to an ombudsman.
• Expanding powers to dismiss complaints lacking material financial loss, distress, or inconvenience.

James Dipple-Johnstone, interim chief ombudsman, stated that these measures will “modernise our operations to ensure we remain a service which keeps pace with a changing sector in delivering our vital service for consumers and supporting confidence in UK financial services.”

The FOS received over 305,000 complaints in the year ending March 2025.