The Finance & Leasing Association (FLA) has urged a fundamental review of the Financial Ombudsman Service’s (FOS) role, arguing that its current approach creates regulatory uncertainty and increases costs for consumers.

Responding to the call for input on Modernising the Redress System, the FLA stated that the FOS has diverged from its original purpose as an alternative dispute resolution body and is now setting precedent through its decisions.

FOS OVERREACH CREATING UNCERTAINTY

According to the FLA, the FOS’s authority to determine what is “fair and reasonable in all circumstances” allows it to reinterpret Financial Conduct Authority (FCA) rules rather than apply them as originally intended. As a result, firms that have complied with FCA regulations may still find themselves liable in large-scale redress cases, opening the door to claims management company (CMC) activity and creating additional risks for the financial services sector.

The FLA warned that this uncertainty raises the cost of finance for consumers and stifles economic growth. Over time, FOS decisions have also become precedent-setting, forcing firms to implement costly, unanticipated measures across their operations.

FLA’S PROPOSED REFORMS

Stephen Haddrill, director general of the FLA, called for urgent reform, saying: “We should not have to point this out, but at a bare minimum, FOS and firms must use the same rulebook.

“Anything else is unacceptable and an open invitation to further CMC activity, increased costs and continuing uncertainty.”

The FLA has proposed a series of reforms, which it urges to be implemented by summer 2025 following an expedited consultation process:

• Reform of the ‘fair and reasonable’ test – The FOS should be required to apply laws, regulations, rules, and guidance as they stood at the time of the act or omission, ensuring that outcomes are determined by historical standards rather than retrospectively altered interpretations.
• Removal of FOS decision precedent – Decisions made by the FOS should not set wider precedent, ensuring that firms are not forced into industry-wide changes based on case-specific rulings.
• Introduction of a right to appeal – The FLA calls for a formal appeal mechanism, either in place of or alongside the existing judicial review process, to provide firms with greater legal recourse.
• Revised approach to interest calculations – The FOS should align with court standards on interest rates, applying commercial rates rather than the current 8% simple annual interest, which the FLA argues is excessive and outdated.

A CALL FOR FUNDAMENTAL CHANGE

The FLA believes that minor tweaks to FOS procedures will not address the core issues and is pushing for a substantial rethink of the Ombudsman’s role within the regulatory system. It argues that without these changes, firms will continue to face unpredictable regulatory challenges, increasing costs that ultimately impact consumers and businesses alike.

With financial firms facing growing pressures from an evolving regulatory landscape, the FLA’s recommendations set the stage for a broader debate on the future of the FOS and its place within financial services oversight.