The government will legislate to reshape the Financial Ombudsman Service following a wide-ranging review aimed at restoring its original remit and improving consistency across financial regulation.

The Treasury has confirmed a package of reforms to the Financial Ombudsman Service (FOS) after concluding that, while the body plays a central role in dispute resolution, aspects of its current framework risk blurring the line between adjudication and regulation.

The review, first outlined by the Chancellor in July 2025, found that changes were needed to prevent the FOS acting as a quasi-regulator and to improve alignment with the Financial Conduct Authority (FCA).

A subsequent consultation, which closed in October and drew 601 responses from firms, trade bodies, consumer groups and other stakeholders, showed broad support for the direction of travel.

At the centre of the reforms is a recalibration of how the FOS determines complaints. The government will legislate to adapt the long-standing “fair and reasonable” test so that, where firms have complied with relevant FCA rules, they will be deemed to have acted fairly and reasonably.

The move is intended to provide greater predictability for firms while maintaining consumer protections.

Ministers also plan to introduce a formal referral mechanism requiring the FOS to seek the FCA’s view where there is ambiguity in regulatory interpretation or where a case could have wider implications for the market. This is designed to ensure greater consistency between the ombudsman’s decisions and the regulator’s rulebook.

In a further attempt to bring clarity to the complaints process, an absolute time limit of 10 years will be introduced for cases brought to the FOS, although the FCA will retain discretion to allow exceptions.

Structural changes are also proposed, with the Chief Ombudsman to take overall responsibility for determinations in a bid to improve consistency in decision-making.

The Treasury said transparency would be enhanced through a requirement for the FOS and FCA to publish regular thematic reports, offering guidance on how certain types of complaints are assessed. These reports are expected to help firms and consumers better understand the likely outcomes of disputes and reduce uncertainty.

MASS REDRESS AND GOVERNANCE CHANGES

The reforms also address how large-scale consumer issues are handled. The FCA will be given clearer tools to respond to mass redress events, enabling it to act more quickly in cases where widespread harm is identified.

Alongside these measures, the government will take a more direct role in the oversight of the FOS. It intends to assume responsibility for appointing the organisation’s chair, while the appointment of the Chief Ombudsman will be subject to government approval.

However, ministers have ruled out making the FOS a subsidiary of the FCA, concluding that the broader package of reforms will achieve sufficient alignment without altering the ombudsman’s institutional independence.

IMPLEMENTATION AND NEXT STEPS

Most of the changes will require primary legislation, which the government said will be introduced when parliamentary time allows. In the meantime, the FCA and FOS have set out proposals for rule changes within the existing framework, including adjustments to the factors considered under the “fair and reasonable” test, the introduction of a registration phase for complaints, and revised grounds for dismissal.

The FCA has also outlined more flexible criteria for identifying mass redress events, aimed at spotting emerging issues earlier and enabling faster intervention where appropriate.

Officials said that implementing these elements ahead of legislation would allow both consumers and firms to experience some of the benefits of reform in the near term, while the full legislative package is developed.

Taken together, the Treasury argues the reforms will deliver greater certainty and coherence across the regulatory system, reinforcing confidence in both the financial services sector and its oversight framework.

Phil Smith, head of redress at independent financial services consultancy Broadstone, said: “The government’s response marks an important step towards bringing greater clarity and consistency to the UK’s redress framework.

“Ensuring that the Financial Ombudsman Service places greater weight on firms’ compliance with FCA rules should provide much-needed certainty for firms, while the proposed referral mechanism between the FOS and FCA could help resolve areas of regulatory ambiguity and inconsistency.

“A time limit of 10 years for bringing complaints to the FOS may enable firms to improve future planning and increase investment. The exceptions flexibility is important especially for longer term financial products where the cause for complaint may take longer to be established, particularly for cases with less financially aware consumers.

“Recent large-scale cases such as PPI, and the motor finance investigation, highlight why a more structured framework for mass redress events is needed. A system that allows issues to be identified and resolved earlier should benefit consumers through faster and more consistent outcomes, while also helping firms manage costs and avoid problems escalating into industry-wide redress programmes.

“Greater transparency through thematic reporting and a clearer structure for FOS decision-making should also help firms better understand how complaints will be assessed.

“Taken together, these reforms aim to strengthen confidence in the redress system by making it more predictable, more transparent and better aligned with the UK’s regulatory framework.”