The UK’s financial ombudsman was acting like a regulator – and it was costing the industry billions
The UK government has announced a major overhaul of the Financial Ombudsman Service (FOS), aiming to rein it in after concerns that the supposedly impartial body had, in some cases, operated like a quasi-regulator.
This overreach, the government says, has created uncertainty for financial firms, deterred investment, and contributed to billions in industry costs through unpredictable compensation payouts and prolonged disputes.
The reforms represent the most significant changes to the FOS since its creation 25 years ago, following a review by the Economic Secretary to the Treasury and a public consultation that drew hundreds of responses from consumers, firms, and trade groups.
Key changes include:
- Modifying the “fair and reasonable” test – Where firms have complied with Financial Conduct Authority (FCA) rules, the FOS must deem them to have acted fairly and reasonably, limiting its ability to impose broader judgments.
- Introducing a referral mechanism – The FOS will be required to consult the FCA on ambiguous rules or issues with wider industry implications, ensuring greater alignment between the ombudsman and the primary regulator.
- Imposing a 10-year absolute time limit for complaints, with limited exceptions allowed by the FCA.
- Structural adjustments – The Chief Ombudsman will take overall responsibility for decisions to improve consistency.
These steps aim to return the FOS to its original purpose: a fast, impartial dispute-resolution service rather than an additional layer of rulemaking.
The government noted that consumer protections will not be weakened, but the system will become more predictable and coherent.
“These reforms to the Financial Ombudsman Service will make redress clearer, more consistent and easier to navigate. By setting clearer boundaries, we are restoring confidence in the system and ensuring it works fairly and predictably for consumers and businesses alike,” said Economic Secretary to the Treasury Lucy Rigby.
The push for reform stems from industry complaints that the FOS’s expansive interpretations in a “small but significant minority” of cases, particularly high-profile matters like motor finance commissions, have functioned as de facto regulation.
This has led to uncertainty, inconsistent outcomes, and substantial financial burdens on firms through compensation, case fees, and operational costs.
The government noted that legislation will be introduced when parliamentary time allows. In the interim, the FOS and FCA are implementing quicker fixes, such as process improvements to speed up resolutions.
