Chancellor Rachel Reeves announced significant reforms to the Financial Ombudsman Service (FOS) and Financial Conduct Authority (FCA) in her Mansion House speech.
Unveiling plans for a modernised FOS framework and new FCA consultation, Reeves hopes to drive financial services growth.
A review of the FCA and FOS approach to redress certainly provides an opportunity to reflect and examine where effectiveness around financial regulation might be improved. Yet the changes could also bring risk.
It is clear that caution is needed to ensure that any regulatory changes provide clearly identifiable benefits – to both firms and consumers.
Opportunity for improvement
The latest data shows that FOS complaints increased by over 50% between July-September 2024 from a year earlier.
Complaints about fraud and scams, current accounts and credit cards are at record highs. The recent issues around car finance and discretionary commission agreements have put the sector on high alert for a new influx of compensation complaints.
It is in no one’s interest that the system works inefficiently. Firms must be able to manage the volume of claims and effectively support consumers making complaints.
Regulators, for their part, need to ensure that the system works in a way that allows firms to do so. Closer alignment between the FOS and FCA could aid this by ensuring a more consistent, streamlined approach.
Similarly, greater clarity about how the FCA rules should be applied and how to manage and mitigate risks is welcome.
It’s also worth considering whether more flexible tools could be given to the regulator to intervene where there has been wide-scale detriment. These would need to be designed to balance proportionality with speed and robustness of intervention.
Consumers key to growth
However, any changes to these institutions should not limit consumers’ ability to make complaints, nor make it more difficult for them to do so.
Financial services regulation really matters to customers. When they buy financial products, they need to be confident that there is a system in place that protects their money and provides appropriate, timely redress if things go wrong.
A key role of the Ombudsman and FCA is to provide effective recourse and redress, particularly when issues arise at a significant or systemic level – for example, Payment Protection Insurance.
Reeves remarked that “the UK has been regulating for risk, but not regulating for growth”. We can’t overlook that growth in financial services will ultimately come from customers. This means they must have trust in the sector and access to redress if needed.
Effective financial regulation that allows businesses to grow and innovate, while providing consumers with trust in the products and services they buy, is a key component of growth.
The FOS plays an essential role in reinforcing that confidence, which the Chancellor has rightly recognised. That makes regulatory reform in this area a delicate and complex task that requires careful consideration.
There is little benefit in reforming the sector if it undermines the very trust that is needed for the growth the UK hopes to achieve.
Reforming the sector
As such, the focus must remain on ensuring a system that provides consumers with a swift and effective system of redress. Proposed reforms need to be viewed through this consumer lens.
Take mass redress issues. While there are understandably concerns about the high costs for firms in managing these issues, any new approach must carefully balance these with the needs of consumers.
As the FCA/FOS call for input says, “The most effective way to mitigate the risk of a mass redress event is for firms to take prompt, proportionate and proactive action to identify and resolve harm.” That must continue to be the key obligation for firms: to stop these issues arising in the first place.
A similar approach needs to be taken in dealing with issues around time limits for bringing complaints and the lack of a long-stop provision when firms can be liable for advice provided many years ago.
As these historic complaints are rare, changes to the time limits and consumers’ ability to bring complaints would potentially undermine confidence. In other words, any changes to specific requirements around redress should be targeted and the consequences carefully thought through.
Excessive and unclear regulation can be a drag on growth. However, all those involved should be acutely aware of the risks and potential costs of ill thought-out deregulation. The FOS has faced challenges with high volumes of cases around mass redress events, but we should not lose sight of the fact that it continues to provide an important service for individual consumers.
Trust is a valuable commodity in financial services and there are many examples in recent history where that has been lost, with real consequences for growth and the profitability of the sector, as well as the wider economy. All that means that regulators should proceed with caution.
Marc Maxfield is a risk and regulation expert at PA Consulting
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