Regulation

FLA seeks overhaul of FOS

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The Finance & Leasing Association (FLA) is calling for a “fundamental review” of the role of the Financial Ombudsman Service (FOS), saying its failure to align with the rules established by the Financial Conduct Authority (FCA) is generating regulatory uncertainty, increasing costs for both consumers and lenders, and impacting economic growth.

The comments were made as part of the FLA’s response to the joint FOS/FCA  call for input on Modernising the Redress System. The association stated FOS has evolved away from the type of alternative dispute resolution body that Parliament originally intended it to be, to the point where FOS can deliver outcomes which are at odds with the FCA’s rules.

The FLA stated: “While it still has a remit to resolve individual complaints, the FOS adjudicates on what it thinks is “fair and reasonable in all circumstances of the case”. In practice, this means that it can reinterpret the FCA’s rules – it doesn’t have to accept the original intent of the rule nor method of compliance by the firm. FOS decides what should have happened in its opinion and holds the firm to that standard.”

The result is that firms complying with FCA rules can still find themselves embroiled in mass redress events. This has been the case within the motor finance market, after FOS found in favour of the consumer in three cases involving undisclosed commission payments, despite lenders following FCA regulations in place at the time.

The FLA say this tension between FCA regulations and FOS’s decision processes generates regulatory uncertainty which provides an opportunity for claims management company (CMC) activity, introduces additional risk to the operation of the market and increases the cost of finance to the end customer – all of which is detrimental to economic growth.

In addition, FOS decisions have become precedent setting over time as firms have been required to implement new, uncosted measures across their businesses.

Stephen Haddrill, Director General of the FLA, said: “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 necessary changes to improve how the FOS operates will not be achieved by tinkering at the edges of FOS’s remit and approach, but by fundamentally reviewing its role in the regulatory architecture.”

The FLA wants to see a series of urgent changes to the complaints’ resolution DISP rules to be implemented in Summer 2025 following an expedited consultation process, including:

  • The “Fair and reasonable” test should be changed to require the FOS to “apply” laws, regulations, rules and guidance which were in place at the time of the act or omission and, where applicable, to determine outcomes by the standards at the time, all without retrospective effect.
  • The precedent effect of FOS decisions should be removed.
  • Introduction of right of appeal (in place of, or in addition to, judicial review).
  • The FOS should mirror the approach of the court to interest (commercial rate not 8% simple annual interest).

The FOS/FCA call for input closed on 30 January. The FCA has said it will summarise the responses and publish next steps in the first half of 2025.

Prudential Regulation Authority

The FLA’s views on the need to streamline and clarify the regulatory process are in tune with those expressed by Sam Woods, chief executive of the Bank of England’s Prudential Regulation Authority (PRA).

Interviewed by the Times, Woods said the question now facing regulators is whether there is further scope to “declutter the system”.

 “I think there is that scope. So what we’re doing is we’re clearing away a lot of undergrowth. We’re significantly pruning the trees but we’re not going to set fire to the forest,” Woods asserted.

His comments follow Chancellor Rachel Reeves’ statement that “risk-taking” had “gone too far”, prompting a round of letters to regulators just before Christmas asking for their plans to simplify their rules.  

In response, the PRA has launched a consultation on a number of issues includes further changes to bonus rules and reducing the regulatory burden on banks by lowering data reporting requirements. It has also suggested further possible reforms, such as setting up a “concierge service” to help foreign financial firms seeking to enter the UK.