Modernising the Redress System: Progress over Perfection?

Introduction

The Financial Ombudsman Service (“FOS”) was established to provide consumers with a free, informal and independent means of resolving disputes with financial services firms. The institution has since grown substantially in scale, and emerging tensions between its informal dispute resolution function and its de facto ability to re-define the meaning of Financial Conduct Authority (“FCA”) Principles and Rules have become impossible to ignore.

The King’s Speech confirmed that the Government would implement a programme of reform announced as part of the broader ‘Leeds Reforms’. This is intended to modernise the redress system, refocus the FOS to its core purpose, and ensure greater coherence between the FOS's dispute resolution role and the FCA's regulatory framework. The Financial Services and Markets Bill 2026 will take forward changes discussed in HM Treasury’s recent consultation response of March 2026. These legislative changes are complemented by further changes to the FCA Dispute Resolution: Complaints Sourcebook (DISP), which were consulted on by the FCA and the FOS in July 2025 and March 2026.

We have focused on the key changes below, but firms will need to familiarise themselves with the detail of the full suite of measures in due course.

The Treasury Proposals

The Treasury's stated objectives for the reform programme are to:

• return the FOS to its original purpose as a quick, informal and accessible dispute resolution service;
• ensure the FOS's decisions are better aligned with FCA regulatory standards and rules;
• improve the FOS's ability to handle mass redress events efficiently and consistently;
• reduce the read-across effect of individual FOS determinations; and
• promote greater transparency and predictability in the FOS's approach to complaints.

The overall direction of travel is broadly welcome, but success depends heavily on how the reforms are implemented in practice.

The 'Fair and Reasonable' Test

The Treasury intends to clarify the scope of the FOS's 'fair and reasonable' jurisdiction by requiring the FOS to find that a firm's conduct is 'fair and reasonable' where it has complied with "relevant FCA rules, in accordance with the FCA's intent for those rules", as they existed at the time of the events in question. 

This re-framing is intended to prevent FCA rules from being applied to historic conduct in ways that were not foreseeable at the time and to avoid the FOS acting as a ‘quasi-regulator’ by issuing decisions at odds with applicable FCA rules (which then need to be considered more widely under the DISP rules). This should be welcomed, particularly given recent concerns arising from the approach taken to recent mass redress events. The Treasury has also helpfully clarified that the test requires the FOS to consider what is 'fair and reasonable' for all parties, not just the complainant. 

For areas not specifically covered by FCA rules, the FOS will continue only to be required to "take that law into account", rather than to follow it, on the basis that requiring strict application of law would duplicate the role of the courts. Therefore, a residual risk of FOS decisions conflicting with the law remains, as does the uncertainty this entails. 

More troublingly, the new approach still provides scope for the FCA to decide retroactively what the intent behind a rule was at a particular time, even if this may not be apparent from contemporaneous guidance, as has been seen in connection with the motor finance issue. If the FCA’s approach to such issues continues, this headline-grabbing change will not provide firms with the clarity sought at the point at which relevant decisions are being taken.

The Referral Mechanisms

There are various mechanisms for referring matters to the FCA proposed. In our view these represent one of the most innovative procedural proposals in the reform package.

The first referral situation arises where there is ambiguity in how FCA rules apply to a particular complaint. In those circumstances, the FOS will be required to request a view from the FCA, which the FOS will then take into account. A linked mechanism allows the parties to a complaint to request that the FOS makes a reference to the FCA, where it has not done so on its own initiative. 

The final referral situation arises where the subject matter of a complaint raises issues that may have wider implications for other consumers or firms. Options open to the FCA in that event will include giving a view to the FOS on the interpretation of relevant rules; seeking clarity from the courts on an issue of law; changing FCA rules or guidance; or invoking a mass redress event.

The FCA will usually have 30 days to respond to such requests, unless complexity requires longer.

The critical question here is whether the detailed rules governing when referrals can be triggered will be calibrated appropriately. If the threshold is set too high, the mechanism will be rarely used and the underlying coherence problem will persist. If too low, the FCA risks being overwhelmed with referral requests and the mechanism will become a source of delay rather than clarity. 

The FCA will also have to be disciplined in ensuring that most responses are given within the 30-day window: if extensions for perceived “complexity” become the norm, FOS response times will suffer. 

Mass Redress Events

The Treasury has agreed with stakeholder views that the FOS is not equipped to deal with mass redress events (“MREs”) under its current structure and this has led to delay, uncertainty and inconsistent outcomes. 

The FCA’s proposals for identifying MREs are discussed below, but the Government will legislate to give the FCA a suite of tools to act quickly, including:

• amending FSMA to exempt the FCA from the usual requirement to consult before pausing the handling of complaints, allowing a swifter regulatory response in the interests of affected customers and firms;
• permitting the FCA, upon determining the existence of an MRE, to direct the FOS to halt work on complaints of that nature, facilitating early intervention and consistent treatment of widespread issues;
• granting the FCA new powers to pause the handling of complaints already submitted to the FOS when a potential MRE arises, helping to reduce inconsistent outcomes; and
• simplifying the requirements for imposing a section 404 FSMA redress scheme, so that they are more likely to be used in practice.

While most of these changes seem sensible, the section 404 changes are potentially concerning. The removal of the requirement to identify an actionable loss represents a material widening of the FCA's powers and raises concerns around due process that do not appear to have been fully interrogated. Firms will be rightly concerned that losses may be imposed where they are seen as convenient ‘deep pockets’, regardless of culpability. 

The Time-bar and the 10-Year Longstop

The Government intends to introduce an absolute 10-year time limit, beyond which the FOS will be unable to consider a complaint. The FCA will, however, have flexibility to create exceptions in DISP for long-term products where a longer limit may be appropriate. Pensions, certain other long-term investments and mortgages are obvious examples.

We have also previously advocated for the six- and three-year time limits to be reviewed. The absence of any longstop has allowed historic complaints to accumulate in ways that create long-tail liability uncertainty for firms, and that bear little relationship to the FOS's intended function as a quick and informal dispute resolution mechanism. A longstop is welcome in principle, but 10 years seems excessive – for the vast majority of cases there is no compelling reason why a complaint cannot be brought (and any issues resolved) much sooner. 

Transparency: Joint Thematic Reports

The Government will legislate to require the FCA and the FOS to produce joint thematic reports on a regular basis. These reports will set out the FOS and FCA's approach to particular types of complaint using illustrative examples drawn from cases the FOS has dealt with. They are intended to be the primary vehicle through which firms and consumers understand how the FOS is likely to approach certain categories of complaint and by which firms will gain an understanding of the FOS’s approach to common issues.

This may mark a shift in emphasis away from reliance on considering individual published decisions when assessing future complaints. However, if reports are high-level or infrequent, the gap will inevitably be filled by continued reliance on individual decisions, whatever the Government's stated intention. 

Structural Changes

The Treasury has proposed structural reforms which, while small in number, represent a significant shift in the FOS’s governance arrangements. 

The Chief Ombudsman will be given overall responsibility for determinations, with the aim of improving consistency across outcomes, but without introducing a formal precedent-based system. The FOS board is to remain responsible for the scheme’s overall effectiveness and governance framework, preserving a clearer internal distinction between operational oversight and adjudication. 

More significantly, the Government also intends to take a more direct role in key appointments, by making the appointment of the FOS Chair a government responsibility and the appointment of the Chief Ombudsman subject to government approval. In principle, these changes should improve FOS accountability, but they will need to be handled carefully if the FOS is to remain, and be seen to remain, an independent dispute resolution body. 

The FCA Proposals

Introduction of a registration phase for complaints

The FCA and the FOS propose introducing a further registration stage between a complaint being referred to the FOS and it being investigated. Complaints would only proceed to the investigation stage where: a final response letter has been received (or the deadline has passed); there are no fundamental objections on admissibility or jurisdiction; there are no regulatory or litigation-related reasons for the case not to proceed; and the complaint meets a minimum evidential standard.

This proposal is a direct response to a well-documented problem of certain claims management companies and other professional representatives bringing poorly articulated or meritless complaints, placing a significant time and resource burden on the FOS. The registration phase, if administered correctly, should go some way to limiting the effectiveness of this CMC tactic. 

Identification of MREs

As referenced above, the FCA has proposed the following criteria for identifying a potential MRE: 

1. it affects a high number of customers; 
2. it has a significant impact on individual consumers, including those in vulnerable circumstances; 
3. it is likely to lead to a high redress bill; 
4. it results in a significant number of firms being unable to meet their redress liabilities; 
5. it leads to a high number of FOS complaints; and/or 
6. it is driven by a systemic or repeated failing that damages the financial system. 

The FCA is not proposing to set rigid thresholds or to require a certain number of criteria to be met before an issue is treated as an MRE, and this flexible approach seems sensible.

Lead Complaints Process

The proposed lead complaints process is designed to streamline the handling of large volumes of similar cases by using a single ‘lead’ complaint to guide the resolution of others.

This should promote consistency and reduce duplication, particularly in high-volume areas. However, its effectiveness will depend on selecting genuinely representative cases. A poorly chosen lead complaint risks distorting outcomes across a wider cohort. There is also a clear risk of delay if related complaints are paused pending the lead decision. The FOS has indicated that it is considering safeguards, including time limits and the ability to release cases where appropriate.

As with the referral mechanism, the success of this process will turn on the detail, in particular, the criteria for selecting lead cases, the treatment of outliers, and the robustness of time limits.

Amendments to Dismissal Grounds

The proposed changes are intended to give the FOS a clearer and wider scope to decline complaints that are better dealt with through the courts or other formal processes.

FOS will be excluded from the new alternative dispute resolution regime being established under the Digital Markets, Competition and Consumers Act 2024. Since the passage of the Alternative Dispute Resolution for Consumer Disputes (Competent Authorities and Information) Regulations 2015, the FOS’s ability to dismiss complaints on the basis that they are more appropriately dealt with by the courts has been materially constrained. The removal of that constraint is sensible and long overdue.

Whilst the expanded dismissal grounds may not impact large volumes of cases, those that may be dismissed are likely to be disproportionately high value, complex and potentially with the greatest contagion risk.  It is appropriate for such cases (e.g. involving complex fraud or highly complex legal questions) to be determined outside of an informal dispute resolution scheme. 

One issue that the Treasury's consultation has not addressed, and which we consider warrants further attention, is the asymmetry of rights between firms and consumers in the FOS process. Consumers remain free to reject the FOS's outcome and pursue their claim through the courts. By contrast, firms are bound by the FOS's determination, subject only to the narrow grounds of judicial review. This may need to be reconsidered, particularly in combination with the money award limit, which at £430,000 makes the FOS an unusually high-stakes informal forum. At these values, the absence of a meaningful appeal right for firms is increasingly difficult to justify, even if it would need measures to avoid misuse.

Our Final Determination 

When tested against the four requirements we identified in our earlier analysis as necessary to achieve greater predictability: 1) clarity of expectation on firms; 2) early identification of emerging issues; 3) prompt and orderly action; and 4) confidence in the decision-making process, the reform package makes genuine progress on all but it is not yet clear whether it will fully deliver on any of them. 

The package contains several worthwhile changes, particularly on the application of the ‘fair and reasonable’ test, mass redress events and the new registration stage, but much of the real work has simply been pushed into the detail of implementation. We will see in practice whether these reforms create a system that is more predictable at the point decisions are being taken by firms, or merely redistribute uncertainty to other parts of the process.