The FCA/FOS Consultation – “Modernising the Redress System” A Chance for Reform?

At a Glance 

On 15 November 2024, the FCA and FOS jointly published a call for input as to how the FOS might improve its redress framework (the CFI). The FCA and FOS consider the current redress framework is effective for individual complaints. The CFI is therefore focused on how the FOS can adopt “a more effective and efficient redress framework for the future” in dealing with mass redress events. 

The CFI is timely given the recent influx of claims in respect of motor finance and consumer claims against banks in respect of APP fraud (see our blog on APP Mandatory Reimbursement Reform, here). The FOS reported in October 2024 that the number of complaints it received in the first six months of 2024 was up 40% compared with 2023. 

We are working with financial services firms to prepare representations in response to the CFI. Please make contact with the authors of this blog if you would like our support. 

What are the FCA and FOS’s concerns with the current FOS regime? 

The CFI identifies various challenges to the FOS’s current operating framework in mass redress scenarios, including those set out below.  

Unexpected volume of FOS complaints

Both the FOS and financial services sector are put under strain when large volumes of complaints are lodged with the FOS regarding the same issue. Respondents generally have 8 weeks to consider a complaint before they are timed out, and the complainant can then rely on their FOS referral rights. A mass redress event can compromise financial institutions’ capabilities to deal effectively with claims before they are lodged with the FOS. 

Similarly, mass redress events delay outcomes for consumers who may suffer from delayed compensation, or lose out on compensation altogether. This is particularly problematic for SME complainants with liquidity issues or distressed consumers. 

The recent increase in complaints in respect of car finance threatened to overwhelm the FOS and has significantly disrupted the motor finance industry. As of May 2024, the FOS had around 20,000 open complaints related to car finance commissions. In response to increasing volumes of complaints brought by claims management companies, the FCA has extended the pause on motor finance complaint handling.

Inconsistent interpretation

The CFI acknowledges that there is a perception that the FOS and FCA can produce inconsistent outcomes. The “fair and reasonable” jurisdiction of the FOS gives it significant latitude in decision making but can lead to it developing its own approaches to issues which diverge from the FCA’s. 

The CFI also recognises that there has been a movement away from prescriptive rules to “outcomes focused regulation,” the most obvious example being the Consumer Duty. There is arguably a higher risk of inconsistency in approach between the FCA and FOS given the very high level nature of the components of the Consumer Duty.[1]

Claims management companies agitating complaints

There are concerns that claims management companies are issuing high volumes of complaints which are not properly evidenced or substantiated. Financial institutions will be aware that many complaints are often based on a template format, are not specifically adapted to the individual complainant in question and adopt a “kitchen sink” approach. This can create additional difficulties for financial institutions in responding. The FOS has announced that it will introduce a £250 fee for each legally-represented case, reduced to £75 if the outcome is in the consumer’s favour. The CFI invites further proposals to mitigate high volumes of unmeritorious claims. 

What are the FCA / FOS seeking input on?

In light of the challenges identified in the CFI, the FCA / FOS are seeking input on the following: 

• ways to modernise the current redress framework;
• problems that firms, consumers and their representatives face in relation to mass redress events and the redress schemes;
• proposed improvements to the redress framework to enable better management of mass redress events to ensure better outcomes for consumers, firms and the market; and
• proposals to ensure consistency on views of regulatory requirements between the FCA and the FOS.

What options have the FCA / FOS proposed for reform? 

The CFI proposes options for reform which are categorised into short / medium term measures and long term measures. 

Short/medium term options include: 

• changes to the timelines for regulated firms to respond to a claim under the DISP rules and for complainants to make a FOS referral; 
• the re-introduction of a two-stage internal dispute resolution process with the regulated firm before any FOS referral; 
• changes to what the FOS should consider in deciding on a “fair and reasonable” outcome; and/or
• changes to the grounds on which the FOS can dismiss a claim under DISP 3. 

Longer term options include:

• increased cooperation between the FOS and FCA, potentially allowing the FOS to pause its assessment of a complaint pending a published view from the FCA; and/or
• a specific framework of rules to apply to mass redress events. 

What other options are there? 

The CFI invites proposals for any other changes which might be made to improve the framework. That provides a welcome opportunity for financial institutions to not only engage with the options proposed in the CFI, but also to develop their own proposals.

In our experience, there are two root cause issues with the current FOS regime in mass redress situations. 

The first is the absence of any effective mechanism for the FCA, the FOS, affected financial institutions and other stakeholders to develop methodologies for the determination of redress in mass claim scenarios. In practice the FOS often develops internal rules of thumbs or standards which are then applied across large volumes of cases, but without any effective process for firms to challenge those rules or standards as they are formulated within the FOS outside of individual complaints or for the FCA to influence them despite their potential prudential impact and potential for significant divergence from the FCA’s own standards. Firms may wish to consider advocating for a more effective mechanism to engage with the FOS and FCA on the FOS’s approach to standard setting. 

The second is the need to ensure that redress in mass claim situations goes to benefit consumers and not those claims management companies which produce copycat template claims that involve no substantial work. The introduction of penalty provisions for claims management companies which repeatedly bring baseless claims (for example by requiring such firms to pay all the FOS fees for such claims) could be effective and would help reputable claims management companies to differentiate themselves from those with an exploitative business model. A refusal by the FOS to engage with claims management company issued complaints that have not been reasonably particularised could also assist in ensuring that such firms undertake proper work for the fees they charge consumers.

What are the next steps?

After the CFI closes on 30 January 2025 the FCA/FOS intend to publish a summary of responses in the first half of 2025. The summary of responses should include next steps and proposed changes to the FOS redress framework to be made in the short, medium and longer term. 

[1] Journal for International Banking and Finance Law (Volume 37, March 2022).