Treasury to Review Financial Ombudsman Service Amid Concerns Over Regulation

The Treasury has announced a review into the Financial Ombudsman Service (FOS), following concerns that the body has overstepped its powers as a complaints adjudicator into the realm of a quasi-regulator. The investigation aims to determine if the service has wrongfully imposed today’s regulatory standards on past practices, particularly in the motor finance industry. This could lead to substantial compensation claims that have the potential to cost billions of pounds.

Central to the review is the issue of discretionary commissions in the car finance market. Complaints submitted to the FOS have uncovered widespread claims of unfair practices, with a December quarter reporting nearly 16,000 car finance-related grievances. Two upheld complaints have already prompted an investigation by the Financial Conduct Authority (FCA) into the use of commissions between 2007 and 2021. Meanwhile, legal rulings are further intensifying the liability burdens placed on the finance sector, raising alarm among industry leaders.

The government has highlighted the need for reforms in regulatory frameworks to ensure economic growth is not stifled by what it perceives as unnecessary bureaucracy. Chancellor Rachel Reeves emphasised the benefits of alleviating constraints on businesses, positioning the reforms as a way to drive greater investment and job creation. The Treasury is also examining whether claims management companies are exploiting regulatory uncertainties to target businesses, causing instability in the financial market.

Stephen Haddrill, Chief Executive of the Finance and Leasing Association, has welcomed the review, echoing widespread concerns that firms are subjected to conflicting FCA rules and FOS interpretations. He noted that compliance under such circumstances remains an onerous and costly process, creating substantial risks for the sector. The potential fallout could mirror the payment protection insurance scandal, which cost banks over £53 billion in redress schemes.

The Treasury’s efforts extend to the creation of a concierge-style assistance service tailored for international financial firms to navigate UK regulations more efficiently. This initiative is part of broader plans targeting systemic reform across a wide spectrum of regulatory bodies, including the Financial Conduct Authority, Natural England, and the Health and Safety Executive. The aim is to ensure regulators not only enforce rules effectively but also support growth and innovation within the economy.

The FOS has expressed its approval of the review, stating that it will help create a more modern dispute resolution framework. With recent leadership changes at the organisation and mounting external pressures, the review is widely considered necessary to instil clarity, fairness, and stability into the wider regulatory ecosystem. Industry watchers are now awaiting the supreme court ruling next month, which could carry further implications for the sector.