The House of Lords Financial Services Regulation Committee has called for sweeping reforms to the Financial Ombudsman Service (FOS), warning that its current role as a de facto regulator is undermining certainty, constraining growth and damaging the UK’s international competitiveness.
In a report published today (13 June), the committee said the FOS’s ability to set regulatory precedents — without formal accountability or alignment with the Financial Conduct Authority (FCA) — is creating unacceptable uncertainty for financial services firms and investors.
It argues this regulatory ambiguity has contributed to a “risk premium” on UK financial firms, making the market less attractive to international investors.
“The tension between FCA regulations and FOS decision-making is a long-standing issue… action is long overdue,” the report states.
Peers said firms should be confident that complying with regulation and the law is sufficient to avoid retrospective sanction or mass redress, but that is “currently not guaranteed.”
They argued the FOS’s growing role in interpreting regulation has blurred the lines between redress and regulation, straying from its original remit of swift, informal dispute resolution.
The committee recommended:
- Reviewing and potentially removing the precedent-setting effect of FOS decisions, particularly in mass redress cases;
- Allowing the FOS to pause decisions while awaiting FCA guidance on complex regulatory issues;
- Legislative reform to bring the FOS’s remit back in line with its original purpose.
“The FOS’s remit must be brought closer to its original mandate… it cannot continue to function as a quasi-regulator,” the report states.
The committee also criticised the FCA for failing to distinguish between wholesale and retail firms, and for maintaining “cliff-edge” regulatory thresholds that penalise smaller firms as they scale.
It urged the FCA and Bank of England to explore adjustments to support proportionality and innovation.
On the Consumer Duty, the report warned that limited clarity and inconsistent guidance are pushing firms into overly cautious compliance. It called on the FCA to:
- Clarify expectations, particularly around which markets and customers are in scope;
- Streamline the rulebook to reduce duplication and regulatory burden.
Peers warned that if the FCA fails to address these concerns, the FOS may again step in to fill the gap, leading to further uncertainty and inconsistent application of the Duty.
