The summer is usually a quieter period for the Financial Conduct Authority (FCA), but this year has been an exception, with a number of consultations and other important developments landing during the supposed “summer break”.
One that stands out is the FCA’s consultation on modernising the redress system (CP25/22), published alongside a parallel paper from HM Treasury. These propose what look to be some fundamental – and ultimately helpful – changes to the much-criticised Financial Ombudsman Service (FOS).
At present, the statutory test applied by the FOS is whether a firm has acted “fairly and reasonably”. This has always been interpreted very broadly, with the result that compliance with FCA requirements has been treated only as a starting point.
Firms could therefore find themselves on the wrong side of FOS decisions even when they had complied with the regulator’s rules.
At present, the statutory test applied by the FOS is whether a firm has acted ‘fairly and reasonably’
The new proposal is that, where FCA rules are “material to the complaint”, compliance with those rules “in a manner consistent with the FCA’s intent” will mean the firm has acted “fairly and reasonably”.
The reference to “intent” does leave some wriggle room, but in most cases this should produce more consistent and predictable outcomes, and potentially reduce the number of cases that reach the Ombudsman.
Alongside this sits a new statutory referral process for the FOS to seek the FCA’s view on cases that depend on the interpretation of FCA rules or have wider implications.
This is intended to ensure greater consistency between the two bodies and to avoid the perception that the FOS is acting as a “quasi-regulator” applying its own standards. It should also help identify wider implications cases earlier and provide clarity more quickly.
There is also a proposal to allow firms or complainants themselves to request that the FOS refers an issue to the FCA. This will need careful management, as overuse could risk slowing the system down.
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Another notable change is the suggestion that individual FOS decisions should no longer be published, replaced instead with a quarterly “lessons learned” document. Proposals to reduce transparency always raise a degree of scepticism – the cynic might ask what is being hidden – but this would mark a clear change in approach.
By contrast, one proposal that will be widely welcomed is the introduction of a longstop. It has long been a frustration that, aside from the three-year rule, there has been no time limit at all for taking a complaint to the FOS.
The suggested 10-year limit – shorter than the 15 years under the Limitation Act 1980 – is a very positive step towards greater certainty, even if “exceptional circumstances” are still allowed.
The consultation papers also emphasise that the FOS is an “informal process” and that one of the aims of reform is to resolve complaints “more quickly and with minimum formality”.
That is laudable, but with the FOS award limit now £430,000 and increasing with inflation, speed should not come at the expense of robustness. Decisions at this level can have a significant impact on firms.
One of the aims of reform is to resolve complaints ‘more quickly and with minimum formality’
If the reforms succeed in reducing the volume of complaints, the FOS should be able to focus more on quality – another frequent concern from firms, who point to inconsistency and high staff turnover. Proposals to curb large numbers of poor-quality complaints from professional representatives should also help here.
Taken together, the package of reforms looks very positive. Firms have been campaigning on several of these issues, particularly the longstop, for years. Implementation will take time, but there is real potential for meaningful and long-overdue change.
Alan Hughes is a partner at Foot Anstey
