How FOS reforms will affect financial services firms

What happened?

Following a major public consultation with over 600 respondents, the UK government has set out plans to reform the Financial Ombudsman Service (FOS). The reforms aim to bring greater clarity and predictability to consumers and firms by introducing significant structural and legislative changes to FOS processes.

Key legislative proposals include revising the FOS’s ‘fair and reasonable’ test, creating a formal referral process back to the FCA for rule interpretation, establishing a ten-year absolute time limit for complaints, and empowering the FCA to better manage mass redress events.

Why does it matter?

For years, the ‘fair and reasonable’ test granted the FOS wide discretion, letting it bypass strict rule compliance to focus on broader interpretations of fairness, which created unpredictability for firms. The proposed reforms narrow this discretion; if a firm complies with relevant FCA rules, the FOS will normally be required to find that it acted reasonably.

However, this is not a pure rules-based shift. Firms must still act in line with regulatory intent, and the FOS will apply its test within a tighter, more structured framework. A formal referral mechanism also means the FOS must refer ambiguous rules back to the FCA, cementing the regulator as the sole authority on rule interpretation.

Who is affected?

These reforms direct impact all regulated UK financial services firms, their complaints teams, risk management committees, and legal departments. The changes apply across wealth management, lending, general insurance, and motor finance sectors.

Key risks

• Regulatory Exposure: Issue escalation from individual complaints directly to industry-wide FCA scrutiny via the new referral mechanism.
• Misaligned Interpretations: Over-reliance on a rigid, literal reading of FCA rules rather than aligning internal procedures with the regulator’s broader intent.
• Escalation Risk: Failure to identify and resolve systemic product or customer issues early, before they trigger mass redress actions.

Actions to take

1. Reassess Complaints Frameworks: Evaluate how your complaints-handling processes align with the spirit and intent of FCA regulations.
2. Document Policy Interpretations: Evidence and document the regulatory rationale behind internal policy decisions and product terms.
3. Strengthen Feedback Loops: Ensure tight integration between complaints data, conduct risk monitoring, and board-level oversight.

Wider implications

The closer alignment between the FOS and FCA signifies a more integrated regulatory regime. Individual complaints can now quickly scale into regulatory scrutiny, meaning compliance and complaints departments can no longer operate in isolation.

Recommendations

Firms should commission independent reviews of their complaint-handling, governance, and conduct risk frameworks to ensure they will withstand the structured oversight of the reformed FOS.

TCC supports firms in assessing how their current complaint-handling, governance and conduct frameworks will stand up to regulatory scrutiny – and help to ensure compliant delivery. As the role of the FOS becomes more clearly defined and FCA-aligned, seeking external expertise is a prudent step.