Regulation for growth — Mansion House & Leeds reforms

In my last article, I wrote about the need for smarter regulation – regulation that supports productive investment, innovation and growth by being clear, predictable and fair. Growth doesn’t just depend on capital and ideas – it depends on confidence in the rules of the game. The Treasury’s consultation on reform of the Financial Ombudsman Service (FOS), alongside the FCA/FOS joint proposals, is a good example of how that principle is being tested. Right now, the way consumer complaints are resolved through the Financial Ombudsman Service (FOS) creates uncertainty that deters investment, ties up capital, and drives up costs. Firms can face huge, unpredictable liabilities years after the fact; consumers see uneven outcomes that undermine trust.

If we want regulation to support growth, we need a complaints and redress system that is predictable, consistent, and rooted in the rule of law. That’s why the Treasury’s proposals on FOS reform matter: get this right, and we lower the risk premium on doing business in the UK; get it wrong, and uncertainty continues to weigh on competitiveness. At first sight, these reforms look promising: a recognition that regulatory certainty is essential for both consumer confidence and market competitiveness. But as with many regulatory initiatives, the detail matters. And unless we confront the rule-of-law and due-process issues head on, there is a real risk this package will create more uncertainty, not 0less.

The Key Proposals

The Treasury consultation and the complementary FCA/FOS paper propose a package of reforms which together would be the most significant reform of the FOS since its creation under the Financial Services and Markets Act 2000:

Alignment of FOS with FCA rules – adapting the statutory “fair and reasonable” test by which the FOS determines complaints so that “where conduct complained of is in scope of FCA rules, compliance with those rules, in accordance with the FCA’s intention for what those rules should achieve, will mean that the FOS is required to find a firm has acted fairly and reasonably”. The FCA would be able to publish its own interpretations to guide FOS decisions.
A framework to clarify the roles of the FCA and the FOS in relation to wider implications issues and mass redress events – obliging the FOS to refer potential wider implications issues to the FCA and enabling parties to a complaint to request the FOS refer such an issue to the FCA.
A more flexible mass redress event framework intended to enable the FCA to investigate and respond to mass redress events more quickly and effectively, with the object of improved consistency for consumers and reduced disruption to markets.
Interest on compensation – moving away from the current flat statutory 8% simple interest towards a rate more closely linked to market conditions (e.g. Bank Rate plus a margin).
Time limits – introducing a hard “long-stop” on complaints, to prevent claims arising indefinitely, with an absolute time limit legislation requiring complaints to be brought within 10 years of the conduct complained of.
Case fees and funding changes – exploring ways to ensure funding remains sustainable while keeping FOS accessible.
Process clarifications – some improvements around timeliness, transparency and consistency of FOS decisions.

What’s to be Welcomed

There is much to be welcomed in what is being proposed – some of it potentially significant in terms of reducing unnecessary costs and burdens on industry:

Recognition that certainty matters – tying FOS outcomes more closely to FCA rules should, in principle, create a more predictable environment for both firms and consumers. For firms, it reduces the risk of surprise outcomes that feel disconnected from the regulatory framework; for consumers, it reinforces consistency with the standards they are entitled to expect. The objective should be to reduce the risk of unpredictable and large latent liabilities emerging for financial institutions years after the event as a result of re-interpretation of what is “fair and reasonable”. Views can reasonably differ as to the extent to which financial institutions have brought these problems on themselves in the past. However, there can be little doubt the attractiveness of the UK’s retail financial services market for investment has been negatively impacted by concern around the way in which such large and unpredicted liabilities have emerged. Whether what is proposed will materially change that is a different question that I will come on to. Helpfully though, the Treasury are proposing that the FOS will be required to refer issues of law or regulation that have wider implications to the FCA for consideration and to ensure that the FCA has the ability to refer legal issues to the courts for binding determination. This should reduce the scope for the FOS being required to make new law or regulatory policy through the determination of complaints.

The move away from 8% interest is one of the most financially significant changes. A market-based rate will reduce distortions and better reflect economic reality. Interest is supposed to compensate for loss of opportunity, but the FOS simply borrowed the courts’ 8% benchmark and applied it as a blanket rule. In fact, the courts themselves rarely awarded 8% outside narrow circumstances, and in practice used much lower, compensatory rates. Over time, particularly in older cases, 8% awards have become punitive, handing complainants far more than they could ever reasonably have expected from any investment. The proposal to drop it is welcome news.

Time limits – the introduction of a clear long-stop is a welcome development. But certainty only comes if the FOS also takes a more rigorous approach to the concept of “constructive knowledge.” Without that discipline, firms may still face the prospect of complaints being entertained many years after the relevant events. Nevertheless, imposing long-stop is a significant improvement the current position in that it should eliminate the risk of potentially indefinite liabilities.

Commitment to accessibility – preserving the FOS as a speedy, informal alternative to litigation remains essential. The ability for consumers to resolve disputes without incurring the cost and delay of court proceedings is central to the scheme’s value, and reforms should be careful not to erode that accessibility in pursuit of other objectives.

The fair and reasonable test is not the real issue

The headline change is the proposed adaptation of the “fair and reasonable test”. This is helpful, but only marginally so in my view. It suggests that where firms have acted in accordance with the meaning and intent of FCA rules in force at the time the FOS will be required to find their conduct fair and reasonable. However, in practice this is likely to provide only a marginal improvement in certainty/predictability for firms: Few FOS decisions turn solely on the “fair and reasonable” test in practice. Much of the FCA Handbook is deliberately high level, open-textured requirements – not just the Principles or the Consumer Duty but various other standards littered around the rule book. These rules rely on broad standards that leave wide scope for interpretation. The adapted “fair and reasonable” test will not address cases where the FOS is applying and (re)interpreting FCA rules (although enabling the FCA to issue guidance on interpretation that the FOS is required to follow or take into account might help).

For the same reason the (welcome) proposal to enable the FOS or the parties to a complaint to require referral of legal or rule interpretation issues to the FCA for guidance may run into practical difficulties:

One of the proposed requirements is that “there must be ambiguity or room for interpretation in how relevant rules should apply to the types of issues raised by the complaint”. I fear policy makers may be underestimating the scope for finding such “ambigiuity or room for interpretation” (and lawyers’ ability to characterize it as such). Ambiguity and room for interpretation are endemic across the FCA Handbook. This could in practice result in an unmanageable number of referrals to the FCA.

It is also unclear to what extent the process that is being proposed for the FCA to consider such interpretations has sufficient process protection built in - including for those directly affected by such decisions - to ensure good quality determinations and minimise legal challenge. Consulting the Consumer Panel and Practitioner Panel behind closed doors is unlikely to command confidence of firms or consumers. Without stronger transparency, there is a risk that the FCA’s interpretive views become de facto law arrived at through a secret process — undermining rather than enhancing confidence. Of course, there is a difficult balance to be struck here - the process needs to support the principle that the FOS is a speedy, cost efficient way of resolving consumer complaints. But if participation and transparency is lacking in how the FCA arrives at its interpretations of its rules then these issues will frequently become bogged down in judicial challenges of the kind we have seen repeatedly over the years (pensions mis-selling, mortgage endowments, PPI and motor finance).

Meaning vs Intention

The consultation refers to FOS being guided by what the FCA “intended” its rules to mean. That is careful and curious wording and the consultation paper does not explain why this phrase has been chosen.

Courts and tribunals interpret FCA rules according to their actual meaning, taking account of purposive interpretation mandated by the Handbook. What was intended is relevant where the meaning of the rules is unclear. So why is so much attention being focussed here on FCA's intent rather than the rules themselves? And does the distinction have any practical implications for firms?

Using FCA intent may be aimed at reducing the scope for judicial challenge – the meaning of rules is something that can be challenged through judicial review whereas one might take the view that the FCA can give an authoritative view on what its own intention was in writing the rule and court should be slow to challenge it. If that is the thinking it risks backfiring: making the FCA intention the central question risks drawing the parties to a complaint and the regulator into evidencing (through contemporaneous material) the FCA’s past state of mind as a question of fact – often a difficult task - which risks increasing uncertainty and scope for judicial challenge.

Other laws as a source of uncertainty

The FCA rules and guidance are by no means the only source of uncertainty that firms face in the determination of FOS complaints. Other aspects of the law also need to be considered by the FOS when determining what is “fair and reasonable”: For example, the “unfair relationships” provisions of the Consumer Credit Act (section 140A tested in the Supreme Court in Plevin v Paragon [2014] UKSC 61) widened the scope for lenders liability to borrowers for “unfair relationships”, which term was left ill-defined in statute.

As the PPI and now motor finance experiences show, lenders face huge uncertainty from these provisions and these provisions have to be taken into account by the FOS in cases involving lenders. In the motor finance cases, for example, while the Supreme Court in Hopcraft and others has brought much needed clarity to the scope of fiduciary duties, they left untouched the aspects of those decisions that relied on section 140A CCA (see Hopcraft & Anor v Close Brothers Ltd (conjoined with Johnson and Wrench)[2025] UKSC 33).

Treasury has consulted on broader CCA reform, and has indicated that 140A will be within the scope of its forthcoming review of consumer rights - identifying where similar outcomes could be delivered by the FCA rulebook, or where they will need to be retained or updated in legislation. This potentially provides a further opportunity to inject much needed certainty into the regime (see HM Treasury, Consumer Credit Reform Phase 1).

Graffiti on the statute/rule book

There are two bigger, broader questions here that reform of the FOS process alone cannot address, but which drive a significant degree of regulatory and legal uncertainty for businesses:

Does principles-based regulation, as it has been applied in the UK over the last 30 years and more, deliver sufficient certainty and predictability to support growth?

Should government review the wider range of other consumer protection provisions scattered across the statute book which impose vague standards of fairness on business that are very difficult to interpret and apply in any predictable fashion? While they were all legislated for with good intent (some through EU legislation that the UK can now move away from, others through domestic initiatives) they have often given rise to unintended and (most importantly) unpredictable outcomes.

The littering of the statute book with vague criminal offences around harassment and anti-social behavior has resulted in the police having to make impossible judgements on the streets, on social media and in airports as to the boundaries of the right to free speech. A similar process has been at work in financial services – vague, woolly standards of fair dealing imposed on business are graffitied onto the statute book and the FCA rules, leaving courts, regulators and the FOS making judgements on a case by case basis as to what is or is not a breach. This is a recipe for arbitrariness and hindsight driven decisions regardless of the process or forum. So while the proposed adaptation of the FOS "fair and reasonable test" and other reforms would be a step in the right direction, only looking at the quality of the underlying rules and standards will really address the problem.