The Financial Conduct Authority (FCA) and Financial Ombudsman Service have set out reforms to modernise the UK redress system, aiming to improve consistency, transparency and predictability for firms.
The changes, published alongside the Treasury’s response to its review of the Financial Ombudsman Service (FOS), are expected to have implications for motor finance providers handling customer complaints.
The reforms to the way redress schemes are implemented, run and monitored in the UK arrive ahead of the FCA’s further details on its redress scheme for motor finance later this month.
It said the final rules of any updated scheme will be published in late March and will cover compensation arrangements for regulated motor finance agreements taken out between April 2007 and November 2024 where commission was paid by the lender to a broker.
The FCA has previously estimated that around 85% of 14m eligible consumers will take part in the scheme, which would mean compensation payouts of £8.2bn. At that level of take-up, the estimated costs to firms of implementing the scheme would be £2.8bn, taking the total cost to £11bn.
Greater certainty for firms
A key shift to these latest reforms to redress schemes will see the Ombudsman place greater weight on firms’ compliance with FCA rules when assessing complaints.
The Government has also confirmed plans to legislate to support this approach, meaning firms that meet regulatory requirements should be judged to have acted fairly.
Shanika Amarasekara, chief executive of the Finance & Leasing Association (FLA), said: “We have always thought it a fundamental point that lenders should be able to rely on compliance with the FCA’s rules to mitigate liability in complaints procedures.
“While extremely pleased that our discussions with all parties – the FOS, FCA and Government – have yielded this result, it is nonetheless disappointing how long the industry has had to deal with a quasi-regulator.”
Changes to complaints handling
The FCA and FOS are also introducing structural changes to how complaints are handled, including a new two-stage process to filter cases before they are formally investigated.
This is intended to reduce poorly evidenced or speculative complaints reaching firms.
Further changes include expanded grounds for dismissing complaints and the removal of “good industry practice” from the Ombudsman’s decision making test, limiting assessments to rules in force at the time of the issue.
Industry response and impact
Phil Smith, head of redress at Broadstone, said the reforms should provide greater certainty for firms while improving outcomes for consumers.
He said: “The Government’s response marks an important step towards bringing greater clarity and consistency to the UK’s redress framework.
“Ensuring that the FOS places greater weight on firms’ compliance with FCA rules should provide much-needed certainty for firms, while the proposed referral mechanism between the FOS and FCA could help resolve areas of regulatory ambiguity and inconsistency.“A time limit of 10 years for bringing complaints to the FOS may enable firms to improve future planning and increase investment.”
Smith said recent large-scale cases such as PPI and the motor finance investigation highlight the need for a more structured framework for mass redress events, adding that earlier identification and resolution of issues should benefit both consumers and firms.
He added: “A system that allows issues to be identified and resolved earlier should benefit consumers through faster and more consistent outcomes, while also helping firms manage costs and avoid problems escalating into industry-wide redress programmes.
“Greater transparency through thematic reporting and a clearer structure for FOS decision-making should also help firms better understand how complaints will be assessed.
“Taken together, these reforms aim to strengthen confidence in the redress system by making it more predictable, more transparent and better aligned with the UK’s regulatory framework.”
New reporting requirements
The FCA has also issued finalised guidance on firm led redress exercises and introduced new reporting requirements under SUP 15.
From June, finance firms will be expected to notify the regulator earlier where potential systemic issues emerge, including where redress costs could exceed £10 million or complaints volumes rise significantly.
The regulator said the changes are designed to encourage earlier intervention by firms and faster resolution of issues, reducing the risk of large-scale compensation schemes developing.
The consultation on further reforms closes on May 11, with additional policy updates expected later this year.