All change: Reform of the UK Financial Ombudsman Service and the redress system

Introduction

HMT has published its response to a consultation it launched in July last year with proposals to make changes to FOS (the “HMT Response”). The changes are aimed at preventing FOS from acting as a quasi-regulator and providing greater regulatory coherence with the FCA. According to the government press release announcing the changes, the “[l]andmark reforms will return [FOS] to its original role as a fast, impartial complaints body”. The changes will be implemented through primary or secondary legislation when parliamentary time allows.

The FCA and FOS also jointly published Consultation Paper CP26/9: Modernising the Redress System (“CP26/9”) aimed at simplifying the redress framework, in particular to better deal with “mass redress events”. In CP26/9, FOS further consults on certain proposals first put forward in the FCA/FOS joint consultation published last July (“CP25/22”) with a deadline for responses of 11 May 2026.

Also in CP26/9, the FCA sets out its final policy position on other proposals first set out in CP25/22. These require changes to rules and guidance in the FCA Handbook which can be implemented ahead of legislation. Some of these changes took effect on 17 March 2026, and some will take effect on 1 June 2026. We have highlighted effective dates throughout this publication.

Separately, the FCA has published Finalised Guidance on Good and Poor Practice on identifying and rectifying harm (FG26/2).

This article provides a detailed analysis of the HMT Response and CP26/9.

The HMT Response

Having considered the feedback received, the government intends to legislate (largely as consulted on) to:

• Adapt the “fair and reasonable” test used by FOS to determine cases, to set out that where firms have met their obligations under relevant FCA rules, FOS will be required to find that a firm has acted fairly and reasonably. FOS will need to consider FCA rules consistent with the FCA's purpose for what those rules should achieve. To this end, FOS will use relevant materials issued by the FCA - such as any related guidance and policy statements - to help determine the FCA’s intended purpose for the rule. In complaints not related to FCA rules (i.e. maladministration complaints) FOS will continue to make determinations as to what is fair and reasonable in the usual way.

  The government also intends to introduce a power that would allow it to specify that particular FCA rules are not to be included in the adapted fair and reasonable test or should be dealt with in a different way. The HMT Response states that this is particularly relevant when considering the application of the high-level FCA Principles for Business, including the Consumer Duty. Given the FCA is increasingly moving towards less prescriptive, more outcomes-focused regulation, one wonders the extent to which FCA rules will end up falling outside the adapted fair and reasonable test.

• Introduce a referral mechanism between FOS and the FCA to require FOS to seek a view from the FCA on matters of interpretation where FOS considers there may be ambiguity in FCA rules relevant to a complaint, or where it considers an issue raised may have wider implications across the financial services industry. The FCA will be required to provide a response to FOS within 30 days (except for more complicated issues where an initial holding response from the FCA will be permitted while it investigates the issue further). The criteria for FOS to make referrals to the FCA will be set out in secondary legislation and will aim to ensure that the referral mechanism is only used where necessary, to avoid unmanageable volumes of repeated referrals on the same issue. FOS’s decision on whether a matter should be referred to the FCA will not be subject to appeal.

  The legislation will also provide that parties to a complaint will be able to make a request to FOS for a view to be sought from the FCA on the interpretation of its rules, but it will be for FOS to approve such requests in accordance with the above criteria.

• Introduce an absolute time limit of 10 years for bringing complaints to FOS, while giving the FCA the ability to make limited exceptions focused on particular features of products (expected to be longer-term products such as pensions). The FCA says that it will set out its proposals on exceptions to the time limit in due course.
• Give the Chief Ombudsman overall responsibility for FOS determinations in order to ensure greater consistency in decision-making. The appointment of the Chief Ombudsman will be subject to approval by HMT and he/she will be accountable to FOS’s Board. The government will also legislate to make the Chair of FOS a government appointment, to ensure appropriate oversight and accountability.
• Require FOS and the FCA to publish regular thematic reports which provide useful information and clarification on FOS’s approach to certain types of complaint, using illustrative examples from cases FOS has dealt with. The publication of reports of individual FOS determinations will continue for the time being, but the HMT Response stresses that FOS determinations are not intended to have a precedent-setting effect and should not be used by firms or consumers as a guide to the way in which FOS deals with certain types of complaint. (On this, see below under “Read-across rules”).
• Ensure the FCA has the tools it needs to respond quickly and effectively to mass redress events (“MREs”) – the criteria for which is set out in CP26/9 (see below) - in cases where such an intervention is appropriate. To this end, the government will legislate to:
  • Allow the FCA to pause complaints-handling timelines that apply to firms and consumers without public consultation.
  • Allow the FCA to direct FOS to pause complaints determinations, and refer relevant complaints at FOS back to firms for them to consider under the terms of a redress scheme under section 404 of the Financial Services and Markets Act 2000 (“FSMA”).
  • Simplify the threshold conditions in section 404 of FSMA that must be met before the FCA can impose an industry-wide redress scheme. The HMT Response says that by linking the test for a section 404 scheme to the FCA’s operational objectives, the FCA’s use of such schemes will be made more coherent with the overall regulatory framework for financial services.

The HMT Response confirms that it will not be taking forward the proposal to make FOS a subsidiary of the FCA in light of concerns that this might undermine FOS’s independence and impartiality, which could dilute public trust in FOS. The HMT Response also confirms that it remains the government’s view that there should be no means to appeal FOS determinations to the courts.

CP26/9

Proposals for consultation

FOS is proposing to make the following changes to its rules, on which it is inviting feedback:

• New registration stage for FOS complaints

  Complainants to FOS will be required to go through a two-stage process:

  • Pre-registration: FOS will assess whether the case is ready for investigation by asking complainants and firms to provide specific information within set timeframes. This information will be limited to what is necessary for the assessment of “case readiness” (e.g. explaining what the case is about and identifying the material facts and evidence) and not for a full investigation.

    At this stage FOS will confirm whether it has jurisdiction, or will close the case if it clearly falls within a dismissal ground. (See below under “Updated dismissal grounds”). FOS may also pause cases at this stage, for example where wider legal or regulatory issues require further consideration, such as in the case of suspected MREs.

  • Registration: This is when full investigation of the complaint by FOS begins, as per the current regime. Note that there may be cases which may move back to the pre-registration stage if the case requires regulatory input from the FCA, particularly on suspected MREs.

  The aim of this proposed new process is that only well-formed, appropriately evidenced complaints that are ready to be investigated are registered. FOS plans to develop and publish supporting guidance and explanatory materials – such as flowcharts and case studies - to support this proposed change in due course, including guidance on the information it requires in order to assess “case readiness”, recognising that the information required will vary by product and complaint type.

  In response to concerns that having the two-stage process may end up excluding complaints unfairly, CP26/9 says that there will be additional safeguards for accessibility and people in vulnerable circumstances.

  The question of differential fees (e.g. whether fees should be lower if a case gets paused at the registration stage) will be consulted on separately in a consultation on the funding models in the next FEES cycle (November 2026).

• Updated dismissal grounds

FOS is proposing to update the grounds on which it can dismiss a complaint without considering its merits (as currently set out in section 3 of DISP). It is either introducing new grounds, amending existing grounds or reintroducing grounds that had been previously removed.

Most of the changes are relatively minor and aim to make it easier for FOS to dismiss cases, particularly in situations which are just beyond the margins of its current rules and where FOS either may have experienced issues in the past or anticipates that it may do so.

The proposed new and updated grounds for dismissal include the following:

• The complainant has acted vexatiously, abusively or otherwise unreasonably in engaging with FOS.
• The respondent firm has already reviewed the subject matter of the complaint in accordance with any specific requirements imposed by the FCA or other regulator – including, if appropriate, making an offer of redress.
• The respondent firm has reviewed the complaint in line with the terms of a consumer redress scheme, which includes single-firm redress schemes under section 55L of FSMA and multi-firm redress schemes under section 404 of FSMA. It does not include complaints about the way in which the firm applied the scheme, with the FCA making clear that this includes complaints regarding a firm’s compliance with the FCA’s motor finance redress scheme.
• The subject matter of the complaint has previously been considered by FOS, unless material new factual evidence - likely to affect the outcome - subsequently becomes available to the complainant. This updates the current rules by limiting the exception to new material evidence that is factual in nature. The change is intended to prevent complainants from re opening cases on the basis that the legal or regulatory landscape has changed since the original complaint, and that the complaint might now be decided differently.
• Issues relevant to the subject matter of the complaint have been dealt with, or are being dealt with, by a comparable complaints scheme, regulator or law enforcement body or dispute resolution process. This expands current rules to cover a wider range of situations where other relevant bodies may be carrying out an investigation into issues related to the same complaint – and whose findings could have a bearing on FOS’s outcome.
• FOS considers that the complaint would be more suitably dealt with by another complaints scheme. This is not a new ground but what has changed is that the requirement for FOS to procure the complainant’s consent to refer their complaint to another scheme has been removed.
• The complaint relates to employment matters from an employee of the respondent firm.
• The complaint is solely about investment performance – and does not include any allegations of wrongdoing on the part of the firm.
• The complaint relates to the conduct of the respondent firm in its capacity as the trustee of a private trust or as an executor under a will. Such issues are to be resolved in accordance with the relevant trust or testament documents, which is beyond FOS’s remit.
• There are other compelling reasons why it is inappropriate for the complaint to be dealt with by FOS, which gives FOS “catch-all” discretion to dismiss cases on their individual circumstances. Guidance will provide a list of illustrative situations where such compelling reasons may arise – such as where the complainant has not suffered material financial loss, or does not have any reasonable prospect of success, or the respondent firm has already offered compensation which is fair and reasonable - most of which already exist in the current rules albeit not as examples of “compelling reasons”. One new example is where the compensation sought by the complainant would significantly exceed FOS’s award limit. In such situations, FOS can recommend that the firm pays the excess but cannot require them to do so – and a complainant who accepts the award cannot sue for the remainder. FOS says that it wants to avoid prejudicing a complainant’s legal rights.
• Clearer guidance on the fair and reasonable test

In anticipation of the incoming legislative change to the “fair and reasonable” test (see above under “The HMT Response”), FOS is proposing to make an amendment to the related rules in DISP. DISP currently says that, in considering what is fair and reasonable, FOS will take into account relevant law and regulations (including FCA rules) and good industry practice. FOS proposes to amend this so that FOS will now take into account what the relevant law and regulations were at the time of the act or omission that is being complained about – and will no longer take good industry practice into account. These changes should help address industry concern about FOS interpreting the current law and regulations retrospectively. The removal of the reference to good industry practice is to address concerns that the concept is subjective and may be misaligned with FCA rules and guidance.

The deadline for feedback on the above proposals is 11 May 2026. A policy statement is likely to be issued later in 2026 and the rules should come into effect shortly thereafter.

Finalised FCA rules and guidance

In CP26/9, the FCA also sets out its final position on issues previously consulted on in CP25/22.

• Updated guidance on when firms should report emerging issues to the FCA

Guidance in SUP 15 will be updated from 1 June 2026 clarifying when firms should report emerging redress issues to the FCA under Principle 11.

The SUP 15 guidance will say that a firm must notify the FCA of any circumstances which it considers:

• may adversely impact at least 40% of the customers of a financial service or product that the firm provides, or may provide, to those customers.
• may lead to the firm paying a “significant total financial sum” in redress if the firm or FOS upholds a complaint against the firm, or a court upholds a related claim against the firm. In this context, a significant total financial sum will be either £10 million or more, or 50% of the firm’s annual revenue for the firm’s last financial year in respect of that financial service or product.
• may lead to the firm paying financial sums in redress that will negatively impact the firm’s capital adequacy or solvency.
• has led, or may lead, to a comparatively high number of complaints received by the firm in relation to a financial service or product. For this purpose, a “comparatively high number of complaints” is where the firm records an increase in the number of complaints received for that product or service as compared to the number of complaints received by the firm as set out in its most recent report provided to the FCA under DISP 1.10 and this increase, in the firm’s opinion, demonstrates potentially recurring or systemic problems in the provision of, or failure to provide, a product or service.
• may lead to substantial financial loss for two or more consumers of a financial service or product. For this purpose, a “substantial financial loss” is where it appears that an individual consumer would lose more than £10,000.

The FCA says that firms should use their judgement when deciding whether to report issues that may indicate a recurring or systemic problem which the FCA would want to know about, and this applies even when the associated threshold is not met. The FCA says that if the firm fails to report an issue when it is clear they should have done, it will take appropriate supervisory or enforcement action.

Where firms identify an issue outside the scope of SUP 15 they should consider the FCA’s finalised non-Handbook guidance (FG26/2) which helps firms identify and rectify redress issues.

• Updated rules for improved efficiency by FOS and the FSCS

The FCA is making a number of minor changes to the rules in DISP and COMP that are intended to improve efficiency by FOS and the Financial Services Compensation Scheme (“FSCS”).

The changes to DISP include adding guidance on how firms could fully cooperate with FOS, saying that full cooperation includes complying with any directions on evidence or requests for information from FOS to assess a complaint. Firms are also required to provide, when acknowledging complaints, information about the deadline by which they have to send the complainant a final response letter. The FCA clarifies that these changes also apply to Gibraltar-based firms passporting services into the UK.

The changes to COMP aim to help the FSCS resolve certain types of valid claim more effectively but not to change the perimeter of who is eligible to claim and who is not.

All the above changes to DISP and COMP came into force on 17 March 2026, apart from the requirement on firms to provide complainants with a deadline by which they have to send the complainant a final response letter, which will come into force on 1 June 2026 in order to give firms time to update their complaint letter templates as needed.

• MREs

  The FCA is proceeding with the definition of “MREs” that it suggested in CP25/22, with a few minor changes. As such, an MRE can be identified using the following criteria. It is an event which:

  • affects a high number of consumers, a high number of firms or multiple firms holding a significant market share within a sector or across sectors.
  • has a significant impact on individual consumers, including those in vulnerable circumstances.
  • leads to a high redress bill.
  • results in a significant number of firms being unable to meet their redress liabilities.
  • leads to a high number of complaints at firms and FOS.
  • is driven by a systemic or recurring failing that damages confidence in the financial system.

  The FCA does not specify how many criteria must be met, or whether certain criteria should be prioritised over others, and emphasises the need for reasonable judgment to be exercised in the assessment. It also says that the criteria are not limited to breaches of FCA rules; some MREs may occur through broader market or conduct issues.

  Where an MRE is identified, the FCA will have additional powers, including extending the time limits for firms to send a final response to a complaint and to direct FOS to refer complaints back to firms – as set out in the HMT Response above. The FCA hopes that the pre-registration stage that is being proposed will enable MREs to be identified more easily.

Other issues on which we await further clarity

• FOS lead complaints process

In CP25/22, it was proposed that FOS would introduce a structured ‘”lead complaints” process, under which firms would be able to apply to FOS to consider a representative sample of lead complaints. These would be considered against both “novel” (new products or services or potential new interpretations of regulation) and “significant” (those likely to generate large volumes of complaints/high levels of redress) criteria. The proposed new registration stage in the casework process (see above under “New registration stage for FOS complaints”) will enable FOS to pause related complaints during the review of a lead case.

CP26/9 confirms the lead complaints process will go ahead. Over the coming months, FOS will work with stakeholders to design that process, focusing on clear criteria for identifying novel and significant issues, setting proportionate governance and oversight arrangements, and developing appropriate safeguards, in particular for consumers in vulnerable circumstances. The FCA and FOS may jointly consult on the content of the final framework.

• Read-across rules

In CP26/9, the FCA says that it received feedback from firms that the DISP guidance on factors firms may take into account when considering complaints (sometimes referred to as the “read-across rules”) can, in practice, result in individual FOS decisions being perceived as setting binding expectations. Firms have raised concerns that this can effectively create de facto standards without going through the FCA’s formal policy-making and consultation processes, which can blur the boundary between the FCA’s role as rule-maker and FOS’s role as impartial dispute resolution body.

The FCA says that it recognises the need to consider the operation of the “read-across” rules carefully, and that it will return to this issue in a later publication once there is greater clarity of how the read-across rules interact with other elements of the reform program, including the role of the joint FOS/FCA thematic reports. (See above under “The HMT Response”).

Comment

The reforms, when fully implemented, should result in greater certainty for firms – such as confirmation that compliance with FCA rules will meet the “fair and reasonable” test, and providing for a direct referral mechanism to the FCA in cases where either rules are not clear-cut or issues may have wider implications (although we wait to see the extent of the power to allow particular FCA rules not to be included in the adapted fair and reasonable test). The proposed registration stage aims to act as a gateway allowing only properly evidenced and articulated complaints to proceed, and arming FOS with wider powers to dismiss claims without merit should ensure that only claims fit for resolution via FOS are brought. Further, the lead complaint process should, once it is put into practice, reduce duplication by providing a framework for resolving similar cases.

The reforms also bring in changes which adapt the redress system to better deal with MREs, to ensure that they are identified sooner. Firms should review internal processes on matters reportable to the FCA to ensure that it now follows the updated guidance in SUP 15 to capture any emerging issues. The changes also allow for the FCA to take the lead in ensuring that the resolution of MREs is handled efficiently, consistently and coherently.

The changes are said to make it easier for the FCA to act when an MRE is identified. Firms should however note that the fact that the FCA makes the point that a MRE may occur, not just through breaches of FCA rules, but through broader market or conduct issues - and the fact that the test for multi-firm redress in section 404 of FSMA is being “loosened” by linking it to the FCA’s broader objectives - gives the FCA wider powers to impose redress without much avenue for challenge.

If you would like to discuss how the changes set out in this article may affect your business, please get in touch with any of the contacts listed or your usual contact at Hogan Lovells.

Authored by Daniela Vella, Dominic Hill, and Virginia Montgomery.