UK financial services industry faces seismic shift in regulatory landscape

Anthony Harrison and Jonanthan Cavill, financial services experts at Pinsent Masons, were commenting after the government unveiled a sweeping package of reforms aimed at clarifying the roles of the Financial Conduct Authority (FCA) and the Financial Ombudsman Service (FOS).

The Treasury’s has published a consultation on the FOS and a joint FCA-FOS ‘Call for Input’ on redress reform. These outline proposals designed to bring greater clarity, consistency and efficiency to the complaints and redress systems. These developments are expected to have far-reaching implications for firms navigating regulatory obligations and consumer dispute resolution.

The Treasury’s review expressed a concern that the FOS in some cases operates as a quasi-regulator – stretching its ‘fair and reasonable’ test beyond its intended scope. To address this, the government proposes a recalibration of the FOS’s remit, including  an adapted ‘fair and reasonable’ test. The FOS will be required to find that a firm’s conduct is fair and reasonable where it complies with relevant FCA rules, aligning more closely with the FCA’s regulatory intentions. The proposals also include formalising FCA-FOS roles in a bid to provide regulatory certainty. Where ambiguity exists in how FCA rules apply, the FOS must seek the FCA’s interpretation, obliging the FCA to respond. Where appropriate, a party to a complaint will be able to request that the FOS seeks the FCA’s view on interpretation of rules. This aims to reduce inconsistences and provide regulatory certainty.

Additionally, a new framework will work to provide clarity on the roles of the FCA and FOS in relation to wider implications issues and mass redress events. The FOS will be obliged to refer potential wider implications issues or mass redress events to the FCA and the FCA will be obliged to consider those issues. Parties to a complaint will also be able to request the FOS refer such an issue to the FCA and it will be for the FCA to decide how those issues should be addressed. A more flexible mass redress event framework aims to allow the FCA to address and respond to events more easily, ensuring that, when needed, events can be considered and dealt with quickly and effectively.

Cavill said: “There are some real game-changing proposals here, particularly on issues like adapting the FOS’s ‘fair and reasonable’ test. There is a sense from the government that FOS has been guilty of ‘mission creep’ in certain areas. The referral mechanisms to the FCA should help iron out these issues, though it is important that is does not become an appeals process. The FCA will need to maintain a clear operational boundary to preserve the FOS’s independence.”

Another proposal is the introduction of a 10 year absolute time limit for bringing complaints to the FOS. This long-debated ‘long-stop’ is intended to balance fairness to consumers with greater certainty for businesses.

Harrison said: “The 10 year time limit is highly significant. Even with exceptions for long-term products, this proposal signals a clear desire to promote business certainty and growth. It is a major shift in tone from previous regimes.”

The FOS has announced a new standard interest rate on compensation awards, replacing the longstanding 8% rate with a more market-reflective formula – the Bank of England base rate plus 1%. This change, set to take effect in January 2026, is expected to reduce the financial burden on firms facing large volumes of complaints.

The FCA is also proposing a more flexible framework for mass redress events, aiming to enable quicker and more coordinated responses to systemic issues. This is particularly relevant in light of recent challenges, such as those seen in the motor finance sector.

“A more flexible mass redress framework should help avoid the disjointed responses we have seen in the past,” said Cavill. “It’s about ensuring consistent outcomes for consumers while reducing market disruption.”

These proposals complement broader regulatory developments, including the chancellor’s Mansion House speech and the Leeds Reforms.