- The Financial Ombudsman Service (FOS) is unfit for purpose. It is failing to deliver on its primary objectives of “providing fair and reasonable resolution of disputes at speed” and “providing value for money and supporting competition and consumer welfare”.
- While not formally a regulator in the strict sense, the FOS exercises de facto regulatory powers in retail financial services by making determinations of complaints brought to it. The fairness of its decisions have been called into question on many occasions.
- Chief Ombudsman of the FOS Caroline Wayman resigned earlier this month amid a mounting backlog of complaints and controversy over levels of compensation.
- This is unlikely to change under new leadership: the formal expansion of the FOS’s jurisdiction into SME complaints, and the increase in the limit of the amount of compensation it can award, will add to the complexity of cases.
- Far from improving confidence in consumer financial services, and therefore helping with competition, the FOS achieves the opposite.
- By driving up costs and risks to businesses through regulation and its broad and subjective definition of “fairness,” the FOS is hitting poorer consumers hardest.
- We have seen a contraction of suppliers in the consumer lending market, and an “advice gap” – with less affluent consumers being excluded from the provision of personal financial advice as it is not cost effective for advisers to provide it.
- The FOS has seen the cost per case increase over its lifetime. In the year 2019/2020 a case cost £920, significantly higher than the budgeted cost of £650.
A new report from the Institute of Economic Affairs, written by IEA Head of Regulatory Affairs Victoria Hewson, draws attention to the shortcomings of the Financial Ombudsman Service (FOS).
Who regulates the regulators: The Financial Ombudsman Service finds that the FOS has failed to deliver its key objectives of “providing fair and reasonable resolution of disputes at speed” and “providing value for money and supporting competition and consumer welfare”. It lacks transparency and accountability and requires major reform.
The author observes that, while the FOS must consider what is ‘fair and reasonable’ in terms of law and regulations when deciding a case, it is not bound by such considerations. This disapplication of the rule of law afforded to the FOS has meant “many consumers consider that they have been treated unfairly” – and the FOS agrees with them.
But the resultant risks to businesses make it very difficult to provide financial services at the lower end of the market to less well-off consumers. Bespoke services are costly, and when the risks associated with dealing with that section of the market are already inherently high, the viability of serving those consumers is threatened.
Further, the FOS “infringes the rule of law requirement for transparency and legal certainty” and the principle that, in a democratic society, changes to the law are enacted by elected representatives in Parliament.
The increase of PPI cases has only exacerbated the problem, straining the Ombudsman’s duty to provide ‘fair’ resolutions ‘at speed’. Hewson notes “there have been persistent concerns that the FOS prioritises efficiency and turnover of cases over quality”.
As for value for money, the FOS has seen the cost per case increase over its lifetime. In the year 2019/2020 a case cost £920, significantly higher than the budgeted cost of £650. Although the former Chief Ombudsmen attributed the increase in cost to the growing complexity of cases, the paper suggests that this only “raises the question of whether such complex cases would be better dealt with in another forum”– especially since the maximum award that the FOS can make has increased from £150,000 to £350,000.
Including the specific objective of dealing with individual disputes, the FOS plays a part in the wider objective of the regulatory system to promote competition. Hewson has highlighted that there is insufficient research into the FOS’s impact, saying reports “have not considered whether the operation of the FOS is conducive to the FCA’s competition objective or is beneficial to consumers at large”.
With the report uncovering deep structural failings, the time is right for the FOS to address concerns with its decision-making process and establish a formal route of appeals for parties to “ensure that the process and decisions are consistent with the rule of law”.
Victoria Hewson, Head of Regulatory Affairs at the Institute of Economic Affairs and author of the report, said:
“It is important that there is a forum for consumers to resolve disputes with financial services providers, because there is such an imbalance of power and asymmetry of information.
“But the FOS does not seem to be getting the balance right. It is in danger of infantilising consumers, who are not expected to take responsibility for their decisions, and playing into the hands of claims management companies.
“This acts against the interests of consumers as a whole, and favours larger firms, who can afford to provide for unpredictable awards, at the expense of smaller and more innovative providers.”