Addressing the Redress System: the time for change is now

With the Chancellor acknowledging that the current "approach to redress can cause uncertainty..… and be a drag on investment" in her first Mansion House speech; the Financial Conduct Authority (FCA) and the Financial Ombudsman Service (FOS) publishing a joint 'Call for Input' (CFI), seeking views from stakeholders on "how to modernise the redress framework, so it better serves consumers and provides greater stability for firms to invest and innovate"; and the Chair of the FOS encouraging 'radical' action at the Treasury Committee earlier this month, there seems to be real appetite for change with respect to the existing redress framework.

Here we examine the problems with the current system and offer our views on what is required to ensure that the redress framework is fit for purpose for all stakeholders as this debate continues.

Key objectives of the CFI

The FCA and the FOS' key objectives, as set out in the CFI, capture the fundamentals well, i.e. that:

1. Consumers receive appropriate redress efficiently when things have gone wrong;
2. Firms identify harm at an early stage, proactively address this harm and resolve complaints more effectively themselves (reducing the need for FOS complaint referrals and case fees for firms);
3. The FCA and the FOS work with stakeholders to identify redress events or issues with wider implications earlier so they can be resolved swiftly and efficiently (which may result in fewer events escalating into 'mass redress events', a reduced burden on the FOS and the Financial Services Compensation Scheme (FSCS) and a potential reduction in the long term of associated levies);
4. Consumer and industry stakeholders have more direct channels of communication with the FCA, the FOS and other regulatory partners involved in the Wider Implications Framework (WIF), which will make it easier and quicker for stakeholders to flag matters which have potentially wider market implications; and
5. The FCA and the FOS work together to ensure their views on regulatory requirements are consistent, providing a more predictable regulatory environment for firms which will help to support investment and further the FCA’s secondary objective of international competitiveness.

Defining the problem - what is not working well at the moment?

The CFI acknowledges the impact of 'mass redress events' within the current framework, describing the FOS as working: "well for individual customer complaints about specific issues. However, challenges can occur when there are large numbers of complaints about the same issue ([the CFI describes] these as ‘mass redress events’)."

While the industry may not agree that the FOS is working well for individual complaints, it will certainly agree that it is failing to adequately handle 'mass redress events'.

This failure stems from the inherent design of the FOS process, being relatively informal and requiring the FOS to "take into account" (but not necessarily follow) relevant law and regulations, relevant regulators’ rules, guidance and standards, relevant codes of practice and (if relevant) what the FOS considers to have been good industry practice at the relevant time.

Such complaints can be made six years from the event being complained about (or, if later, three years from when the complainant knew, or ought to have reasonably known, they had a cause for complaint) and brought to the FOS within six months of the firm's final response. However, unlike in civil claims, the FOS does not have a long-stop period which would otherwise require that the matter being complained of took place within the last 15 years.

As a result, the FOS process, which is separate (in substance and procedure) from the wider legal system, brings inevitable compromises and consequences. Whilst these may be manageable in respect of individual cases below the money award limit, they give rise to a number of challenges for firms in applying FOS outcomes more widely, particularly in instances where a 'mass redress event' results in a large volume of complaints being made in a short period of time across multiple firms.  Key issues are:

• Inconsistency: As the FOS is required to consider each individual complaint on its facts, the application of its 'fair and reasonable' jurisdiction can result in an inconsistent approach being taken by FOS adjudicators. The decision as to what is 'fair and reasonable' gives the FOS a wide discretion, particularly in relation to what the FOS considers to have been "good industry practice at the relevant time", the interpretation of which may fluctuate over time and between individual complaints on the same topic;
• Speed: The volume of complaints received by firms and referred to the FOS in 'mass redress events' will inevitably slow the speed at which they can be handled. Payment Protection Insurance (PPI) is the highest profile example of a 'mass redress event' to date, where over £38.3bn in redress was paid to 34.4 million consumers between January 2011 and April 2021. The timeframe to resolve this event (which required the individual assessment of each customer complaint by firms), quite apart from the financial costs, was not in any stakeholder's interest. We suspect that this prior experience in dealing with PPI cases influenced the FCA's decision to pause complaints handling time limits for motor finance commission arrangements whilst it undertakes 'diagnostic work' to determine next steps. This pause is currently in place until December 2025, although the FCA's approach to motor finance commission complaints has been further complicated by judicial intervention; and
• Resulting uncertainty: firms are obliged to consider FOS outcomes under the FCA's Dispute Resolution: Complaints Sourcebook (DISP) rules at DISP 1.3 on root cause analysis to ensure that these determinations are effectively applied in future complaints handling. If FOS outcomes for complaints on similar topics are inconsistent and provided slowly, this will only intensify the pressure points felt by firms in 'mass redress event' scenarios across the market. Not only do these issues create uncertainty for firms when considering how to conduct future business, but they may also discourage initial investment and innovation in the sector to avoid possible liabilities for practices which cannot retrospectively be changed, particularly given the generous limitation periods which may affect a significant portion of businesses' back books. These liabilities, with additional interest payable, may also drive some out of business.

The challenges of dealing with 'mass redress events' have been exacerbated by the increasing use of professional representatives (PRs) or claims management companies (CMCs), who bring complaints on behalf of consumers in large volumes. Surges in complaint volumes place pressure on firms' resources and, as set out in the CFI, can lead to FOS referrals before firms are able to fully consider and respond to these complaints within the relevant timescales. This results in delays to consumers receiving redress and increased costs for firms, both with respect to additional resource demands needed to deal with these complaints and the payment of FOS case fees. Any proposals for 'mass redress events' therefore need to understand and respond to this dynamic.

In addition, there is the separate issue in the large number of low-quality complaints submitted by PRs and CMCs which are poorly articulated, not supported by evidence and which may have no merit.

If CMCs and PRs submit poorly particularised complaints to firms, they may not lead to any material redress for those consumers at all. Yet doing so still places a burden on firms, as well as the FOS, which is currently not required to dismiss any low-quality claims under DISP 3.3, even if it is unable to make an assessment of the complaint's merits. It is easy to see how this could quickly lead to the FOS becoming overwhelmed, particularly in a 'mass redress event' scenario, where large numbers of opportunistic claims from CMCs and PRs are submitted, on which the FOS then has to adjudicate.

Outside of the CFI, the FCA has also identified and shared its views on a number of harms and risks that CMCs pose to their consumers or the markets in which they operate, including: misleading, unclear and unfair advertising, failing to investigate the existence and merits of each element of a potential claim and poor attitudes to their own regulatory obligations.¹

So, how could it work better?

Although there are a number of proposals contained within the CFI, devising an alternative approach to dealing with 'mass redress events' is not necessarily straightforward.

Any reform of the current redress framework, and by its extension the roles played by the FCA and the FOS in this space, may not guarantee a swift resolution when 'mass redress events' arise. However, it is clear from the issues identified above that reform of the redress framework is necessary to meet the challenges faced in the existing landscape.

In short, the overarching objective of any change to the redress framework must be to provide greater predictability.

Most firms and senior managers want to "do the right thing".  They should be supported in doing so.

Greater predictability is also in the interests of consumers.

In our view, there are four key requirements to achieving this greater predictability:

1. Clarity of the expectations on firms at the time events occurred, resisting hindsight driven re-interpretations;
2. Early identification of emerging issues which may give rise to 'mass redress events';
3. Prompt and orderly action, particularly where potential 'mass redress events' arise; and
4. Confidence in the decision-making process and decision maker.

Requirement 1:

Clarity of the expectations on firms

In recent years, the FCA has placed an increasing focus on outcomes-focused regulation, exemplified by the Consumer Duty in place since July 2023. As acknowledged in the CFI, the outcomes-focused nature of the Consumer Duty: "potentially risks creating uncertainty for firms or inconsistent outcomes for consumers".

This uncertainty could, at least in part, be counteracted by the FCA or the FOS with an acknowledgement that there is not only one 'right way' of doing things in outcomes-focused regulation – especially when it comes to looking at historic issues with the benefit of hindsight.  Doing so would seem to be consistent with the FOS' 'fair and reasonable' test.

To reduce uncertainty further, where the FCA does see misconduct and harm, it is incumbent on it to call that out promptly. Delay has been unhelpful in the motor finance sector, where the FCA, despite banning discretionary commission arrangements (DCA) in 2021, has still not determined the appropriate regulatory response to the complaints and claims which have been generated. As a result, both firms and consumers are left in a state of uncertainty, while a lack of clarity persists on the expectations of firms prior to 2021 and any resulting redress that may be due.

The need for timely clarity has been emphasised by the Chair of the FOS, Baroness Manzoor.  In her recent appearance at the Treasury Committee in relation to the FOS she stated: "…it is really important that there is clarity from Government and from the FCA to businesses so that we—and we are right at the end of the scale, not at the forefront of it—are not having to interpret the rules and guidance that are being given to others..".²

Requirement 2:

Early identification of emerging issues

The CFI explores whether additional requirements or clarifications are required for firms when reporting and notifying the FCA of redress events, in order to ensure the FCA and the FOS have greater visibility of redress matters at an early stage. Whilst the early identification of potential redress issues by the FCA and the FOS is to be welcomed, it appears unnecessary to place an additional burden on firms in this respect when, as noted within the CFI, there are multiple existing FCA rules and principles for firms to comply with on this topic, for instance:

• DISP 1.3.3R contains obligations for firms to identify and remedy recurring or systemic problems through their complaints handling;
• The FCA's Supervision Manual 15.3 requires firms to inform the FCA about certain events that have occurred, or may occur, which would have a serious regulatory impact;
• The FCA's Principles for Businesses (PRIN) 2A.2.5R requires firms, in accordance with the Consumer Duty, to take steps to proactively remediate customers when they identify that their actions have caused foreseeable harm;
• PRIN 2A.9 requires firms to monitor outcomes experienced by retail customers from their products and identify the root cause of, and remediate, a failure to deliver those outcomes; and
• PRIN 2.1.1R requires firms, in accordance with Principle 11, to deal with its regulators openly and co-operatively and "must disclose to the FCA appropriately anything relating to the firm of which that regulator would reasonably expect notice."

Given these existing requirements, it is difficult to see what practical benefit any further rules or guidance issued by the FCA in this area could provide in respect of redress event notification obligations on firms.

In making these notifications, while firms can assess the potential impact a 'mass redress event' would have on their businesses, they will not necessarily be aware of redress implications across the wider market for the purposes of an FCA notification (as suggested by the CFI).

Rather, it is the FCA who would be better placed to carry out this assessment to determine where there are issues of potential wider implication, based on the wide range of data it already receives from firms, including from complaints, alongside its thematic and other supervisory work (which the FCA has expressed as reflecting its desire to use its "other powerful tools") and whistleblowing reports.

The FOS is also well-placed to identify issues of potential wider implication that might amount to a 'mass redress event', based on the detail and volume of complaints it is receiving and can informally, or formally, refer matters to the FCA. For example, under section 234D Financial Services and Markets Act 2000 (FSMA), the FOS may invite the FCA to take action where there has been a potential failure by regulated person(s) to comply with requirements which apply to the carrying on of any activity where consumers have suffered, or may suffer, loss or damage to which a remedy or relief would be available in legal proceedings.

Other groups also have a role to play:

• PRs / CMCs: The suggestion in the CFI that PRs and CMCs can play their part in the early identification of issues is welcome and they ought to be encouraged to do so through formal obligations and, if necessary, enforcement action. This should be done while seeking to avoid their use of any notification requirement tactically, to artificially inflate the significance of an emerging issue to bolster their complaint numbers through advertising and the sourcing of further customers (which, as noted above, forms part of the harms and risks CMCs pose to consumers or the markets in which they operate). We note, however, that, since not all PRs and CMCs are regulated by the FCA, anything which might give rise to further regulatory arbitrage between the FCA's and the Solicitors Regulation Authority's respective regimes is to be avoided. 
• Consumer organisations: In prior matters affecting the financial services sector, consumer organisations have played an important role in drawing the regulators' attention to emerging issues via the super-complaint route (available through section 234C FSMA), such as those made by Which? in respect of authorised push payment (APP) fraud and the Citizens Advice Bureau regarding PPI.

In any event, greater industry engagement is certainly required and is to be encouraged when emerging issues arise that could ultimately become a 'mass redress event'.

When it comes to the identification of these emerging issues, the CFI invites responses on whether a formal definition of a 'mass redress event' should be adopted by the FCA or the FOS. Given that the CFI sets out two examples of prior 'mass redress events' which are at opposing ends of the spectrum in terms of financial quantum and the number of affected customers,³ adopting a rigid definition here would be unhelpful. Rather, flexibility in determining when a 'mass redress event' arises would be of greater benefit to regulators and firms, acting as a helpful indicator as to when an issue driving consumer complaints may ultimately be tipping the balance into a 'mass redress event'. Any definition should allow for an element of discretion, perhaps by outlining a number of quantitative thresholds which, when a number are met, would trigger the consideration of a 'mass redress event' – this could perhaps be analogous to the "significant implications" factors set out at paragraph 12 of the WIF's Terms of Reference. We do not underestimate the difficulty in early identification of a 'mass redress event', but a flexible approach, considered quickly, seems to us most likely to succeed.

Requirement 3:

Prompt and orderly action

Once issues which might give rise to 'mass redress events' are identified, prompt and orderly action is required to swiftly resolve the matter for firms and consumers. This will require the FCA and the FOS working closely together with stakeholders in order to deliver clarity and certainty.

However, the current framework to support the FCA and the FOS working together on issues which might have a broader impact, the WIF, does not appear to be achieving its aims. This is despite the WIF's relaunch in 2022 and its Terms of Reference being revised in both 2023⁴ and 2024. While the WIF does appear to be identifying issues, and paragraph 3b of its Terms of Reference requires WIF members to agree "the most appropriate approach to managing…risks and issues", it is not clear that action to address these matters is being taken promptly enough (or in an orderly manner). By way of example:

• Motor finance DCAs: This has been present in the WIF's 'Issues Log' since its relaunch in 2022 (originally described as Pengelly v Wood), but the current disarray in the motor finance space while the FCA carries out its further 'diagnostic work', the related pause for responding to consumer complaints until December 2025 and subsequent judicial intervention (both in respect of appeals to be heard in the Supreme Court⁵ arising from civil claims and in the Court of Appeal⁶ regarding the judicial review of FOS decisions), suggests that the WIF has not achieved a good outcome in this respect for firms, WIF members, or consumers, in the three years since its relaunch.
• APP fraud reimbursement: The WIF's 'Issues Log' also notes the APP fraud reimbursement requirement, which came into force on 7 October 2024. However, given the high-level description set out within the 'Issues Log', it remains unclear whether the WIF has yet reached a consensus on the expected standard for firms when handling customer complaints under this new scheme.

In light of the above, it does not appear that the WIF is being used effectively in order to manage the risks and issues which it identifies. However, we acknowledge that more might be being done by the WIF than is otherwise apparent from the minutes of meetings published on the WIF's webpage (which have been held between two and four times a year since its relaunch in 2022).

To ensure that prompt and orderly action is being taken in any given circumstance, any proposed changes to the current redress framework arising from the CFI to ensure swift resolution ought to include:

1. A pause on the timeframes in which firms and the FOS are required to deal with consumer complaints, while consideration is given by the FCA on what (if any) further steps to take. While the FCA has introduced such a pause for the motor finance industry, as discussed above, this decision was only taken in January 2024, at a time when the scale of the issue was becoming clear and events in the regulatory landscape were being overtaken by civil claims. The better approach would be for the FCA to take early action to pause these complaints response timelines – and the sooner it can do so, the better;
2. The imposition of a long-stop in which complaints can be raised to the FOS, which would be beneficial to firms in avoiding never-ending potential liabilities for past business practices. Whilst this long-stop could mirror the 15-year provision within the Limitation Act 1980 for civil claims, arguably this period could be reduced further in order for the FOS to handle complaints (perhaps to a one or three-year long-stop), given that the FOS was established to provide a swift resolution. While such a move could be seen as weakening consumer protections, this is part of the trade-off of using the FOS as an informal alternative to civil claims; and
3. The 'buy in' of the FOS where potential 'mass redress events' are emerging, so that inconsistent decisions are not taken on individual complaints in connection with the same topic which have already been referred to the FOS.

Requirement 4:

Confidence in the decision-making process and decision maker

In the absence of the early identification of emerging potential 'mass redress events', followed by prompt action being taken to address and resolve these issues, the FOS is currently being left to make wide-ranging determinations on consumer complaints it is receiving. This was not its intended role when established by Parliament in 2001.

In these circumstances, the resulting concern is that the FOS is effectively playing the role of a quasi-regulator. This is not a new issue.⁷ While the Hunt Review in 2008 found that the FOS was largely fit for purpose, Lord Hunt concluded that: "[i]t is not the job of the FOS to provide a means of addressing systemic failures in regulation or industry by default". However, the increased use of the FOS to resolve complaints, combined with the root cause analysis rules in DISP, mean that this is exactly what is happening.

As acknowledged by the FCA at the Treasury Committee in December 2024, the current system is not working well, particularly in respect of 'mass redress events': "As soon as you get into a mass redress situation, the scheme does not work entirely satisfactorily to allow the range of factors—the order, the fairness, the equity—and the wider considerations that, frankly, only the FCA or the Government have the jurisdiction and the statutory powers to think about… the system  is not designed to get fairness for [consumers in a mass redress scenario] in an orderly fashion on its current individual decision basis."⁸

However, simply moving away from the current 'fair and reasonable' test and swapping the decision-maker from the FOS to the FCA is not a complete solution. As Bluecrest⁹ demonstrates, handing the FCA very wide powers to require redress, without needing to justify all the elements of a legal claim, also risks leading to unfair and inconsistent outcomes.

A right of substantive appeal to the Upper Tribunal or the civil judicial system, rather than the current judicial review process, would instil further confidence in the decisions being taken, whether by the FCA or the FOS. This would not be proportionate in every BAU case, as it would delay resolution, but it would greatly assist in ensuring 'mass redress event' cases are determined robustly.

In summary

While there will always be trade-offs in dealing with complaints and determinations from the FOS, the current system appears to give rise to the worst of all worlds: a slow process which results in inconsistent decisions and drives uncertain outcomes which are unsatisfactory for all market participants. Taking the current situation with motor finance commission complaints as an example, the position stakeholders find themselves in as a result of the current redress framework was described as "one unholy mess" by the Chair of the Treasury Committee in December 2024.¹⁰

It is time to look at alternative options for dealing with 'mass redress' – options that offer predictability through greater clarity of expectations on firms, improved identification of issues, prompt and orderly action and both a decision-making process, and decision makers, that give confidence to redress framework participants.  

We welcome the debate which the CFI kicks off and look forward to engaging further with the forthcoming proposals arising from the CFI by the FCA and the FOS which are expected to be published during the first half of this year.