Response to FCA consultation on Modernising the Redress System

Consumer Scotland is the statutory body for consumers in Scotland. Established by the Consumer Scotland Act 2020, we are accountable to the Scottish Parliament. The Act defines consumers as individuals and small businesses that purchase, use or receive in Scotland goods or services supplied by a business, profession, not for profit enterprise, or public body.

Our purpose is to improve outcomes for current and future consumers, and our strategic objectives are:

• to enhance understanding and awareness of consumer issues by strengthening the evidence base
• to serve the needs and aspirations of current and future consumers by inspiring and influencing the public, private and third sectors
• to enable the active participation of consumers in a fairer economy by improving access to information and support

Consumer Scotland uses data, research and analysis to inform our work on the key issues facing consumers in Scotland. In conjunction with that evidence base we seek a consumer perspective through the application of the consumer principles of access, choice, safety, information, fairness, representation, sustainability and redress.

The Consumer Principles are a set of principles developed by consumer organisations in the UK and overseas.

Consumer Scotland uses the Consumer Principles as a framework through which to analyse the evidence on markets and related issues from a consumer perspective.

The Consumer Principles are:

• Access: Can people get the goods or services they need or want?
• Choice: Is there any?
• Safety: Are the goods or services dangerous to health or welfare?
• Information: Is it available, accurate and useful?
• Fairness: Are some or all consumers unfairly discriminated against?
• Representation: Do consumers have a say in how goods or services are provided?
• Redress: If things go wrong, is there a system for making things right?
• Sustainability: Are consumers enabled to make sustainable choices?

We have identified redress and information as being particularly relevant to the consultation proposal that we are responding to.

Overview

Consumer Scotland welcomes the opportunity to respond to the Financial Conduct Authority (FCA) and Financial Ombudsman Service (FOS) consultation on modernising the redress system for financial services. Ensuring that consumers have access to an effective complaints and redress system is essential to ensure that things can be swiftly put right when they have gone wrong. It is particularly important in complex markets like financial services where there is often a significant knowledge gap between consumers and firms and where there is significant potential for consumers to experience financial detriment.

It is clear that there are issues in the existing redress landscape and that consumers may have issues navigating it. The FCA’s Financial Lives Survey found that, when respondents were asked about the experience of complaining to their provider, 34% of those who raised a complaint or attempted to do so found the process very or fairly difficult and 23% were unable to raise a complaint.[1]

We welcome the objectives of the consultation, particularly the aims of ensuring that:

• consumers can get appropriate redress when issues arise
• firms will identify harm at an early stage, proactively address it and resolve complaints more effectively
• mass redress events or complaints with wider implications are identified earlier and notified to the FCA promptly, so that problems can be resolved swiftly and efficiently.  

Our response to the consultation focuses on:

• our preference to retain the fair and reasonable test,
• our strong concerns regarding the imposition of an absolute limit longstop for complaints and
• the importance of ensuring that consumers, including those in vulnerable circumstance, are not negatively impacted by any changes to the redress system. 

More holistically, we have concerns that the proposed introduction of  a number of further formal processes to the complaints system, such as referrals, requests for FCA clarification and registrations, will collectively lead to the development of a more formal, rules-based, less accessible complaints system for consumers. While acknowledging the desire for more certainty, we wish to emphasise the need for the system to be flexible, accessible, fair and to take account of consumer’s individual characteristics.

Fair and reasonable test

Currently, an ombudsman determines complaints based on what is, in its opinion, fair and reasonable in all the circumstances of the case, taking account of the law, FCA rules and guidance, codes of practice and good industry practice. The Treasury’s view is the fair and reasonable test should be retained, but adapted to better align with the FCA’s regulatory standards. It proposes that where FCA rules are material to the complaint, complying with those rules in a manner consistent with the FCA’s intent for those rules, will mean a firm has acted fairly and reasonably. This approach would ensure that, where FCA rules apply to the situation complained of, the Financial Ombudsman will not hold firms to standards that are different from those set by the FCA at the relevant time. Where an issue requires regulatory interpretation, the Financial Ombudsman would consult the FCA and potentially refer matters to the courts for legal clarity where it considers this appropriate to ensure regulatory coherence.

Consumer Scotland favours retaining the current fair and reasonable test. We note that it is used across a number of other ombudsmen schemes, such as legal services, and is well understood. We agree with the view of consumer groups, as detailed in the consultation paper, that the fair and reasonable test is essential for protecting consumers, particularly in complex markets like financial services. We suggest that any breach of consumer law should also be relevant when assessing what is fair and reasonable in the circumstances of any case.

We do not believe that FOS is currently prevented from considering whether a firm has complied with the relevant FCA rules in determining what is fair and reasonable. While more explicit references to FCA rules may provide a greater degree of certainty and clarity for industry, it is important that this does not delay justice for consumers or lead to the use of an inflexible, rule-based system.

Consumer Scotland would welcome more clarity about what the practical differences in consumer outcomes would be under the proposed changes to the fair and reasonable test. For example, what impact would the proposed changes have on FOS taking individual consumer circumstances, such as vulnerability, into account?  What may be reasonable for one consumer, may not be for another. Consumer Scotland would be concerned if decisions were to be made with regard to any hypothetical “average consumer” as this may not sufficiently take into account the real world needs of many consumers.  We consider that this has potential to undermine the focus on fair outcomes which the Consumer Duty is intended to promote. We also consider that it will be necessary to guard against the risk that consumers may be required to engage with detailed FCA rules and rulings to bring forward complaints. This scenario should be avoided as it would add complexity to the consumer journey and create potential barriers to redress.

Rather than altering the fair and reasonable criteria, Consumer Scotland would prefer greater certainty to be delivered by more extensive use of guidance to firms, including the use of worked examples of good and poor practice, drawing on common drivers of complaints. This could also be addressed under the supervisory model where a firm is showing an increase in complaints driven by particular practices or processes.

Should the proposed changes to the fair and reasonable test be pursued, any referrals made to the FCA seeking clarification on the interpretation of rules should be in accordance with strict timetables in order to avoid unnecessary delays and potential detriment being caused to consumers. The consultation envisages that the proposals may also reduce referrals to the FOS by enabling firms to resolve complaints earlier, as the FCA will have a greater role in giving regulatory clarity where issues with wider implications are identified. However, it will be important that monitoring of FOS case levels takes place to ensure that this is actually borne out in practice and that a demonstrable rise in first tier resolution is occurring in practice. It is important to ensure that decisions, and the financial consequences of redress being ordered, are not simply being delayed by referrals.

It is also proposed that parties would be able to request a referral after the FOS initial assessment but before a final determination so that, where relevant, the FOS can consider whether or how the FCA’s view impacts their case determination. As the consultation notes, it would be crucial that this provision does not simply become used as a de facto appeals mechanism where a party is unhappy with the initial assessment. Again, this provision appears to us to introduce an additional procedural step, and element of complexity, which does not align well with the ethos of an ombudsman service which is designed to be simple, free, and accessible. Although the referral option is in theory available to both parties, we consider that it is far more likely, in practice, to be used by firms, who are familiar with the wider landscape and the FCA’s detailed rules. For this reason we do not support the proposal. If the proposal does proceed then detailed criteria will be required to support its appropriate use, along with monitoring of its effects. These criteria should be developed and monitored by the FCA and FOS in consultation with stakeholders, including consumer bodies.

Longstop for complaints to be lodged

Currently the FOS can only consider a complaint referred to it within 6 years from the event complained of or, if later, within 3 years from the date on which the complainant became aware (or ought reasonably to have become aware) they had cause for complaint. The FOS can still accept out of time complaints if they consider the complainant’s failure to complain within the time limits was due to ‘exceptional circumstances’ or if the firm consents.

The Treasury is consulting on introducing a 10-year longstop date within which complaints must be brought. The Treasury also proposes to give the FCA limited flexibility to make exceptions to this, where longer timeframes are justified in exceptional circumstances. Consumers would keep the right to bring cases to the courts outside of the longstop, subject to any existing rules and statutory time limitations.

Consumer Scotland strongly opposes the imposition of a 10 year absolute limit for bringing complaints. There are already time limits set, however these provide appropriate discretion based on when consumers should reasonably have been aware of the events. We note that this is consistent with ombudsmen practices in other sectors such as legal services, which also impose strict time limits but allow complaints where a consumer was excusably unaware, with the relevant time limits running from when consumers were, or should have been, aware of the grounds for complaint.

We agree with the concerns outlined in the consultation paper from consumer groups that changes to the existing time limits could widen the gap between more informed and engaged consumers and others, including consumers in vulnerable circumstances, who may only become aware of an issue after publicity some years later. We would welcome the publication of data relating how many and what kind of cases would be excluded if the 10 year absolute limit longstop was to be implemented. Publication of this data would allow for greater understanding of the level and nature of impact on consumers that would occur as a result of the imposition of the proposed longstop.

Many financial services products are “lifetime” products or services. For services such as long term investments, life insurance and protection policies and pensions, it is possible that harms may go undetected for a long period of time and so it is essential that consumers are not left without redress in the event of provider failures. This is important in order to support consumer confidence in the system, which will encourage engagement in the financial services sector, supporting economic growth.

Consumer Scotland views the proposed backstop option of going to court as insufficient to protect consumers. There are considerable power and resource differentials between providers and consumers and the expense and delay associated with court action, and the potential liability for judicial costs, means that many consumers will not view this as a viable option. In many cases civil legal aid will not be available. The introduction of such measures may have the unintended effect of driving consumers towards the use of professional representatives or claims management companies, which runs counter to other measures being proposed and implemented to manage such claims.

Mass Redress Events

Consumer Scotland welcomes the general approach to identifying and responding to wider issues and potential mass redress events (MRE). We support the aim of ensuring these events are identified earlier in order to prevent issues becoming widespread, more harmful and more challenging to address.  We welcome the desire to address issues more proactively, putting in place measures to allow firms to resolve issues at first tier. This would remove the need for consumers to enter into complaints processes and allow firms to more quickly tackle systemic issues.

We broadly support the proposal to consider potential MREs against a framework of 6 criteria, all commonly identified in past MREs. We also agree that these criteria should not have rigid thresholds applied, in order to allow flexibility of approach.  We support calls made in response to the previous consultation for more proactive communications from regulators and complaints bodies with consumers and media and the provision of independent advice to consumers to allow them to identify their rights and take any necessary actions within the required timeframes.

We broadly support the potential to pause active complaints in order for the FCA to produce a ruling or advice that offers consistency, which would ultimately allow larger number of complaints to be processed more effectively, and reduce the risk of events overwhelming complaints systems. However, it important that this does not cause unnecessary delays to consumers. We recommend that the FCA monitors this in order to identify if it is resulting in consumer detriment due to disproportionate or unnecessary delays.

We also welcome proposals to clarify the guidance on when firms should report potential events to regulators. The proposed guidance includes criteria, and in certain cases, thresholds for when firms should submit SUP 15 notifications. The proposed criteria appear sensible and we welcome the requirement for firms to have regard to the impact of any such event on vulnerable consumers.

Other consumer issues

We welcome the desire to create a more effective, swifter and more transparent process. However, introducing measures to deliver efficiency and certainty must not disproportionately focus on the needs and priorities of industry at the expense of improving outcomes for consumers. Access to robust and reliable redress mechanisms is essential to ensure consumer confidence, which in turn supports investment and economic growth. Ensuring industry clarity on expectations, and promotion of best practice, can also play a role in ensuring that consumer needs are better met.

We support the proposal that FOS should publish a quarterly thematic ‘lessons learned’ document. In line with the consumer principle of information, we also consider that consumers should be able to quickly and transparently access information about the disciplinary record of firms, in order to promote effective consumer choice.

With regards to the proposed changes to the Dispute Resolution Sourcebook, in line with the consumer principle of information, we support clearer signposting of FOS’s role and improved information to consumers.

We understand that the Treasury is also considering whether the current institutional arrangements for the FOS will continue to support their intended reforms or whether an alternative approach would better advance the objectives of this consultation. One option the government is seeking views on is whether there would be benefits to making the FOS a subsidiary of the FCA, so that both organisations become part of the same corporate group. Consumer Scotland opposes any such merger of structures as we consider it is important that consumers are able to be confident that the FOS is independent of government, industry and regulators.

Measures to promote consistency of approach and timely resolution

We welcome the introduction of interactive decision frameworks for caseworkers, to encourage consistency of approach, as long as these do not reduce the ability of caseworkers to take into account what is fair and reasonable in the circumstances of each individual case. FOS also proposes to introduce a structured ‘lead complaints’ process to actively address novel and significant complaint issues as they emerge, working collaboratively with firms and the FCA to resolve these emerging issues efficiently. While we can see benefit in this process, in delivering certainty for industry and consistency in dealing with large groups of similar complaints, we have concerns that related complaints would be paused awaiting the determination of lead complaints. We consider that strict time limits would be needed to ensure that this was not simply used as a delaying tactic.

We note that this again introduces a further layer of process, with associated complexities, in what is intended to be a simple process for consumers. Complexity of process can be a barrier to redress, with each additional layer presenting a risk of consumers dropping off through process fatigue or requiring support from third parties to negotiate processes. We recommend that rather than being viewed in isolation, the collective impact of these additional layers, and potential pauses, should be mapped out as part of a model consumer journey to ensure that these measures remain proportionate as a whole.

We note that the FCA and FOS are not currently minded to extend the 8 week deadline for firms to resolve a complaint at first tier or to reintroduce the 2-stage procedure for firms to use at first tier. We support this stance. We consider that 8 weeks is common across other ombudsman schemes such as those in the energy sector. This has recently been reduced to 6 weeks for telecommunications. We are strongly of the view that any extension would not be in the best interests of consumers.  

FOS also proposes to introduce a new ‘registration’ stage in its complaints-handling process. Positioned between the existing referral and investigation stages, this new step aims to bring greater structure, fairness and efficiency in managing complaints. Consumer Scotland acknowledges that many complaints systems require some kind of checkpoint or eligibility measure to ensure that complaints are competently made. Consumer Scotland considers that this process, if applied, should be as light touch as possible. In particular, we caution against applying extensive Minimum Evidential Standards. We note from the consultation that pilots have shown a reduction in cases being taken forward and would caution that this may result in some consumers, especially those not using professional representatives and who may be in vulnerable circumstances, finding the process overly complicated or off putting. This may have an adverse effect on consumer access to justice.

Professional Representatives

With regards to case fee rules and rules for complaints brought by professional representatives, we support measures encouraging companies to submit better prepared complaints and supply relevant information.

We note the concerns expressed regarding differing regulatory approaches to regulating professional representatives and would encourage the FCA to work with the Advertising Standards Authority, Legal Services Board and Solicitors Regulation Authority and Law Society of Scotland to ensure that consumers receive consistent, transparent information enabling them to make informed decisions about whether to utilise the services of professional representatives. We would also encourage regulators to consider how consumer protections from poor practices adopted by professional representatives can be dealt with under legislation such as the Digital Markets, Consumers and Competition Act.  

From 1 April 2025, FOS has introduced a new charging model for fee charging professional representatives such as claims management companies and legal firms who bring complaints on behalf of consumers. At this stage, no further changes to the representative charging model are planned, however case fee levels remain under ongoing review. We suggest that monitoring of the impacts of these changes by FOS will be necessary before considering what further measures should be taken.