Who Regulates the Regulators? The Financial Ombudsman Service

Abstract

While not formally a regulator in the strict sense, the Financial Ombudsman Service (FOS) exercises de facto regulatory powers in retail financial services, as its rules and determinations direct the behaviours of firms. While intended to be independent, the FOS has a close relationship with the Financial Conduct Authority. Ombudsmen, however, have considerable discretion to make determinations of complaints brought to them based on what they consider fair and reasonable in the circumstances and are not bound to follow law, regulation, and good industry practice. This has been described as a disapplication of the rule of law. The FOS has expanded its role from resolving complaints to "preventing detriment", which seems to overstep its statutory function. The formal expansion of its jurisdiction into small- and medium-sized business complaints and the increase in the limit of the amount of compensation it can award seem likely to further increase the complexity of its cases, calling into question the fairness of decisions and highlighting the need for greater transparency on internal decision-making policies. Increasing complexity and the higher amounts of financial compensation that may be awarded in some cases also suggest that there should be a review of the charging structure for FOS cases. While some form of alternative dispute resolution is necessary for consumers in dispute with financial service providers, there are signs that the way the FOS operates has introduced unfairness and uncertainty for firms. There is evidence of anti-competitive effects in lending and advice markets, and limited evidence of improvements in consumer outcomes in financial services generally. The FCA should undertake an investigation into the effect on competition of the FOS and its decisions. A more formal channel for dispute resolution in financial cases involving small and medium sized businesses (previously recommended by the Treasury Committee of the House of Commons) should be considered.