Financial ombudsman service 'unfit for purpose' says think tank

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Financial ombudsman service 'unfit for purpose' says think tank

The UK Financial Ombudsman Service (FOS) is unfit for purpose and needs major reform, according to the influential Institute of Economic Affairs (IEA) in a stinging report on 31 March.

The free-market think tank said the ombudsman "acts against the interest of consumers as a whole" and choked market competition because of its bias towards larger firms.

It was also 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".

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."

The fairness of its decisions has been called into question on many occasions and 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," the report's author IEA head of Regulatory Affairs, Victoria Hewson, stated.

"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 think tank also highlighted how the FOS has seen the cost per case increase over its lifetime, for example in the year 2019/2020 a case cost £920, significantly higher than the budgeted cost of £650.

Hewson 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."

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