16-11-2024

FCA and FOS Call for Input on Revamping Consumer Compensation Schemes

Collaborative Effort Following Government Initiatives

The Financial Conduct Authority (FCA) and the Financial Ombudsman Service (FOS) have announced a call for public input on enhancing consumer compensation schemes related to financial firms. This initiative follows Chancellor Rachel Reeves’ recent Mansion House speech, where she highlighted that the existing approach to redress often induces uncertainty and hampers investment for businesses.

During her address, the Chancellor stated that the government had been working closely with both the FCA and FOS to craft a new agreement aimed at significantly improving the operational rules governing consumer compensation schemes.

Call for Input from Stakeholders

The call for input invites contributions from industry representatives, think tanks, and consumer groups, with a deadline set for 30 January. The regulators aim to gain insights on several critical areas:

  • Potential modernisation of the current redress framework
  • The challenges presented by mass redress events and the overall impact of the redress scheme on firms and consumers
  • Possible adjustments to better identify and manage mass redress events
  • Strategies to enhance cooperation between the FCA and FOS to ensure consistent regulatory perspectives

The Impact of Mass Redress Events

The current redress framework effectively handles individual complaints. However, issues arise during mass redress events, wherein numerous complaints share a common cause. The regulators have identified that difficulties can escalate when firms fail to detect issues early or to take timely action to mitigate harm.

One of the most notorious mass redress events in UK corporate history was the payment protection insurance (PPI) scandal, which cost banks approximately £50 billion following the sale of unnecessary insurance to millions of customers alongside personal loans. Concerns regarding the product were first raised in the early 1990s, but it took over two decades for the situation to be resolved.

Recent Developments in Consumer Protection

Last month heralded a significant victory for consumer groups with a landmark ruling in a car finance misselling case in the Court of Appeal. This ruling could obligate lenders to provide billions of pounds in compensation to affected borrowers, potentially marking the largest mass redress event since the PPI scandal. The court found that it was unlawful for lenders to pay commissions to car dealers without borrowers’ clear understanding.

Industry Perspectives

Brian Nimmo, Head of Redress at Broadstone, commented: “The FCA and FOS are seeking ways to modernise the redress framework for mass events. We have witnessed several high-profile cases, including the current motor finance investigation, which could emerge as another significant example.”

Nimmo further stated, “A more effective framework would not only support consumers in receiving timely compensation but also help firms manage costs better, for instance, by decreasing interest payments on payouts and resolving issues promptly to prevent them from escalating into mass events.”