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Chancellor Rachel Reeves will on Thursday call for an overhaul of the UK system for consumer redress in the financial services sector, as lenders brace for a potential multibillion pound bill for alleged mis-selling of car finance.
Reeves wants to modernise the operation of the Financial Ombudsman Service (FOS) to give consumers and businesses more clarity about the compensation landscape in future, according to allies of the chancellor.
The role of the FOS in major City compensation cases has been under scrutiny in the Treasury for months, but Reeves’ allies said the need for reform had been brought into stark relief by recent turmoil in the car finance sector.
The FOS has taken a consumer-friendly stance on complaints over alleged mis-selling of car finance that has put the Financial Conduct Authority, the chief UK financial regulator, on the back foot, and threatened to leave banks exposed to compensation claims worth billions of pounds.
“The FOS has an important role to play in protecting consumers but there is a case for modernising it and giving consumers and firms more clarity,” said one person briefed on Reeves’ thinking.
Two rulings by the FOS at the start of this year upholding consumer claims against banks have forced the FCA to step in and pause such compensation cases while it investigates the issue of commissions paid to car dealerships by finance companies and decides how to respond.
Lawyers at “magic circle” firm Clifford Chance said in a note last month that “the ramifications of the position FOS has taken . . . could be significant”.
Barclays is challenging one of the decisions by the FOS from earlier this year in a judicial review.
But lawyers said the bank was likely to lose after the Court of Appeal said last month it was unlawful for car dealers to receive any commissions from finance providers unless they were fully disclosed and accepted by consumers, in a ruling that went further than the FOS.
The stance of the FOS in siding with consumers on car finance has echoes of its role in the payment protection insurance (PPI) scandal, which ended up costing banks about £50bn in redress.
In the three months to April, the FOS said it received 15,925 complaints about car finance, almost five times more than during the same period last year.
It added more than 90 per cent of these were brought by claims management companies, which shot to prominence by pursuing PPI complaints for thousands of consumers in return for a cut of any compensation.
Nikhil Rathi, head of the FCA, said earlier this year the UK redress system “stands out in Europe due to its combination of complexity and the scale of claims management activity”, and endorsed a review.
Meanwhile Reeves will use her Mansion House speech to urge the technology and telecom sectors to do more to combat online payment fraud, after claims by the financial services industry that they are enabling such activity.
Almost 80 per cent of so-called push payment fraud — when someone is tricked into sending money to a fraudster posing as a genuine payee — starts online, of which 60 per cent is estimated to begin on social media, according to trade body UK Finance.
Banks and payment companies have since October been liable to reimburse claims of push payment fraud worth up to £85,000.
Reeves will demand that companies including Meta, TikTok, BT and EE update ministers about progress on fraud prevention before March, with the veiled threat of further action if they fail to act.
Asked whether Reeves would be prepared to go further, a Treasury official said: “The ball will be back in our court if demonstrable progress has not been made.”
However, Reeves will fall short of committing to specific measures that would give social media companies a financial incentive to prevent fraud by making them shoulder some of the cost of reimbursing fraud victims.
Separately Reeves will outline major pension reforms, including the consolidation of the £391bn of assets in 86 separate local council retirement schemes, to create a series of “Canadian-style” megafunds that would be encouraged to invest in the UK.
The chancellor has ruled out — at least for now — forcing pension funds to invest in UK assets such as equities and infrastructure, a move which would have provoked an outcry from the sector.
