Plans for Financial Ombudsman Service shake-up revealed – but Martin Lewis warns they could create a 'protection gap'

The Government, the Financial Ombudsman Service (FOS) and regulator the Financial Conduct Authority (FCA) consulted on the shake-up between July and October 2025.

Martin and MSE responded at the time, expressing concerns that the proposals could cause delays to complaint responses, damage consumer confidence, lead to reduced consumer willingness to take out long-term products and reduce the effectiveness of the FOS as an independent and impartial service.

The changes will now need to be legislated for before they take force. Here are the key need-to-knows:

The 'fair and reasonable' test will change

Currently, the FOS decides how to side on complaints based solely on what it believes is "fair and reasonable" in the specific circumstances of the case. In practice, this means that even if a company is acting within the law, the FOS can still rule against it if it believes the company has treated you unfairly or unreasonably. The FOS can also take into account voluntary codes of practice that the firm has signed up to or what it considers to have been good industry practice at the time.

If the FOS rules in favour of a consumer, and the consumer accepts its decision, the decision is legally binding, and the company involved must comply.

But the test will now more closely align with FCA rules. So, if the FOS finds that a firm has followed relevant rules set by the FCA, the FOS must decide in the firm's favour and therefore rule that they've passed the "fair and reasonable" test.

Feeding into the consultation, we'd argued that the existing test works and should be left untouched. We added that changing the system in this way is inappropriate as the FCA is withdrawing detailed guidance about how customers should be treated and relying more on high-level statements, creating extra uncertainty about what the FCA's rules mean. It would also prevent the FOS from separately considering how companies are complying with good industry practice or any voluntary codes which firms had signed up to.

Martin Lewis: 'There's a whiff of "consumers be damned"'

Martin responded to the initial consultation with the following comment – since that time, little about his position on the issue has changed:

A time limit will be imposed on complaints

A 10-year time limit on consumer complaints relating to ALL products is also to be imposed – though the FCA will be able to make exceptions to this timeframe.

Currently, you've the longer of EITHER six years from the event you're complaining about taking place OR, crucially, three years from when you knew you could make a complaint (or when you should reasonably have become aware) – which means the issue could have happened more than 10 years ago. You just need to contact the Ombudsman within six months of your last contact with the firm, and you need to have complained to the firm first.

In response to the consultation point on this, we'd opposed the introduction of extra time limits and argued that exemptions to the 10-year rule should be made for long-term products, such as pensions, long-term insurance and mortgages. We also highlighted that the FCA and FOS had not published any data on the potential impact of a 10-year time limit – meaning they had no idea how much consumers would lose out on due to the changes. In addition, we said the time limit may discourage consumers from taking out long-term products in the first place due to weakened trust in the regulatory system.

Other key changes

Other key changes announced include:

• A 'referral mechanism' between the FOS and the FCA will be established. This will enable the FOS to ask the FCA for its view if it sees ambiguity in the FCA's rules and REQUIRE it to ask the FCA if it believes an issue being considered could have wider impacts in the industry.
  
  We'd supported this type of mechanism in principle in our consultation response, but raised concerns that it may contribute to further delays and backlogs. The Government says that people who take their complaints to the FOS will be able to trigger this referral mechanism but in practice it will be very difficult for most people to judge when they should be asking for the FCA to clarify the meaning of a rule.

• The Chief Ombudsman will be responsible for all FOS decisions. The Government has said this will increase consistency across the organisation's decision-making. Currently, decisions are made by a panel of ombudsmen, with no overall point of responsibility.

• The FOS and FCA will need to publish regular reports on their decision-making processes. These reports will include information about how the FOS considers complaints, plus clarification on which types of complaint will be covered by the FCA's rules.

• The FCA will be given more tools to respond to 'mass redress events' – such as car finance redress, for example – so it can respond more efficiently. This will include:
  - the FCA no longer needing to consult to pause complaints handling deadlines that apply to consumers and firms before referring a complaint to the FOS and;
  - returning unresolved FOS complaints that are within scope of an FCA-approved redress scheme to the relevant firm to consider.