The Financial Ombudsman Service has acted as “a quasi-regulator,” says the Treasury, and has set out a new path for the disputes body, which will see it defer to the Financial Conduct Authority.

The consultation report, prepared by Economic Secretary to the Treasury Emma Reynolds (pictured), says in the 25 years since FoS was formed it has, at times, overlapped with the larger FCA, which has produced confusion for firms and inconsistent rulings for consumers.

Reynolds said: “There is not always coherence between the regulatory approach set by the FCA as the financial conduct regulator and the approach used by the FOS to settle complaints between consumers and firms.”

She added: “This potential for tension can, in a small but impactful number of cases, result in the FOS acting as a quasi-regulator.

“This can leave firms operating within an uncertain regulatory environment, with damaging consequences for the ability of firms to invest, innovate and grow, and can lead to unpredictable outcomes for consumers.”

Reynolds, who began her report in March, added that firms “highlighted the potential for strain on the redress system when FoS is required to handle cases which are related to a mass redress event”.

FoS handled millions of long-running payment protection insurance compensation claims, with regulators potentially facing claims from millions of motorists if they were mis-sold finance agreements when buying a car, after a Court of Appeal ruling last October.

Firms have also complained that FoS has done little to combat the tide of claims management companies that have grown up around finance firms since the beginning of the payment protection insurance scandal in the 1990s.

Reynolds says the government will use changes to legislation, when parliamentary time allows, to make a series of reforms, including:

• FOS will be required to find that a firm’s conduct is “fair and reasonable” where it has complied with relevant FCA rules
• A new framework on how FOS and the FCA work together — where there is ambiguity in how the FCA’s rules apply, the FOS will be required to seek a view from the FCA and the FCA will be obliged to respond
• A 10-year time limit for complaints brought to the FOS
• The FCA will play a greater role in mass compensation cases, sometimes called mass redress events. FOS will be “obliged to refer potential wider implications issues or mass redress events to the FCA, and the FCA will be obliged to consider those issues”

Industry welcomed clearer roles between the FCA and FoS.

Broadstone senior consultant Simon Robinson says: “The review of the Financial Ombudsman Service is aiming to create a more coherent framework between it and the FCA.

“There is a particular focus on mass redress events, which is timely given the imminent Supreme Court ruling on motor finance.

“The hoped-for outcome appears to be the creation of a more flexible approach that can react with agility and speed with greater involvement from the FCA to create consistent and speedy outcomes.”

Earlier this month, UK Finance also labelled FoS a “quasi-regulator” and insisted that the government publish a timetable of reform for the body.

The Treasury report, Review of the Financial Ombudsman Service, is open for consultation for 12 weeks until 8 October.