The Financial Ombudsman Service has been slammed as “unfit for purpose” in a damning report by the Institute of Economic Affairs..

The think tank concludes that the organisation is 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”.

Furthermore the paper, entitled “Who regulates the regulators? The Financial Ombudsman Service” claims the FOS lacks accountability and transparency, calling for major reforms.

It comes after chief ombudsman Caroline Wayman announced her resignation earlier this month amid a backlog of complaints.

The FOS is also in a consultation process over plans to make 150 staff redundant.

The IEA report, by head of regulatory affairs Victoria Hewson, highlights controversy over the fairness of FOS decisions and levels of compensation.

It points out that the cost of dealing with each case in 2019/2020 was significantly higher than the budgeted amount at £920 instead of the anticipated £650.

Although this overspend has been attributed to the growing complexity of cases, the report questions whether FOS is the right forum in which to deal with such difficult issues, especially as the maximum award has increased from £150,000 to £350,000.

The think tank says the problems are unlikely to be solved under new leadership as the FOS’s expanded remit to cover small business complaints is only expected to add to the complexity of cases.

Hewson’s report argues that far from improving confidence in consumer financial services and boosting competition, the FOS achieves the opposite.

It claims that by pushing up costs and business risks, the FOS is hitting the poorer consumers hardest.

It points to the “advice gap”, arguing that less well-off customers are being excluded from financial advice because it is not cost-effective for firms to serve this market.

The report says the FOS “infringes the rule of law requirement for transparency and legal certainty” and the principle that, in a democratic society, changes to the law are enacted by elected representatives in Parliament.

Hewson argues that there has been a lack of research into the ombudsman’s impact meaning policymakers “have not considered whether the operation of the FOS is conducive to the FCA’s competition objective or is beneficial to consumers at large”.

Hewson says:“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.”

A spokesperson for the FOS says: “Since the Financial Ombudsman Service was set up we have helped millions of consumers resolve their problems with financial businesses. 

“In 2020/21, excluding PPI, we received around 50 per cent more cases than we expected to and are currently helping thousands of people with complaints, including many who have seen their lives or businesses impacted by Covid-19. 

“We have recruited new staff to help us significantly reduce waiting times for customers and ensure we continue to provide an effective service. 

“If anyone isn’t happy with how their complaint to a financial provider has been dealt with, they can come to our service with confidence that we will help put things right.”