“Modernising the Redress System” – a new approach for modern day “mass redress events” in the financial services sector?

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In last week’s Mansion House speech, there was a promise to deliver a Call for Input on proposed changes to the FCA’s redress system, that promise was delivered the very next day. The Call for Input is a collaboration between the Financial Conduct Authority (‘FCA’) and the Financial Ombudsman Service (‘FOS’) (together the ‘Regulators’) and has the stated aim of a modernised redress system that “better serves consumers and provides greater stability for firms to invest and innovate”.

The focus of the Call for Input is what the Regulators term as “mass redress events” i.e. those cases where large numbers of consumers raise a grievance in respect of the same issue. These events often involve large numbers of consumers and significant amounts of redress. They can cause bottlenecks in the complaint resolution process together with resourcing and costs issues, and delays, resulting in poor outcomes for both consumers and for firms. Recent examples of mass redress events include the payment protection insurance (‘PPI’) mis-selling complaints and the complaints arising from advice given to members of the British Steel Pension Scheme (‘BSPS’).

Key Objectives

The five stated key objectives of the Call for Input are these:

• Achieving efficient and appropriate redress for consumers “when things have gone wrong”.
• Reducing the number of complaints that are referred to the FOS by ensuring that firms are more effective and pro-active at resolving complaints themselves.
• Preventing “mass redress events” from occurring, and reducing the associated burdens on the FOS and the Financial Services Compensation Scheme (‘FSCS’), by focusing on the early identification of redress events or issues with sector wide implications, with a view to resolving them swiftly and efficiently.
• Enabling more direct channels of communication from consumer and industry stakeholders to the Regulators for the purpose of flagging matters which might have wider implications for the market.
• Improving how the Regulators work together to ensure that the regulatory requirements imposed on market participants are consistent and predictable.

Aim of the Call for Input

The aim of the Call for Input is for the Regulators to obtain feedback from market stakeholders on how the current system could be modernised, to ensure better outcomes for firms, consumers and their representatives, including:

• The problems that the current system and mass redress events are causing.
• The changes that could be made to the redress framework to enable better identification of and management of mass redress events.
• How the Regulators could change  and improve how they collaborate to ensure consistency on the regulatory requirements.

Why the Call for Input?

An ineffective consumer redress framework could hinder the FCA in its pursuit of its primary and secondary statutory objectives. In addition, the regulatory rules pertaining to complaints handling and FOS consideration of complaints, are out of date, having not been reviewed for a decade. The following two factors are highlighted in the Call for Input as necessitating an appraisal of why updating of the redress framework is necessary:

• The impact of mass redress events of the kind seen in recent years and the potential for them to impact detrimentally on growth, innovation and investment.
• The conduct of professional representatives in the bringing of complaints to firms and to the FOS.

The current rules were designed and work effectively for individual complaints. The FOS was established with a view to it assessing circa. 30,000 of such complaints per annum. Complaints now exceed 200,000 per annum with mass redress events being a key driver of the increased complaints volume. Although the FOS has some capacity and processes to deal with high volumes of complaints about similar issues (such as the motor finance complaints) it is currently under a duty to resolve each complaint based on what is fair and reasonable on its facts. 

It may well be that adapting the redress system to include some form of systematic approach to address the issues presented by mass redress events could introduce efficiencies for the FOS in resolving large volumes of similar case type redress claims. This could leader to faster and more consistent outcomes for consumers than is presently the case. It could also mitigate some of the risks of handling mass redress events within the current redress system which include high costs, long delays and the likelihood of disorderly failures. 

Issues to be addressed

There are several issues identified in the Call for Input as requiring of detailed regulatory analysis. These include:

• The introduction of a formal definition of a “mass redress event” and an understanding of whether such a definition would assist with the earlier identification of events involving significant issues that may need careful management with a view to avoiding them becoming systemic.
• Identifying the factors to be considered when determining whether an issue might have the potential to become a mass redress event, for example, the risk of firm failure, contagion risk, the number and type of consumers affected and the scale of redress that is in contemplation.
• Addressing poor behaviours in the claims management industry (for example, the referral of large numbers of poorly evidenced claims).
• Improving, as between stakeholders and the Regulators, the early identification of and management of issues that might have wide implications. 
• Closer alignment of the FCA and FOS in relation to regulatory requirements and the interpretation and communication of expected standards and behaviours.
• Supporting the FCA’s objectives of ensuring appropriate protection for consumers and facilitating the international competitiveness of the UK by ensuring that mass redress is provided in an “orderly, consistent and efficient way” to ensure trust and confidence in the markets which are factors essential to sustainable economic growth and international competitiveness. 
• Addressing whether positive change can be achieved with further guidance or rule changes, for example to the Dispute Resolution Complaints Sourcebook (‘DISP’), and alignment of approach with the overall expectations under the Consumer Duty.
• Reducing the routes for consumers (and/or consumer representatives) to escalate matters to the FOS by mandating that firms resolve complaints effectively and narrowing the basis upon which a referral to FOS can be made.
• Ensuring that complaints made to the FOS are properly articulated and evidenced. 
• Establishing the appropriate case fee rules for mass redress events.
• Clarifying the case dismissal powers that it is appropriate for the FOS to have (which are currently limited but in flux given the prospective repeal and replacement of the Alternative Dispute Resolution for Consumer Disputes (Competent Authorities and Information) Regulations 2015 by The Digital Markets, Competition and Consumers Act 2024 (in relation to which the FOS will be exempt)).
• The appropriate level of regulatory consultation and co-operation between the Regulators, for example, where there is a high volume of complaints on a similar issue or where the interpretation of regulatory rules is a key issue.
• The possible use of a regulatory “pause” in instances where a mass redress event is suggested but where time is required to gather the information required to ensure that the correct regulatory response is delivered and an orderly, consistent and efficient outcome is achieved.
• Enabling an improved level of reporting of redress events to ensure earlier and greater visibility of potential systemic redress issues.
• Setting clear boundaries for engagement by the Regulators with professional representatives to ensure that they play an appropriate role in the redress system ensuring that “consumers are protected and the redress system functions effectively”. 
• Effective collaboration amongst the “financial services regulatory family” (or ‘WIF’ which comprises of the FOS, FCA, Pensions regulator and Money and Pensions Service) to ensure optimal collaboration on matters of wider implication.
• Improvements to mechanisms for stakeholder engagement to ensure the capture of valuable sources of regulatory intelligence, for example, increased engagement with industry and consumer groups. 

The Call for Input is open until 30 January 2025 and a regulatory response in respect of it is promised in H1. The Regulators are keen to hear from a wide range of stakeholders including consumer groups and professional representatives, other regulators, policy groups, industry bodies, regulated firms, advisors and consultants, experts and think tanks.

We will be following the outcome of the Call for Input with interest. The best way to stay connected with updates and insights is to sign up to our regular financial services regulation ‘round-up’ which you can do by clicking here https://buff.ly/4hh166o. You can meet our team of financial services regulation lawyers by clicking here Financial services lawyers | Financial services law.

 

The FCA and the Financial Ombudsman Service want to seek views from stakeholders on how to modernise the redress framework, so it better serves consumers and provides greater stability for firms to invest and innovate. Find out how to give your feedback.

https://www.fca.org.uk/publications/calls-input/modernising-redress-system