The Financial Ombudsman Service is battling against a litany of obstacles as the government looks to “fundamentally” change its regulatory makeup.
The organisation was rocked earlier this year by a leadership crisis following the abrupt departure of chief executive Abby Thomas in February.
A Treasury Committee report, published in July, revealed Thomas had been dismissed after a “mutual collapse in confidence” stemming from “fundamental disagreements” with the board over strategy.
Just days later, Baroness Zahida Manzoor, chair of the FOS, announced she would step down at the end of her term on August 1.
Her departure was also mired in controversy after Manzoor refused to appear before the Treasury Committee during its inquiry into Thomas’s exit, arguing her position as a peer exempted her from giving oral or written evidence. The committee later criticised her conduct as “unnecessary and disrespectful”.
Further scrutiny piled on after The Times revealed Thomas received a severance package of £229,879, including £100,000 for loss of office, £107,692 in lieu of notice, and £22,177 for gardening leave, which began on her departure date.
Meanwhile, the Financial Conduct Authority (FCA) launched an “unsuccessful” recruitment campaign for Thomas’s successor, eventually appointing an interim chief executive in July.
This leadership vacuum comes at a time of potential upheaval as part of the Treasury’s deregulation push.
Chancellor Rachel Reeves described plans for “the most significant reform to the Financial Ombudsman Service since its inception.”
Abdulali Jiwaji, banking litigation partner at Signature Litigation, told City AM: the reforms were a “big shift psychologically because this ombudsman has always just been established in the market as a really user friendly service for consumers”.
He added: “It did strike me as quite a fundamental shift… it’s a move to shift some of the balance.”
FOS back in banks favour
Coinciding with Reeves’ Mansion House speech, the Treasury published a review of the FOS outlining proposals to clarify its relationship with the FCA.
Under the new framework, when FOS interpretations of FCA rules are unclear, it would be required to seek the FCA’s view, which the latter must then provide.
This move follows mounting criticism from the banking industry, with UK Finance labelling the FOS – which was designed to settle complaints between consumers and businesses that provide financial service – a “quasi-regulator”.
Backlash grew as the industry argued the FOS’ remit evolved beyond complaints to exercising regulatory-like functions or influences, despite not being a formally designated regulator.
Charlotte Hill, partner at Charles Russell Speechlys, said the reforms would result in “tighter coordination between the FOS and FCA, legislative changes to redress mechanisms, and a sharper focus on pro-growth regulation.”
While Hill acknowledged the reforms may bring “greater predictability”, she warned: “Consumers could face slower processes and narrower avenues of redress unless reforms are carefully balanced.”
Jiwaji added the changes would likely “flip the balance in favour of institutions”, noting that the FCA would essentially become “the referee” in disputed interpretations.
He predicted the reforms could lead to rulings that had previously favoured consumers being “prescribed” to now favour institutions instead.
Friction between the FOS and financial giants has intensified in recent years.
City AM revealed in July that the UK’s ‘Big Six’ banks – Barclays, HSBC, Lloyds Banking Group, NatWest, Santander and Nationwide – paid a combined £38.8m in FOS administrative fees over the past year.
The banking industry body – UK Finance – had criticised the fee model warning it “opened the door to penalising firms disproportionately, particularly in the context of mass-generated complaints driven by professional representatives.”
In an effort to appease industry concerns, the FOS introduced a revised fee structure in April.
Under the new system, professional representatives are now charged £250 for every case submitted beyond the first 10 per financial year. Meanwhile, banks are exempt from fees for their first three complaints. From the fourth onwards, a standard case fee of £650 applies, reduced to £475 for dismissed, withdrawn, or out-of-jurisdiction cases.
Staying relevant
Complaints to the FOS surged to their highest levels since the PPI scandal in the 12 months to 31 March, 2025, topping 305,000 cases.
This spike was largely driven by a nearly 500 per cent increase in motor finance complaints, which soared to 73,328, up from just 12,604 the previous year.
The ombudsman’s caseload rose by more than 50 per cent over the same period.
Hill said: “The ombudsman is under real strain,” noting that “surging complaints, leadership gaps and governance questions have dented confidence.”
Modest relief came between April and June, when complaints fell to their lowest in more than a year.
Still, Hill stressed the importance of “quick wins on transparency and efficiency” for the FOS to maintain relevance.
“Practical steps include clearer communication on leadership changes, streamlining complaint-handling with two-stage complaints, and tackling frivolous claims.”
Despite pressure to reform and stabilize, Jiwaji said the FOS role remained secure.
He said the outcome of the Treasury’s review “largely recognised the incredibly important role that the FOS plays,” adding that the “momentum” is with the organisation to continue “in some form or another” due to its vital function in diverting disputes away from the courts.