Lender commissions case still in focus as appeal looms
Last week we reported that the Chancellor was going to look at action to try to get some kind of better control of certain areas of financial regulation – and sure enough, she did. She has set her sights on reforming the UK’s financial complaints system, partially in a bid to protect banks from the crippling costs of mass compensation events, while providing greater clarity for consumers. Her plans, unveiled alongside proposals from the Financial Ombudsman Service (FOS) and Financial Conduct Authority (FCA), aim to address rising complaints volumes and the growing influence of claims management firms.
The reforms, which Reeves outlined formally in her Mansion House speech, are part of a broader drive to modernise the financial services sector and mitigate the risk of another industry-wide crisis akin to the £50 billion payment protection insurance (PPI) scandal.
Proposed reforms to redress framework
Under the proposed changes, companies may be granted more time to respond to complaints, while the scope for appealing decisions made by the ombudsman could be curtailed. These measures aim to streamline the complaints-handling process and alleviate pressure on the FOS, which dealt with over 200,000 cases last year—a number that has risen by 50% over the past 12 months.
In a move designed to deter frivolous claims, the FOS announced plans to charge a £250 fee for cases submitted by professional representatives, such as claims management companies, after the first 10 filed in a year. If a claim is successful, the fee will drop to £75. Ordinary consumers will continue to have free access to the service.
James Dipple-Johnstone, deputy chief ombudsman at the FOS, acknowledged the challenges posed by high volumes of complaints in specific areas, such as car finance. “By strengthening our collaboration with the FCA and industry, we can tackle these issues more swiftly and deliver better outcomes for all parties,” he said.
The shadow of car finance mis-selling
The reforms come as the financial sector grapples with the fallout from allegations of mis-selling in the car finance market. A recent Court of Appeal ruling revealed widespread failures to disclose broker commissions to borrowers, resulting in inflated interest rates for car loans.
The judgment described the treatment of consumers as “poor”, with brokers incentivised to raise loan costs to boost their commission earnings. This prompted a wave of complaints, with nearly 16,000 car finance cases filed with the FOS in just three months—a fivefold increase on the previous year.
Banks are bracing for significant compensation payouts, with analysts estimating liabilities could exceed £9 billion. Barclays has already launched a judicial review of a FOS ruling in an attempt to limit its exposure, but experts suggest the bank’s chances of overturning the decision are slim.
The FCA has already urged the Supreme Court to expedite a decision that would allow lenders to appeal the decision.
Read more: Lloyds Bank shares plummet on 'worst case scenario' news
The FCA has temporarily paused some compensation cases as it reviews the regulatory framework around broker commissions. However, the disruption has unnerved investors, with shares in Lloyds Banking Group plunging by more than 7% last month as concerns about compensation liabilities mount.
Reeves’ broader regulatory agenda
Reeves’ intervention is part of a wider effort to recalibrate the UK’s financial regulations in the wake of her £40 billion tax-raising Budget. The Chancellor has vowed to balance consumer protection with fostering economic growth, while streamlining regulatory burdens on firms – the latter having been widely welcomed by a number of commentators.
“The FOS plays a vital role in protecting consumers, but there is a clear case for modernising its processes to ensure clarity and predictability for both consumers and businesses,” a source close to Reeves’ office told the Financial Times.
David Postings, chief executive of UK Finance, welcomed the focus on reform. “The complexity of the current system makes it costly and burdensome for businesses,” he said, adding that the creation of a “competitiveness champion” could help regulators balance their mandates effectively.
Balancing consumer rights and economic growth
The car finance controversy, which echoes the scale and severity of the PPI crisis, underscores the urgent need for a more transparent and efficient redress system. Reeves’ reforms are designed to avert a repeat of the unchecked claims culture that once burdened the banking industry.
With billions potentially at stake for banks and tens of thousands of consumers awaiting redress, the success of Reeves’ plans will be closely scrutinised. For an embattled financial services sector, they could mark the first step towards restoring trust and stability.
