FOS complaints rule has “fundamental error”

Four UK banks have won a significant legal victory against the Financial Ombudsman Service (FOS) after the High Court found it had made a “fundamental error of law” in allowing customer complaints about historic lending past the standard six-year window, which the lenders argued risked opening up the floodgates to compensation claims.

In what the judge described as “a novel legal departure”, the case marks the first known instance of the Financial Conduct Authority (FCA), the statutory regulator that developed the rules that govern the conduct of the FOS, intervening to oppose the position taken by the FOS, which the regulator described as “irrational and procedurally unfair”.

Collective responsibility

The case concerned four judicial reviews brought by Barclays, NatWest, Santander and Vanquis, who all challenged the FOS’s new interpretation of its jurisdiction over consumer complaints in decisions which were all made in July 2024.

The banks argued that the complaints, which largely related to credit card and bank overdraft borrowing, were brought out of time. As well as failing to comply with the FOS’s jurisdictional rules on complaint time limits, the FOS was also seeking to assert jurisdiction over the entire credit relationship, which would involve both investigation and, if appropriate, redress.

In its court submission, the FOS acknowledged that it has adopted a new legal interpretation. It said this was following a “review [of] its approach to the legal question of the scope of its jurisdiction”.

On this basis, the FOS said it had investigated the complaints not only on the basis of whether or not specific actions such as credit limit increases were “unfair” under the terms of the Consumer Credit Act, but also more widely on the grounds that the overall relationship between the lender and the borrower over the years was unfair.

A key part of the FOS argument centred on the concept of “collective responsibility” which the judge labelled “the most important and controversial” concept in the case. FOS described this as the responsibility on a creditor in a creditor-debtor relationship to correct unfairness that the creditor has produced.

The primary question for the court was whether the FOS’s interpretation of the law about complaint time limits and scope of jurisdiction was correct. In the event, the judge found in favour of the banks, stating: “It cannot be right that it is highly likely that the outcome would not have been substantially different if the error had not occurred. The FOS claims a jurisdiction for the whole of the credit relationship, a fundamental error of law.”

Claims surge

The court heard evidence from Barclays that the proper interpretation of the FOS’s jurisdiction potentially “has huge consequences in thousands of cases”, while Santander filed evidence that since the new approach assumed by the FOS, the number of complaints against the bank has more than doubled, from 31,000 to 71,000.

Currently it is not clear what the impact will be on the FCA’s motor finance redress scheme, which goes back to 2007, since many of the historic claims involve hidden commissions which were not disclosed to consumers, and are therefore open to challenge.

However, the legal ruling comes at a time when the FOS is subject to a government review overhauling its remit given fears it has become a “quasi regulator”, and that its actions are deterring investment in the UK.

In a statement, the Finance & Leasing Association (FLA) said it welcomed the ruling, adding: “We strongly believe that FOS complaints handling should align with FCA rules. This delivers certainty for lenders and consumers. In turn, this creates a more attractive outlook for investment in the UK and drives the growth we need.

“This is another milestone in the journey for the reform of FOS. The FLA will continue to work closely and productively with FOS on behalf of its members to ensure a proportionate and predictable ombudsman regime.”