The End of Free Financial Justice? How New Fees Could Undermine Consumer Protection at the Financial Ombudsman Service

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Fairness Analysis: The Introduction of Fees for Complainants Seeking Legal Representation at the Financial Ombudsman Service (FOS)

Introduction

The Financial Ombudsman Service (FOS) was founded on the principle that consumers should have free and accessible redress when financial firms treat them unfairly. Historically, its funding model ensured that complainants bore no cost for lodging disputes, while financial firms paid case fees and levies. This policy was designed to remove financial barriers to justice and enhance consumer confidence in financial services.

However, with the introduction of fees for claims management companies (CMCs) and the proposed move towards charging consumers who seek legal representation, a fundamental shift is underway. This analysis considers the fairness of such a change within the historical and policy context of the FOS’s original funding model.

1. The Original Justification for a Free-to-Use FOS

As outlined in previous findings, the rationale behind keeping the FOS free for consumers was based on key policy objectives:

  • Access to Justice: Consumers, particularly those of limited means, would be able to challenge financial firms without fear of cost.
  • Encouraging Complaints When Justified: Free access would ensure that consumers did not hesitate to pursue valid disputes.
  • Maintaining Market Confidence: A robust and cost-free redress mechanism enhances trust in financial services.
  • The Polluter Pays Principle: Firms that cause complaints should bear the cost of resolving them, incentivising better behaviour.

These principles have underpinned the FOS’s funding model since its establishment. The question now is whether the proposed changes represent a fair and proportionate evolution or a departure from its founding ethos.

2. The Context Behind the Proposed Change

The introduction of a £250 fee for CMCs (after 10 free cases annually) is intended to deter speculative or weak claims that overwhelm the FOS and impose unnecessary costs on respondent firms. Additionally, respondent firms’ case fees have been reduced from £650 to £475 if a case is not upheld or withdrawn, aiming to address concerns that businesses were unfairly burdened by weak claims.

However, alongside this, the next step appears to be charging consumers who seek legal representation—effectively ending the blanket principle that the FOS is free for all complainants. This move raises significant fairness concerns.

3. The Fairness Debate: Who Benefits and Who Loses?

The introduction of claimant fees for legal representation changes the power balance between consumers and financial firms. Below are key considerations:

(i) Impact on Consumer Access to Justice

The original policy of free complaints aimed to ensure all consumers—regardless of financial means—could seek redress. Introducing fees for legal representation disproportionately affects vulnerable complainants, particularly those:

  • Facing complex cases (e.g., fraud, pension mis-selling, and investment disputes).
  • With disabilities or language barriers that make self-representation difficult.
  • Lacking financial literacy or legal expertise.

Charging these consumers could disincentivise legitimate complaints, particularly where financial firms have significant legal resources to defend cases. The firms already have lawyers—shouldn’t consumers be entitled to seek legal help without cost penalties?

(ii) Incentivising Firms to Reject Complaints

Currently, firms know that any complaint escalated to the FOS will cost them a fee, regardless of outcome. This motivates firms to resolve legitimate complaints internally. However, if claimants must pay for legal help, firms could exploit this barrier by rejecting complaints at the first stage, knowing that some consumers will be financially deterred from escalating.

This dynamic shifts the balance of power further in favour of financial institutions—potentially leading to a rise in unfairly dismissed complaints.

(iii) The False Equivalence Between CMCs and Individual Claimants

The justification for charging CMCs is that they have turned mass-claim handling into a business model, often submitting high volumes of speculative or templated cases. However, the same logic does not apply to individuals who require legal representation for complex financial disputes.

  • CMCs operate for profit—they should be held accountable if they submit weak cases.
  • Individual consumers with legal representation are different—they seek assistance because their case is difficult, not because they are running a claims business.

Equating the two is unfair and risks harming consumers with genuine grievances.

4. The “Fair Funding” Argument: Who Should Pay?

Proponents argue that the new charging model creates a fairer cost structure by shifting some of the burden away from financial firms. However, this overlooks the original policy intention of the FOS—to hold firms accountable for their actions.

The “polluter pays” principle is undermined if costs are shifted to claimants, as it:

  1. Reduces firms’ financial responsibility for misconduct.
  2. Disincentivises firms from resolving issues internally.
  3. Places more financial risk on the very consumers the FOS was created to protect.

A fairer approach would be to target bad actors among CMCs while maintaining free access for consumers, including those needing legal assistance.

5. The Bigger Picture: A Threat to Consumer Protection?

This change is happening amid broader discussions on “modernising the redress system,” with concerns over:

  • Mass redress events (e.g., PPI, pensions mis-selling) overwhelming firms.
  • Firms leaving markets due to fear of large compensation claims.
  • Regulatory pressure to prevent financial exclusion by limiting mass claims.

However, shifting costs to consumers is not the right solution. The real issue is holding firms accountable without creating loopholes that weaken consumer protections. If consumers lose access to free redress, the financial industry may face less scrutiny—leading to worse outcomes in the long term.

6. Alternative Solutions

Instead of penalising consumers for seeking legal help, the FOS could:

✅ Increase scrutiny on CMCs—apply higher case fees to those with high rejection rates.
✅ Introduce a success-based refund model—if a case is upheld, the consumer (or their lawyer) is reimbursed for the fee.
✅ Keep legal representation free for vulnerable consumers—such as those with disabilities, low incomes, or complex cases.
✅ Create a graded fee system—where small claims remain free but larger, more complex cases require a modest contribution.

Such alternatives would maintain fairness while discouraging abuse.

7. Conclusion: An Unfair Shift of Burden

The proposal to charge consumers who seek legal representation at the FOS represents a fundamental departure from the service’s founding principles. While reforming CMC practices is justified, penalising individuals who need legal help is unfair and risks creating new barriers to justice.

The FOS was designed to balance the scales between consumers and financial firms. Shifting costs to claimants tilts the balance in favour of firms, reducing accountability and undermining trust in the system.

A better approach would be targeted reform—ensuring that firms and bad actors in the claims industry bear the cost, rather than consumers who simply seek justice.

The UK Financial Ombudsman Service: Rationale for a “Free-to-Complainant” Funding Model

Historical Context and Legislative Background

The Financial Ombudsman Service (FOS) in the UK was established as a unified dispute-resolution body in the early 2000s. It was created by Parliament under the Financial Services and Markets Act 2000 (FSMA) and became operational on 1 December 2001​

This new statutory scheme merged eight previously separate financial sector ombudsman schemes into a single “one-stop” service for consumer complaints​

The consolidation addressed criticisms that the old patchwork of multiple schemes was confusing for consumers, by providing a unified system of complaint handling across banking, insurance, investments and other financial services​

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FSMA defined the FOS’s role as an independent mechanism to resolve disputes “quickly and with minimum formality” as an alternative to the courts​

Crucially, FSMA also set out the FOS’s funding structure: the legislation mandated that the FOS be funded by the financial businesses it covers and not by consumers​

In fact, FSMA contains no power to charge consumers for using the ombudsman service​

As a result, from its inception the FOS has been free for complainants, with its costs met through levies and case fees paid by respondent firms in the financial industry​

This legislative design reflects a clear policy choice that consumers should have cost-free access to redress, with industry bearing the expenses of dispute resolution.

Policy Objectives Behind the Funding Model

The free-to-complainant, industry-funded model of the FOS was driven by several policy objectives aimed at improving consumer protection and confidence in the financial system. Key objectives and reasoning included:

  • Ensuring Access to Justice and Consumer Protection: Regulators and lawmakers saw accessible redress as a cornerstone of financial regulation. The government explicitly viewed independent complaint resolution for retail consumers as a vital component of the regulatory regime, supporting the statutory objectives of maintaining confidence in the financial system and securing appropriate consumer protection​. By removing financial barriers for complainants, the FOS model ensures that consumers can pursue disputes regardless of their means. This aligns with the broader aim of promoting consumer confidence – customers know that if something goes wrong with a financial product, they have a free, impartial avenue for recourse. Indeed, the existence of an ombudsman “independent organisation dedicated to fair outcomes” is seen as a significant contributor to confidence in financial services, since consumers can trust that an impartial body will judge their complaint if needed​. This, in turn, benefits the industry by underpinning trust and stability in the market​.
  • Removing Barriers to Complaining: A free service was intended to eliminate any cost deterrent that might prevent wronged consumers from seeking redress. The FOS’s constitution deliberately requires no charge for complainants to refer a complaint, so that cost does not form a barrier to access​. Even a modest fee could dissuade some consumers (especially those with small claims or limited resources) from pursuing a valid complaint. By contrast, making the service free encourages consumers to assert their rights and hold firms accountable. This open access was viewed as essential for fairness and “access to justice” in financial services​. Notably, the ombudsman model offers an informal alternative to court – with no court fees or risk of legal costs – allowing consumers to resolve disputes without the expense and complexity of litigation. The FOS process is designed to be user-friendly (no need for legal representation or complex evidence) and cost-free to consumers, providing a “proportionate, prompt and informal” path to redress that would otherwise be out of reach for many​.
  • Encouraging Confidence in Internal Complaints Handling: The availability of a free external ombudsman also creates an environment where consumers are more willing to trust the system. Financial firms can reassure dissatisfied customers that if they remain unhappy after the firm’s own review, they have the right to escalate the complaint free of charge to the independent ombudsman, whose decision the firm will abide by​. This dynamic helps defuse situations with persistent complainants and lends credibility to firms’ internal complaints processes, knowing an unbiased referee can step in at no cost to the customer. Overall, the policy intention was that an accessible ombudsman would bolster consumer confidence in financial firms and the regulatory framework, by guaranteeing that unresolved issues can be fairly reviewed without cost​.

Regulatory and Economic Principles Underpinning the Model

Under this funding approach, respondent firms finance the FOS through annual levies and per-case fees, reflecting a regulatory philosophy akin to a “polluter pays” principle. In other words, firms that generate more complaints bear more of the costs of the dispute resolution system. This principle creates a financial incentive for businesses to handle complaints better and reduce poor practices that lead to disputes​

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By internalizing the cost of redress, the scheme nudges firms toward improving customer service and compliance: if a firm’s misconduct or errors result in many complaints, it will directly pay more through case fees. Stakeholders have generally supported this polluter pays model as a fair way to fund the ombudsman and encourage firms to minimize consumer harm​

In practice, the FOS uses a combination of an industry-wide levy (to cover fixed overheads) and case fees charged to firms for each complaint resolved​

This mix ensures the service has stable funding while still linking a portion of costs to the volume of complaints each firm attracts. From an economic standpoint, such a structure spreads the overall cost of dispute resolution across the industry (and ultimately, as needed, across consumers in general via firms’ pricing) but places the marginal cost on the firm involved in each case. This approach is seen as equitable and efficient. It avoids burdening taxpayers or individual consumers with the expense of resolution, instead making it part of the cost of doing business in finance – a cost that firms can work to reduce by treating customers fairly.

The funding model is also designed to safeguard the FOS’s independence despite being industry-funded. Statute and governance arrangements prevent firms from influencing the ombudsman’s decisions or budget in exchange for their fees​

For example, the FOS’s board is appointed by the regulator (with Treasury approval for the Chair) and the ombudsmen are appointed on terms to ensure independence​

Firms have no say in individual case outcomes and do not directly control FOS finances. This structure upholds the impartiality of the service while still relying on industry funding – a balance that many ombudsman schemes aim to strike.

Comparisons with Ombudsman Schemes in Other Jurisdictions

The FOS’s funding model – free to the complainant, funded by the industry – is not unique to the UK; it aligns with international best practices for financial ombudsman schemes. In fact, many jurisdictions have adopted similar approaches to ensure consumers can seek redress without cost. For example:

  • Australia: The Australian Financial Complaints Authority (AFCA), the ombudsman for financial services disputes in Australia, operates on a very similar basis. AFCA’s services are free of charge to consumers and small businesses, and it is funded by levies and case fees paid by member financial firms. Australian policymakers and consumer advocates consider the no-fee access “an essential feature” of the system to maintain access to justice and fairness in financial dispute resolution​. Membership in AFCA is mandatory for financial firms, and the industry funding model is designed to be responsive to demand while incentivizing firms to avoid complaints – much like the UK’s polluter-pays concept​.
  • Canada: The Ombudsman for Banking Services and Investments (OBSI) in Canada is another parallel. OBSI provides impartial dispute resolution for banking and investment complaints at no charge to the consumer, functioning as an alternative to the courts​. It finances its operations by charging fees to its member financial institutions​. This mirrors the FOS approach: consumers and small businesses get free access, while all participating firms collectively fund the service. As in the UK, the Canadian model aims to enhance consumer protection and confidence by removing cost barriers and ensuring firms contribute to resolving the disputes they generate.
  • Europe and Other Regions: Across the EU, alternative dispute resolution (ADR) schemes for consumers are generally low-cost or free to the consumer by policy design. European Commission recommendations and networks like FIN-NET have long promoted the establishment of out-of-court redress mechanisms that are accessible and inexpensive for consumers, particularly in financial services. Many European countries have financial ombudsmen or mediators funded by industry levies or professional bodies, with no fee (or only a nominal fee) for consumers to bring a complaint. This common structure reflects a shared regulatory philosophy: effective consumer redress must not be impeded by cost. Even outside Europe, the principle holds – various industry ombudsman schemes (in sectors like energy, telecommunications, etc.) around the world use industry funding so that individuals can seek help freely. The UK’s FOS was something of a trailblazer in unifying and formalizing this model in financial services, and its approach has influenced ombudsman scheme designs globally.

Impact and Effectiveness of the Model Over Time

Over the past two decades, the FOS’s funding model and free access policy have had a profound impact on the UK’s financial dispute resolution landscape. Uptake and usage of the service have been very high, indicating its effectiveness in providing access to justice. Since its establishment in 2001, the FOS has helped consumers and small businesses resolve over 4 million complaints against financial firms​

This volume of disputes handled – covering issues from bank accounts and insurance to mass mis-selling scandals – demonstrates that consumers are willing and able to use the service when they have grievances. The absence of any fee to file a complaint means that even small-value or complex cases (e.g. mis-sold payment protection insurance (PPI) policies) could be pursued. Indeed, the FOS played a pivotal role in resolving mass complaint episodes like the PPI scandal, handling hundreds of thousands of those cases and securing redress for consumers, which shaped its workload for over a decade​

This has provided relief and compensation to consumers who might otherwise have had no realistic avenue for justice, given the costs of individual court action.

The funding model has largely proven effective at balancing the costs between industry and consumers. From the regulatory perspective, the FOS contributes to market confidence and integrity. Consumers know that if a dispute cannot be settled with a bank or insurer directly, they have a free and fair forum to turn to, which bolsters trust in the financial system as a whole​

Firms, on the other hand, have a clear incentive to resolve complaints internally to avoid incurring case fees, and more broadly to improve their customer service to reduce the number of complaints escalated to the ombudsman. In this way, the “polluter pays” aspect has nudged firms towards better practices; many firms actively monitor FOS decisions and try to address systemic issues to prevent repeat cases. Industry funding of the FOS has also meant that the service can scale its resources in response to demand (since funding increases with complaint volumes), ensuring it can handle surges like the PPI cases without being constrained by a fixed public budget​

This demand-driven funding has helped make the scheme a flexible and largely sustainable part of the financial regulatory infrastructure.

The free-for-consumers model has generally been very popular, but it has not been without challenges. One consequence of not charging complainants is that there is little financial filter against frivolous or unmeritorious complaints, which in some instances has led to heavy workloads. In practice, however, the vast majority of FOS cases are genuine disputes; the service uses initial screening and informal resolution to weed out trivial cases. A more significant issue that emerged was the rise of claims management companies (CMCs) and other paid representatives who lodge large numbers of complaints on behalf of consumers. Some of these CMCs took advantage of the free service by flooding the FOS with templated or poorly evidenced claims, knowing that the firms (not the consumers or the CMCs) would have to pay the case fees regardless of merit​

This behavior has at times strained FOS resources and imposed costs on firms even for complaints that were not upheld​

It also created a perverse incentive for firms to sometimes settle borderline claims for less than the £650 case fee to avoid larger costs​

In response, the FOS and regulators have adapted the model to curb abuses while keeping it free for consumers. In 2023–2024, the UK government approved a rule change allowing the FOS to charge case fees to CMCs and similar professional representatives who bring claims in bulk​

This policy, implemented in 2024, aims to discourage exploitative mass claims by making those third-party intermediaries carry a cost for unfounded cases – without compromising the core principle that consumers can access the ombudsman at no cost​

Importantly, throughout these adjustments, policymakers have reaffirmed the commitment that the FOS will remain completely free for consumers to access directly​

The integrity of the funding model’s original intent – to impose no charges on individuals seeking redress – has thus been maintained even as the FOS refines its fee structures for the industry.

Overall, the UK’s approach of a free-to-use Financial Ombudsman Service funded by respondent firms has been highly effective in advancing consumer protection and confidence, and it has become an integral part of the financial regulatory system. Independent reviews and stakeholder feedback over time have concluded that the model provides a “world class” alternative to the courts for resolving finance-related disputes, offering outcomes that are fair, accessible, and timely​

By all indications, the cost structure has met its policy objectives: it has removed financial barriers for consumers, held firms accountable for the cost of poor practices, and resolved millions of disputes in a way that strengthens trust in financial markets. The continued evolution of the funding scheme – adjusting levies and case fees, and aligning incentives under the polluter-pays principle – suggests that the FOS will carry on refining its model. Yet the foundational rationale remains unchanged: ensuring that consumers can seek redress freely and fairly, while the industry pays its share to support that system. This approach, born out of legislative foresight in 2000, has stood the test of time and influenced the development of ombudsman services well beyond the UK.

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