Lord Sharkey (LD)

My Lords, I will speak to my Amendments 13 to 15 and 99. Clauses 7 and 8 propose radical reform of the relationship between the FOS and the FCA, and of the method of determining complaints to the FOS. These proposals will have a critical effect on consumer protection. They will turn the independent FOS into a subset of the FCA and make successful complaints harder to progress or achieve. Parliament designed and brought the FOS regime into being to provide accessible, no cost procedures for quickly determining complaints. At its heart is the “fair and reasonable” test. This test is abolished by the Bill, despite having been explicitly confirmed in July last year in the memorandum of understanding signed by the FOS and the FCA. The Bill will reduce access to free and impartial redress, introduce additional bureaucracy and costs, and ultimately risk damaging confidence in the financial services industry. The Government have not supplied any meaningful hard evidence that might justify, or at least explain convincingly, the rationale for these reforms. They say only that the Government’s review found that, “in a small but significant minority of cases, the FOS has acted as a quasi-regulator”. They do not say how small or how significant these cases are, or how significance was defined and engaged, and they have completely ignored repeated requests from these Benches to provide a clear description of the problem being addressed and of the necessity for such radical changes. Three months ago, at Second Reading, I asked for hard evidence. I got none, not even an acknowledgement of the request. I asked again on the first day in Committee, and again had no result. I asked again on the last day in Committee. This time, the then Minister—who is in his seat—apologised for not writing in answer to my questions and promised to get back to me “as soon as we have that information to hand again”.—[Official Report, 8/7/26; col. GC 161.] I have heard nothing since. This lack of response displays an almost contemptuous approach to parliamentary scrutiny, and it also makes obvious that the Government are unclear about the existence of any significant problem in the way that the FOS and the FCA operate under their current MoU. I am grateful to Sarah Pritchard, FCA deputy CEO, for her attempts to persuade the Government to answer our questions in a meaningful way. In her letter to me and my noble friend Lady Kramer of 6 August, she said: “We recognise that you have consistently sought further evidence from HM Treasury to support the case for reform, particularly the contention that uncertainty in FOS decision making may be constraining innovation. Following our meeting, we have formally re-iterated this request to HM Treasury and highlighted the importance of ensuring parliament has access to the evidence and analysis underpinning these proposals”. HMT appears to deal with these things even-handedly; it has ignored her as well. Her letter went on to say: “One area where legislative change is being proposed concerns the interaction between our rules and the Ombudsman’s ‘fair and reasonable’ test. The aim is to provide greater consistency and alignment between regulatory requirements and complaint outcomes, while preserving the Ombudsman’s discretion to consider the wider circumstances of the case”. This sounds like the arrangements currently in place under the MoU, but the Bill goes much further in practice. In effect, it reduces the scope of this discretion and reduces the FOS to a subset of the FCA, with the FCA rulebook being the determinator. It is very hard to see that this preserves the independence of the FOS and, of course, independence is desirable. In evidence given to the Treasury Select Committee on 15 July, Nikhil Rathi said: “From the FCA’s perspective, we want an independent Financial Ombudsman Service. That is a really important safeguard for your consumers”. Both Mr Rathi and Mr Alder, the FCA chair, in the same TSC session, went on to express concern about the interaction between the FCA’s interpretation of rules and the FOS’s decision-making. Mr Rathi said that “with a system where people can try to instrumentalise it so that everything that they disagree with can get pushed to us to try to deal with in 30 days because it is deemed ambiguous, you will gum up the system”. His chair emphasised the point of this: “To Nikhil’s point, if we get this wrong, the system will become gummed up … As a result, the main objectives of those changes in the legislation will not be met. It is very important that we get this right”. This is the very real danger of a requirement for the FCA to respond to a referral from the FOS within 30 days. In the same session, Sarah Pritchard said: “We have been clear that we want the Financial Ombudsman Service to deliver quickly for consumers. We do not want to turn into a backdoor appeal mechanism. Where there are important matters around the intention of our rules, absolutely we should be there to clarify. We are already taking referrals from the Financial Ombudsman Service that do that”. The July 2025 MoU between the FOS and the FCA is in operation now. It seems clear that this blueprint has taken into account current and anticipated problems, but it differs radically from the FOS proposals in Clauses 7 and 8, including on the absolutely critical criterion of the FOS making a determination. If the MoU is working and if it is working with, as it says, the fair and reasonable test at its heart, why are the Government proposing to abolish that test and the FOS’s effective independence? My Amendments 13 and 14 address these issues. Amendment 13 would remove Clause 7, with its referral method and four other pages of prescriptive micromanagement, including a kind of Henry VIII power on page 6. Amendment 14 seeks to restore the “fair and reasonable” test agreed in the MoU. Consumer groups have noticed the proposed changes in the Bill and many are very strongly opposed. For example, Martin Lewis of Money Saving Expert strongly supports the removal of Clause 7 and the replacement of Clause 8 with the current “fair and reasonable” test. In all, 12 leading consumer organisations have written to us asking for support for Amendments 13, 14 and 15. I will not read out the whole list, but they have agreed a statement that says: “At a time when the cost-of-living crisis is pushing household budgets to breaking point, the Government should not be altering the fairness test and introducing new bureaucratic hurdles in the very system that provides redress for financial loss”. Finally, my Amendment 15 would create breathing space to enable a proper evidence-based review to take place, with a report to Parliament on its findings and recommendations. Amendment 15 sets out the proposed independent review process and its scope and timelines. It requires the review to take place not before the second anniversary of signing the MoU and then to report within 12 months. Amendment 99 would simply put the commencement of Clauses 7 and 8 on hold until the review’s report has been laid before Parliament. I beg to move.