When the Regulator Chooses the Referee: The Next FOS Chair Appointment Is a Scandal in Plain Sight

The Financial Conduct Authority is expected to choose the next permanent Chair of the Financial Ombudsman Service, subject to the approval of HM Treasury. The regulator that has repeatedly failed to prevent financial scandals, and the government department that tried to intervene in the motor finance Supreme Court case because of concerns about the economic consequences, will therefore decide who oversees the body consumers must turn to when the financial industry mistreats them.

That is not meaningful independence in any way, shape or form.

This is simply the regulator and the government choosing the referee.

The FOS is supposed to stand between consumers and the financial industry

The Financial Ombudsman Service exists because most consumers cannot realistically take a bank, lender or insurer through the courts every time they are treated unfairly. It is supposed to provide an accessible, impartial and genuinely independent means of resolving complaints.

The FOS describes itself as an independent public body. Its Board is responsible for ensuring that it operates successfully and independently. Yet every member of that Board is appointed by the FCA, while the permanent Chair is appointed by the FCA with the approval of HM Treasury. The FOS has recently confirmed that recruitment for its new permanent Chair is expected to begin shortly. Financial Ombudsman Service announcement.

The contradiction should be obvious.

A body cannot credibly describe itself as independent when the people responsible for its strategic direction, governance and resources are selected by the regulator whose decisions, failures and policies are often central to the complaints before it.

Independence is not created by repeatedly using the word “independent”. It is created by removing the power of interested institutions to control appointments, dismissals, budgets and strategic direction.

A referee does not become independent simply because the league says so after choosing them.

The first recruitment exercise already failed

This is not even the first attempt to appoint the next permanent Chair. The original recruitment campaign was unsuccessful, leaving Liam Coleman to serve as interim Chair.

Mr Coleman had been sitting on the FCA’s own Board immediately before taking the FOS role. Before that, he had spent more than 30 years in banking, including serving as chief executive of the Co-operative Bank and holding senior positions at Royal Bank of Scotland and Nationwide. FCA announcement.

This is not an allegation of personal wrongdoing against Mr Coleman, but it is about the message conveyed by the appointments system.

The Financial Ombudsman Service is supposed to challenge financial institutions and, where necessary, reach conclusions that the FCA, Treasury and financial services industry may find uncomfortable. Yet the interim Chair moved directly from the FCA Board and came from a lengthy banking career, while his permanent replacement will again be selected through a process controlled by the FCA and Treasury.

The same institutions keep selecting from the same circles, before having the audacity to the seek to reassure the public that the outcome is independent.

At what point does the revolving door become impossible to ignore?

The FCA’s record does not justify this power

The FCA’s statutory objectives include protecting consumers, maintaining market integrity and promoting effective competition. However, Parliament has also given it a secondary objective to facilitate the international competitiveness and growth of the UK economy, particularly the financial services sector. FCA secondary objective.

On paper, growth is secondary.

In practice however, consumers are entitled to ask whether it has become the overriding consideration.

The evidence certainly suggests that the priority list has changed.

The motor finance commission scandal provides perhaps the clearest recent example. Discretionary commission arrangements encouraged dealerships to manipulate the interest rate paid by customers, with the opportunity to earn more commission when customers were charged more. The FCA eventually banned those arrangements in 2021, despite it being brought to its attention way back in 2016.

Millions of customers were charged a higher rate of interest, not because their credit risk justified it, but because it generated more profit for the lender who, in turn, paid a larger commission to the dealership for arranging the finance.

Yet, as far as the FCA’s published enforcement record shows, there has still been no identifiable fine imposed specifically upon a firm for operating or benefiting from the historic discretionary commission model.

No meaningful punishment.

No visible deterrence.

No example made of the firms that profited from a model in which a customer’s interest rate could unlawfully be manipulated to increase commission.

Instead, the response has centred upon managing complaints, controlling liabilities and constructing a redress scheme that the FCA itself repeatedly presents in the context of market certainty and continued access to competitively priced motor finance.

A redress scheme steadily reduced in favour of industry

The FCA’s final motor finance redress scheme is revealing, not only because of what it proposes to pay consumers, but because of how it changed between consultation and publication.

The FCA says that it tightened the eligibility criteria, reducing the estimated number of eligible agreements from 14.2 million to 12.1 million. It expects around one in three awards to be capped. Its estimated redress bill fell from £8.2 billion at consultation to approximately £7.5 billion, while the overall estimated cost to industry fell from £11 billion to £9.1 billion. The FCA also says that changes to the scheme reduced lenders’ expected delivery costs by more than 40%.

Those are not insignificant adjustments, and it is little wonder the proposed scheme has been legally challenged.

More than two million agreements were removed from estimated eligibility. A third of awards are expected to be restricted. The industry’s total bill was reduced by almost £2 billion, while its administration costs were cut dramatically.

The FCA nevertheless described the scheme as providing “certainty and finality for firms and investors” and helping to maintain an effective motor finance market.

That language matters, because consumers did not create this scandal. Consumers did not design the unlawful commission structures. Consumers did not conceal the arrangements. Consumers did not decide that a motor dealer should be financially rewarded for increasing their interest rate.

Consumers just paid for the increased lender profits, and the large commission payouts.

When the consequences finally arrived, the regulator’s attention again turned to certainty for firms, stability for investors, the cost of administering redress and the future functioning of the market.

Consumer protection was absent, as was any real deterrent.

That is precisely why the FCA should have no role in choosing the Chair of the body expected to decide whether individual consumers have been treated fairly.

Treasury’s attempted intervention exposed the same priorities

HM Treasury’s involvement is no less troubling.

The FCA was permitted to intervene in the Supreme Court motor finance commission proceedings, unsurprisingly seeking to protect the market. HM Treasury also attempted to intervene, but its application was refused.

The Supreme Court recorded that Treasury’s proposed submissions expressed concern about the possible consequences for the national economy. The Court concluded, however, that Treasury had provided nothing of substance concerning the relevant law or factual context that was not already before it. Supreme Court decision on intervention applications.

That should concern every consumer, because when the country’s highest court was considering the legal consequences of hidden motor finance commission, Treasury’s instinct was to seek a place in the proceedings because of the possible economic impact.

Not because consumers had been denied material information.

Not because borrowers may have paid more than they should.

Not because millions of agreements could have been affected by undisclosed financial incentives.

The concern presented to the Court was the potential effect upon the economy.

There will always be consequences when wrongdoing is widespread. The greater the scandal, the greater the financial cost of putting it right. But those consequences cannot become an excuse for limiting accountability.

A market does not become healthy because those who broke the rules are protected from the full cost of their conduct. It simply becomes a market in which wrongdoing remains profitable, thus creating an in-built culture of mis-selling that we see today.

The bodies being challenged must not appoint the person overseeing the challenge

There will inevitably be cases before the FOS involving policies or positions supported by the FCA. There will be complaints in which the Ombudsman must decide whether a firm has acted fairly despite a regulator having failed to intervene earlier. There will be disputes where the legally or morally correct outcome for a consumer conflicts with the FCA’s desire for market certainty or Treasury’s concern about economic consequences.

In those circumstances, the FOS must be prepared to disagree with the FCA.

It must be prepared to reach conclusions that Treasury finds inconvenient.

It must be prepared to require redress even when the aggregate cost to industry is substantial.

How can consumers be expected to trust that process when the Chair of the FOS has been selected by the FCA and approved by Treasury?

The issue is not whether the successful candidate describes themselves as independent. The issue is that their appointment depends upon the approval of the very institutions from which independence may later be required.

That is a structural conflict before the person has even started the job.

The proposed reforms could make the position even worse

The current arrangement already allows the FCA to appoint the FOS Chair with Treasury approval. However, legislation currently before Parliament would transfer the appointment power directly to HM Treasury. It would also make the appointment of the Chief Ombudsman subject to Treasury approval and require closer formal interaction between the FOS and FCA on issues involving regulatory interpretation or wider market implications. HM Treasury review response.

This is the opposite of the strengthening of an independent consumer body.

It is the gradual absorption of that body into the regulatory and governmental machinery surrounding the financial services industry.

The FOS will still be called independent. Its website will still use the language of impartiality. Ministers and regulators will still insist that operational decisions remain separate, but independence is not merely about whether a minister telephones an Ombudsman and tells them how to decide a particular case.

It is about who appoints the leadership.

It is about who controls the governance structure.

It is about who can influence strategic priorities and resources.

It is about whether the people running the organisation know that their appointment, reappointment or removal ultimately depends upon those whose policies they may need to challenge.

Parliament has already warned about the danger

This is not an imaginary concern being raised only by critics of the FCA or FOS.

The Treasury Committee has expressly warned that the Financial Ombudsman Service must both be independent and be seen to be independent. It raised concerns that government control over senior appointments could jeopardise the actual and perceived independence of the organisation and recommended a statutory safeguard giving the Committee an effective veto over the appointment or dismissal of the Chair and Chief Ombudsman. Treasury Committee statement.

HM Treasury rejected that recommendation, arguing that such a statutory safeguard was unnecessary. Under the current arrangements, until new legislation is passed, the FCA will continue to appoint the Chair with Treasury approval. Government response to the Treasury Committee.

In other words, Parliament’s own scrutiny committee identified the problem and proposed an additional protection.

Treasury said no, and that refusal speaks volumes.

If the government is confident that the process is genuinely independent, why resist a statutory safeguard designed to protect that independence?

Why should Treasury retain decisive influence over the appointment of those responsible for resolving disputes between consumers and one of the country’s most powerful industries?

Why should the FCA be trusted to choose the Chair of an organisation that may need to expose or correct the consequences of the FCA’s own regulatory failures?

Scandal after scandal, but almost nobody is held responsible

PPI was not prevented.

Interest-only mortgage mis-selling was not prevented.

Packaged bank account mis-selling was not prevented.

Payday lending abuses were not prevented.

Unaffordable lending on a vast scale was not prevented.

The manipulation of motor finance interest rates through commission incentives was not prevented.

Grotesque commission levels and poor value within GAP insurance were not prevented.

Each time, the scandal becomes too large to ignore… and GAP insurance will soon become too big to ignore. Each time, consumers are expected to navigate slow and obstructive complaint processes. Each time, the industry warns of the cost of redress. Each time, the regulator speaks about proportionality, certainty, stability and market impact.

The firms retain the profits until they are forced to return some of them. Senior executives rarely face personal consequences. Regulatory enforcement arrives late, if it arrives at all. Redress becomes a negotiation about what the industry can afford rather than a straightforward question of what consumers lost.

Then, after overseeing this repeated cycle, the FCA is entrusted with choosing the Chair of the organisation consumers rely upon to obtain justice.

It is difficult to imagine a more obvious conflict.

Institutional corruption can exist without a brown envelope

The word “corruption” is serious and should not be used carelessly. There is no allegation here that a prospective candidate has accepted a bribe or committed any criminal offence.

But corruption is not limited to cash changing hands in secret.

Institutions can become corrupted when they are diverted from their original purpose. A consumer protection system becomes institutionally corrupted when the protection of markets, firms and government policy is repeatedly allowed to take precedence over justice for the people harmed.

That is the the position we are now in, and it is playing out in plain sight.

The FCA regulates the industry.

Poor regulation and a lack of deterrent creates poor conduct.

Poor conduct generates complaints.

The FOS decides those complaints.

The FCA appoints the FOS Board and, under the current process, chooses its Chair.

Treasury approves that appointment.

Both the FCA and Treasury have demonstrated that the economic consequences for the market are central to their thinking when consumer redress threatens to become expensive.

This is a closed circle of influence, presented to the public as independence.

The recruitment process must be stopped and redesigned

The appointment of the next permanent FOS Chair should not proceed under the existing arrangement.

The FCA should have no power to select the candidate. Treasury should have no power to approve or reject them. The financial services industry should not dominate the shortlist, the interview panel or the informal network from which candidates are drawn.

The appointment should be conducted by a genuinely independent commission with substantial consumer representation and transparent selection criteria. Any candidate’s current and historic relationships with the FCA, Treasury, banks, lenders, insurers and industry trade bodies should be published and properly scrutinised.

There should be a public parliamentary hearing before appointment, together with a statutory safeguard preventing the Chair or Chief Ombudsman from being appointed or removed simply because their decisions become inconvenient to regulators, ministers or the financial services industry.

The successful candidate should serve a fixed, non-renewable term, removing any concern that future reappointment could influence their approach.

Most importantly, the FOS must retain the ability to decide what is fair and reasonable in the individual circumstances of a complaint, rather than being reduced to an administrative arm of FCA policy.

Anything less leaves independence dependent upon goodwill.

That is not independence at all.

Consumers need a watchdog, not another part of the machine

The next FOS Chair will inherit an organisation facing profound questions about delay, consistency, quality of investigations, regulatory alignment and public trust.

That person must be required to confront some of the largest financial institutions in the country. They must challenge restrictive interpretations promoted by the FCA. They must defend consumer redress against political pressure arising from its cost to the market.

They cannot credibly perform that role while owing their appointment to the FCA and Treasury.

The public does not need another carefully managed appointment from within the financial establishment. It does not need another regulator, banker or industry insider passing through the revolving door before declaring that lessons have been learned.

It needs an Ombudsman service with the courage and structural freedom to say that the regulator was wrong, the government’s priorities were misplaced and the consumer must be compensated in full.

The FCA should not choose the referee.

Treasury should not approve the referee.

And neither should be allowed to reshape the referee’s powers because justice has become too expensive for the industry that caused the harm.

Until that changes, every claim that the Financial Ombudsman Service is truly independent deserves to be treated with profound scepticism.

The appointment process is not a minor governance issue. It goes to the very legitimacy of the consumer protection system.

And the scandal is now hiding in plain sight.