Reeves to make it harder to claim compensation for City scandals

Telegraph

15-07-2025

Rachel Reeves is preparing to make it harder for the public to launch mass compensation claims for City mis-selling scandals in a bid to avoid a repeat of the motor finance crisis.
The Chancellor has launched a consultation on plans to rein in the power of the Financial Ombudsman Service (FOS), which adjudicates disputes between individuals and financial companies.
At the moment, if the FOS discovers a mis-selling scandal, it has the power to propose an industry-wide redress scheme.
However, under plans put forward by Ms Reeves, it will have to consult the Financial Conduct Authority (FCA), which will consider the impact of major payouts on the broader economy.
Plans to tighten the rules come in the wake of the car finance mis-selling scandal, which risks costing banks as much as £44bn and has shaken faith in Britain as a place to invest in.
Under the new proposals, the FCA will also be able to order the FOS to pause its own investigations until a decision has been made on how to address a large-scale scandal.
Additionally, compensation will not be awarded if companies followed FCA guidance – a change to previous rules which allowed the FOS and the courts to apply their own judgment.
The level of interest paid on compensation will also be cut for claims made after January 1, 2026 under the proposals.
Currently, redress payments owed to wronged customers come with the addition of interest, paid at a rate of 8pc from the date at which their financial product was mis-sold.
Under new plans, the interest will be paid at the Bank of England's base rate plus one percentage point – meaning the total will be as low as 1.1pc for the period, at which the official rate was just 0.1pc.
Car finance scandal
The proposed changes come in the wake of the car finance scandal, which revolves around the undisclosed payment of commission by banks to dealers who sold car loans to customers.
The Court of Appeal declared the arrangement unlawful last year, opening up huge liabilities for major banks, including Lloyds. Some lenders brought a challenge to that judgment at the Supreme Court, with a ruling yet to be handed down in the case.
The Treasury sought to intervene in the case amid fears the car finance market could grind to a halt ahead of a ruling, but Ms Reeves's petition was rejected.
Charlie Nunn, the chief executive of Lloyds Banking Group, last year warned the car finance deliberations were harming the entire economy.
'Investors are looking at this and saying this principle of the courts coming up with decisions independently from the regulation – which is then having a significant retrospective look back – is bleeding across the whole economy,' he said in December.
Emma Reynolds, the economic secretary to the Treasury,appeared to agree as she unveiled the consultation. She said: 'For years, stakeholders have consistently raised concerns that some elements of the redress framework can generate problems and lead to inconsistent outcomes for consumers and uncertainty for firms.
'This has suppressed investment and innovation in UK financial services, which can lead to firms offering fewer, less innovative products for consumers due to concerns about potential future redress.'
Sarah Pritchard, deputy chief executive at the FCA, said the reforms would balance consumer interests with those of banks and the wider economy.
'When something goes wrong, it is right that people are compensated. But a lack of certainty in the financial redress system can hold back investment and innovation,' she said.
'Our changes will help create a system that is more predictable for firms and gives consumers quick and fair compensation where they're owed it, supporting UK growth.'
However, consumer champions warned that the plans meant victims of poor financial practice risked losing out.
Gina Miller of True and Fair, a financial campaign group, said: 'The proposed changes will reduce the FOS's powers to make awards, give the FCA a much greater say in mass redress schemes, and slashes the interest paid on redress. So much for the principle that consumers must be fairly compensated when they suffer loss due to regulatory or industry failure.
'These proposed measures risk tilting the balance of power further in favour of financial institutions, at the expense of ordinary savers, investors and small businesses. Limiting redress when schemes become 'too big' for banks to bear is not only unfair but undermines the very purpose of regulation: to protect consumers, not institutions.'