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In recent weeks, Ministers have set out new measures to help people struggling with the cost of living – including free bus travel for children and targeted reductions in food tariffs. But the Financial Services and Markets Bill that has recently been laid before Parliament points in a very different, and concerning, direction.
At the heart of the Bill is an upending of how the Financial Ombudsman Service currently decides complaints.
Removing rights to redress: the Bill's Clause 8
The Financial Ombudsman Service was set up as a simple, impartial dispute resolution service. Since its creation by a Labour Government in 2001, the Financial Ombudsman has had wide discretion to find in favour of complainants if, in its view, firms have not acted fairly or reasonably given all the circumstances of the case.
However, the Bill proposes radical changes to how this system operates.
Change 1: The 'rule-compliance' test: a much narrower pathway to redress
Clause 8 of the Bill means that consideration of fairness would occur less often. It requires that:
Complaints can only be upheld if firms have breached FCA rules; rather than the Ombudsman first considering unfair treatment, and the wider circumstances of the case.
Only if the FOS can identify a rule breach, will it be able to consider whether the lender acted unfairly and unreasonably.
In short, for the first time, the Ombudsman will be required to find in favour of firms if they ticked the right boxes – even if their actions were unfair or unreasonable, or led to unfair outcomes.
Change 2: Putting the onus on 'consumer responsibility' when things go wrong
Importantly, Clause 8 adds a further criterion into the heart of the legal framework. Even where a rule breach has occurred and firms have acted unfairly, the Ombudsman would be required to consider a "general principle" that "consumers should take responsibility for their decisions".
While the Ombudsman is still, in theory, meant to adjudicate the merits of whether firms acted rightly or wrongly, this new ‘have regard’ turns the Ombudsman into a judge of consumer trade-offs, creating new openings for the well-resourced finance sector to argue why borrowers should carry the blame.
Together, the potential dangers of these changes is clear: a pincer movement that closes off routes to redress, making borrowers bear the consequences for poor lending practice.
The Bill is scheduled for its Second Reading in the House of Lords on 8th June, which provides Peers with their first chance to have their say on these proposals, and we urge them to reject Clause 8 in its entirety.
Context: Predatory lending and the affordability crisis for UK households
To understand what is at stake, we need to address the reality facing millions of households in Britain today.
Nearly a quarter of all adults have told the ONS they need to increase borrowing to survive. 15 million people in the UK struggling with the affordability crisis have taken out an estimated £13 billion of credit to pay for essentials. Over 7.5 million people need debt advice as a result.
Meanwhile, predatory credit card lending is on the rise. Our Good Score, Empty Cupboard report found over 4 in 10 low to middle income borrowers took up credit offers made to them via credit score dashboards. 1 in 5 of these experienced financial distress within six months of doing so.
As such, the extent to which hard-up households can be held personally responsible for their borrowing is limited. Failing safety nets and rising living costs are forcing many to use credit to paper over the cracks. Meanwhile, lenders and credit score providers are actively exploiting borrower desperation, offering ‘pre-approved’ credit or increasing limits even though this is placing households under increasing, and often unreasonable, financial pressure.
The danger of the Government's proposals
The Government says lenders should escape penalty if they can show they followed the rules. But that only works if rule-compliance delivers fair outcomes. The evidence from published Ombudsman decisions shows that compliance with rules, often focused on processes, do not necessarily deliver fair outcomes.
CfRC has recently reviewed 250 Ombudsman decisions from the second half of 2025 involving sub-prime credit cards. Around a third of these complaints were upheld.
Importantly, many complaints about irresponsible lending were upheld despite lenders having followed the rules, with respect to the processes they followed to meet high-level FCA requirements.
A Financial Ombudsman decision from December 2025 involving Capital One illustrates the point. A borrower (‘Mr A’) was given a credit card with a £500 limit, later increased to £1,250. Capital One argued it had followed FCA rules, using customer data, credit reference information and internal modelling to assess affordability, all of which indicated the lending was affordable.
But while the Ombudsman accepted that the lender’s initial checks were “reasonable and proportionate” –the key test in FCA rules – for the level of credit being provided, that alone did not save the lender. Instead, the Ombudsman judged that Mr A’s £24,000+ of existing debt– split between credit cards and hire purchase, and which Capital One had seen - meant the lending was “irresponsible”.
The Ombudsman viewed that the additional borrowing was "unlikely to be sustainably affordable". It would only push ‘Mr A’ deeper into debt. The Ombudsman ordered Capital One to remedy the complaint by putting Mr A back into the position he would have been had Capital One not acted irresponsibly.
Why the current fair and reasonable test matters
The current regulatory framework acknowledges the radically unequal state of affairs between lenders and borrowers. The FCA’s ‘CONC’ rules on affordability assessments, and the Ombudsman's "borrower-focused" test are both deliberately asymmetric.
The reasons for this are clear: lenders are professional, systematic credit assessors who use risk models, experience and large data-sets to regularly lend to the edge of what is responsible. Without safeguards, some will often go beyond this. By contrast, consumers are information and time-poor, and are often seeking credit in ‘survival mode’ or at times of personal crisis.
Maintaining effective duties on lenders is needed precisely because information, power, and expertise are structurally unequal. Our current Ombudsman is fair to lenders, and fair to borrowers. It operates on a case-by-case basis. Principles and Outcomes-based regulation requires this.
Rule ambiguity and the 'borrower responsibility' test
Ultimately, many Ombudsman decisions come down to their interpretation of what is “fair and reasonable” based on the financial information that lenders had available to them at the time of advancing credit. As with the case above, many decisions hinge on whether the credit repayments are “sustainable” or would have (CONC 5.2A.12) “a significant adverse impact” on the borrower’s financial situation. These terms are not precisely defined in the FCA’s rules and leave the Ombudsman with considerable discretion.
However, adding a borrower responsibility requirement in this situation adds a third limb in the Ombudsman decision-making process. Even if the FCA rules were broken, and proportionate affordability checks had not been carried out; and even if the credit being advanced was clearly going to have a significant adverse impact on the borrowers circumstances, the Ombudsman is being tasked to ask itself: "given what the consumer knew about themselves, was this a decision where they are the responsible party?"
Proposals driven by industry lobbying
These proposals have not appeared out of thin air. UK Finance has been explicitly calling for this shift: the pressure for tighter alignment with FCA rule interpretation, and less room for case-by-case fairness judgments appears driven by industry frustration at the costs it incurs as a result of its own poor practice. Uncertainty regarding the number of complaints firms can expect and the potential liabilities they face has particularly impacted investment in the 'sub-prime' sector.
However, this is not a weakness in the regulatory framework. In fact, it is doing exactly what it should in the current climate: it is tempering risk appetite and constraining (although not completely eliminating) irresponsible lending to people in financially distressed circumstances.
Prior to the introduction of affordability assessment rules in 2018, lenders only had to consider whether someone would repay them, not whether they could also afford to do so. They were able to find highly committed, and profitable, borrowers, who would make considerable personal sacrifices, to maintain credit repayments. With the cost-of-living crisis, and lenders having to now assess affordability as well as willingness to repay, the legitimate market for responsible sub-prime credit is shrinking. Faced with this, and in the search for profits, some lenders are taking the concept of affordability to its extremes.
In these circumstances, borrowers facing lenders operating on the very edge of responsibility have time and again only had one strong backstop: an independent Ombudsman, able to start from first principles, and provide a quick and fair route to redress.
Don't dilute redress! Scrap Clause 8 of the Financial Services Bill
We call on Parliament to challenge the Government and force the withdrawal of these proposals. In the current affordability crisis, we need to maintain an effective Ombudsman backstop and do more to help hard-up households. We should not be embedding a 'blame the victim' have regard into the complaints process. We call on Peers to vote to scrap Clause 8.
