Vulnerable bank customers could face ‘higher barriers’ to redress in Treasury overhaul
Warnings are being raised over a planned Treasury shake-up of financial services rules after an impact assessment revealed vulnerable customers could be excluded from receiving compensation when wronged.
The government unveiled its Enhancing Financial Services Bill at the King’s Speech, which paved the way for reform to consumer redress protections through changes in the Consumer Credit Act and Financial Ombudsman Service (FOS).
In total, banks are expected to make over £1bn in savings across a 10-year period from the collective changes.
Under proposed updates to the Consumer Credit Act, the Bill removes the old rule that automatically enforces harsh, punitive sanctions – such as making an entire credit agreement legally unenforceable – for minor formatting or data-entry errors on a statement.
The shift aims for lenders to no longer face massive, disproportionate financial penalties for low-harm, technical mistakes.
But the accompanying impact assessment has revealed concerns that the policies will create “higher barriers to redress and a weakened deterrent against poor practice, creating more scope for detriment among those least able to navigate complex processes”.
Respondents to the consultation on the policies also flagged this could particularly hit people with disabilities or mental health conditions, or those with lower financial literary and digital skills.
“These groups are less likely to spot noncompliance, to know which route to pursue, or to persist through protracted complaints, increasing the likelihood that harms go unremedied,” the assessment said.
Freeing up the FOS
The bill estimates that against a 10-year backstop, the FOS’ workload will drop by 27,900 cases per year. This tees up around 3,000 consumers – the number expected to be upheld against historic data – to miss out on an estimated £600,000 in annual cash redress.
Alex Neill, co-founder of Consumer Voice said: “Making redress harder to access risks tilting the balance further away from consumers and reducing pressure on firms to resolve complaints fairly in the first place.”
“Economic growth cannot come at the expense of accountability. Ministers should be focused on strengthening confidence in the financial system, not weakening protections for consumers who already face the greatest barriers to being heard.”
The government attempts to rebut the criticism in its response to the impact analysis of the sanctions changes, stating “it will not disproportionately affect people who share protected characteristics… because the sanctions being repealed are attached to prescriptive information requirements, which are also being repealed”.
These changes switch the regulatory approach from enforcing rigid templates to allowing lenders to define their own communication strategies.
But the government does note the changes to Consumer Credit “may result in households forgoing cash redress” in cases where breaches of information requirements did not have “demonstrable harm”.
On the changes to the Ombudsman, it said there would be “some direct negative impacts, although we expect a net benefit”.
A spokesperson for banking industry body UK Finance said: “UK Finance welcomes the government’s plans to modernise the Consumer Credit Act.
“Updating these rules will remove outdated requirements and be beneficial for consumers as it will allow lenders to communicate with them in clearer, more tailored ways.”
A Treasury spokesperson said: “The Financial Services and Markets Bill will modernise how the sector is regulated, enable it to grow and to lend more to businesses, and make consumer protections fit for the digital age – while strengthening protections for vulnerable consumers by improving clarity of information and maintaining access. It will do this while ensuring high standards of regulation and oversight across the system.”