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Chancellor Rachel Reeves will on Thursday call for a review of Britain’s system of redressing consumers in the financial services sector, as lenders brace for a possible multi-million pound bill over alleged mis-selling of car finance.

Reeves wants to modernize the operation of the Financial Ombudsman Service (FOS) to give consumers and businesses more clarity about the compensation landscape in the future, according to the chancellor’s allies.

He will use his speech at Mansion House on Thursday to promise stability as he tries to reassure his audience in the City of London that he has a clear economic growth strategy behind his £40bn tax rise budget.

The FOS’s role in the city’s major compensation cases has been under scrutiny at the Treasury for months, but Reeves’ allies said the need for reform had been highlighted by recent turmoil in the funding sector. automobiles.

The FOS has taken a pro-consumer stance on complaints about alleged mis-selling of car finance, putting the Financial Conduct Authority, the UK’s main financial regulator, on the defensive, and threatening to leave banks exposed to compensation claims worth billions of dollars. pounds.

“The FOS has an important role to play in protecting consumers, but there are reasons to modernize it and give more clarity to consumers and businesses,” said one person briefed on Reeves’ thinking.

Two FOS rulings earlier this year upholding consumer claims against banks have forced the FCA to intervene and pause those compensation cases while it investigates the issue of commissions paid to car dealers by finance companies and decide how to respond.

Lawyers for “magic circle” firm Clifford Chance said in a note last month that “the ramifications of the position FOS has taken… . . “It could be significant.”

Barclays is challenging one of the FOS’s decisions from earlier this year in a judicial review.

But lawyers said the bank was likely to lose after the Court of Appeal last month said it was illegal for car dealers to receive commissions from finance providers unless they were fully disclosed and accepted by consumers, in a ruling that went beyond the FOS.

The FOS’s stance of siding with consumers on car finance has echoes of its role in the payment protection insurance (PPI) scandal, which ended up costing banks around £50bn in compensation.

In the three months to April, the FOS said it received 15,925 complaints about car finance, almost five times more than during the same period last year.

He added that more than 90 per cent of these were filed by claims management companies, which rose to prominence by filing PPI complaints for thousands of consumers in exchange for a reduction in any compensation.

Nikhil Rathi, head of the FCA, said earlier this year that the UK’s redress system “stands out in Europe due to its combination of complexity and the scale of claims management activity”, and backed a review.

Meanwhile, Reeves will use his speech at Mansion House to urge the technology and telecommunications sectors to do more to combat online payment fraud, after the financial services industry claimed they are enabling such activity.

Nearly 80 percent of so-called push payment fraud (when someone is tricked into sending money to a scammer posing as a genuine beneficiary) begins online, of which an estimated 60 percent begins on social media. , according to trade body UK Finance. .

Since October, banks and payments companies have been required to refund push payment fraud claims worth up to £85,000.

Reeves will demand that companies such as Meta, TikTok, BT and EE report to ministers on progress in fraud prevention by March, with the veiled threat of further action if they do not act.

Asked if Reeves would be willing to go further, a Treasury official said: “The ball will be back in our court if demonstrable progress has not been made.”

However, Reeves will stop short of committing to specific measures that would give social media companies a financial incentive to prevent fraud by making them bear part of the cost of reimbursing fraud victims.

Separately, Reeves will describe important pension reformsincluding consolidating £391bn of assets into 86 separate council retirement plans, to create a series of “Canadian-style” mega funds that would be encouraged to invest in the UK.

The chancellor has ruled out – at least for now – forcing pension funds to invest in UK assets such as shares and infrastructure, a measure that would have sparked protests in the sector.