In this paper a new distributed fault detection and isolation (FDI) methodology is proposed in the form of a multi-agent network representing a combination of a consensus based FDI observer for residual generation and a consensus based decision making strategy for change detection, applicable in real time. The proposed observer is based on overlapping system decomposition and a combination between the local optimal stochastic FDI observers and a dynamic consensus strategy. It is shown how the proposed algorithm can generate residuals which provide, under general conditions concerning local models and the network topology, high efficiency, scalability and robustness. The proposed decision making strategy provides solutions for two particular cases: a) local detection for non-overlapping parts of the identified subsystems; b) a consensus based strategy for FDI in the overlapping parts.One selected example illustrates the applicability of the proposed methodology in practice.