Financial Ombudsman Service to update compensation interest levels

The Financial Ombudsman Service (FOS) has confirmed plans to revise the interest rate applied to some of the awards it directs financial firms to pay.

From January 1 next year the new rate will track the Bank of England base rate plus 1%, calculated as a weighted average over the time a consumer was without their money.

This marks a significant change from the longstanding fixed rate of 8%, which had remained in place for nearly 25 years.

The move follows consultation earlier this year and aims to align compensation more closely with current economic conditions.

Every case referred to the FOS currently results in a £650 case fee for the business involved, regardless of outcome.

While this fee remains unchanged, a shift in the compensation interest rate could slightly reduce the total financial exposure for firms in upheld cases.

The revised rate applies specifically to “deprivation” awards, where consumers have been left without access to funds they were entitled to, such as delayed insurance claims.

This is separate from compensation for actual losses, which is still calculated independently.

FOS said the change is intended to be fairer and more proportionate, based on feedback from both the industry and consumer groups.

The 8% rate will still apply if a business fails to pay compensation on time, in order to discourage unnecessary delays.

Full details of the change and the broader plans to modernise the redress system will be published in the autumn.

Earlier this year FOS introduced a £250 fee per case for claims management companies, after their first 10 cases, as it was being inundated with CMC cases which were also costing respondents dearly, no matter whether the case was upheld. 

Dealer groups have privately told Automotive Management about the efforts they go to to avoid customers referring to FOS, given the £650 case fee they're charged by the ombudsman.

But motor finance complaints have more than tripled year-on-year to 73,328 for 2024/25, as lenders and the industry prepare for the Supreme Court Ruling on commissions, according to the latest FOS data.

Simon Robinson, senior consultant and actuary at independent financial services consultancy Broadstone, said: “This change from the Financial Ombudsman Service will be welcomed by the financial services industry and is long overdue. The use of the 8% interest rate to apply to compensation awards was overly generous, particularly given long periods of low interest rates.

“The 8% rate had not been changed in over two decades and does not reflect the modern macroeconomic environment. This new rate structure, while still in excess of most savings rates, will more accurately reflect the time value of money for consumers.

“The review of the Financial Ombudsman Service is aiming to create a more coherent framework between it and the FCA. A lack of certainty in the redress framework has historically led to uncertainty for firms and unpredictable outcomes for consumers which harms confidence in the system from all parties.

“There is particular focus on mass redress events, which is timely given the imminent Supreme Court ruling on motor finance. The hoped-for outcome appears to be the creation of a more flexible approach that can react with agility and speed with greater involvement from the FCA to create consistent and speedy outcomes.”