The Financial Ombudsman Service (FOS) is proposing to change the interest rate applied to the compensation awarded to consumers, to tie it to the Bank of England base rate.
If someone is found to have lost out because of their financial firm’s errors, the ombudsman can order the business to pay compensation, plus interest.
There are different types of interest businesses can be directed to pay, and one of these compensates consumers for being “deprived” of money (not having it available to use) such as when it finds a claim has been wrongly turned down by a financial firm.
The ombudsman can currently direct businesses to pay 8% interest on top of the compensation for the period their customer was out of pocket. It can also tell a business to pay 8% interest if it does not pay compensation on time.
But the service said feedback suggests the interest rate “could be better aligned with, and reflect, market conditions”.
For new complaints submitted to the service, it is recommending changing the interest rate so it tracks against the Bank of England’s average base rate plus one percentage point.
The base rate would be calculated as an average rate over the period that the money was due until the date redress payment is made. The consultation is gathering feedback on this recommendation as well as other potential options and proposals for implementation.
The Bank of England base rate currently sits at 4.25%, its lowest level in two years. Economists have speculated that two more reductions could happen this year.
James Dipple-Johnstone, interim chief ombudsman at the FOS, said the service welcomes feedback “on whether our proposed new interest rate strikes the right balance between simplicity, fairness and proportionality”.
The consultation will run until July 2 and the service said further proposals around its service will be brought forward in the summer.
