FOS to cut 8% compensation award interest rate

The Financial Ombudsman Service (FOS) is consulting on the interest rate applied to the compensation awarded to consumers in financial dispute, in a move likely to have significant implications for auto lenders, who are also waiting to hear the details of any redress scheme established by the Financial Conduct Authority (FCA) once the Supreme Court has made its ruling on the Court of Appeal case relating to mis-selling.  

FOS has been seeking views on how to modernise the dispute resolution system after launching a joint call for input with the FCA at the end of last year, and this is the first recommendation to emerge.

Currently FOS handles interest awards in three ways. The approach to one of these – payment of interest as part of a money award – does  not form part of the consultation.

However, FOS is proposing changes to both pre-determination and post-determination interest. FOS can currently direct the business to pay interest on top of the compensation for the period their customer was out of pocket, and can also require a business to pay interest if it does not pay compensation on time.

The rate for both has historically been set at 8%, a figure which respondents to the call for interest challenged as too high, and not aligned with market conditions.

As a result, FOS is now recommending changing the interest rate so it tracks against the Bank of England’s base rate +1%. 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.

“We welcome feedback from stakeholders on whether our proposed new interest rate strikes the right balance between simplicity, fairness and proportionality.”   

Consultation on the recommendations, which also looks at a number of other interest rate options and proposals for implementation, will run until 2 July 2025.

Of particular interest to auto lenders will be the issues around implementation of the new rate. The proposals are:

• Apply to all existing cases. The new rate would be applied to all complaints upheld by FOS from the date that the new rate is implemented.
• Apply to complaints referred to FOS from the date that the new rate is implemented (Recommended option). Apply the new rate to new complaints submitted to FOS from the date that the new rate is implemented.
• Apply to future acts/omissions. Apply the new rate only where the act/omission complained about occurred after the date that the new rate is implemented.
• Apply only to customer losses occurring after the implementation date. Apply the new rate only to complainant losses which were incurred after the date that the new rate is implemented.

Pre-determination interest reflects payment for being “deprived” of money – that is, not having it available to use, and the example given by FOS is where an insurance claim has been wrongly turned down.

However, some commentators have suggested there could be pressure, notably from claims management companies, to extend this to include cases where borrowers were found to have paid more in commission than the norm, thus depriving them of the opportunity to invest that money in other ways.  This argument, if judged successful, would potentially increase the amount of compensation auto lenders would be required to pay out for the many cases of mis-selling brought to FOS.

FOS said further proposals to modernise the dispute resolution system and better tackle mass redress events will be brought forward in the summer.