The Financial Ombudsman Service has today (4 June) opened a consultation on the interest rate applied to the compensation awarded to consumers.
This is the first step in the organisation’s response to its joint Call for Input with the Financial Conduct Authority (FCA) which sought views on how to modernise the dispute resolution system. Further proposals will be brought forward in the summer.
If a consumer is found to have lost out because of their financial firm’s errors, the Financial 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 – that is, not having it available to use – such as where an insurance claim has been wrongly turned down. In these cases, the Ombudsman can currently direct the business 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 doesn’t pay compensation on time.
Feedback from the Call for Input suggested that this interest rate could be better aligned with, and reflect, market conditions. For new complaints submitted to the service, the Financial Ombudsman is recommending changing the interest rate so it tracks against the Bank of England’s base (average) 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. The consultation published today is gathering feedback on this recommendation as well as a number of other interest rate options and proposals for implementation.
James Dipple-Johnstone, Interim Chief Ombudsman at the Financial Ombudsman Service, said:
“The decisions made by our vital service have this year helped thousands of consumers and businesses resolve disputes in sometimes very difficult and stressful circumstances.
We think that reform of the dispute resolution system is crucial to make it fit for the future. That is why we are acting on feedback from our Call for Input and reviewing a range of our processes to ensure that they work for a modern economy.
We welcome feedback from stakeholders on whether our proposed new interest rate strikes the right balance between simplicity, fairness and proportionality.”
The consultation comes as the Financial Ombudsman Service works closely with the FCA and HM Treasury to reform the UK’s dispute resolution system. The aim is to ensure the system – including the vital role the Financial Ombudsman plays within it – is fit for the future.
The organisation has already begun its transformation, having become the first UK Ombudsman to introduce charges for professional representatives. The move makes the service’s funding model fairer and encourages better due diligence from professional representatives when they refer cases.
The Financial Ombudsman has been facing increasing demand for its service in recent years. Last year it resolved over 200,000 complaints, providing an accessible alternative to the courts.
Despite increasing demand, the service announced in April that it would be maintaining the significantly lower costs for respondent businesses which were introduced in the last financial year. Case fees remain frozen at £650, and the reduced compulsory and voluntary jurisdiction levies are being maintained which, taking into account inflation, represents a saving of £70m to industry compared to pricing in 2023/24.
The consultation is available here and will run until 2 July 2025. Further proposals to modernise the dispute resolution system and better tackle mass redress events will be brought forward in the summer.
