The Financial Ombudsman is plotting a major shake-up of how much interest firms have to pay on compensation pay outs which would make it far less generous for consumers ruled to have been treated unfairly.
Currently, firms are ordered to pay a flat 8 per cent interest on compensation awards.
But the Ombudsman has announced it is launching a consultation to review the amount of interest firms pay on compensation awards after a Call for Input with the Financial Conduct Authority where it sought views on how to update the dispute resolution system.
It could push through new rules that would see the interest on compensation paid to people when things go wrong from 8 per cent to the Bank of England base rate plus 1 per cent, which would currently mean a far lower 5.25 per cent.
If a consumer is found to have lost out financially because of an error by a financial firm, the FOS can force the business to pay compensation, plus interest on top.
There are different types of interest the FOS can order businesses to pay, and one of these compensates consumers for losing out financially – such as where an insurance claim has been wrongly turned down or where a bank account was closed unfairly.
The FOS could order firms to pay less interest on compensation awards, cutting it from 8 per cent to 1 per cent above the base rate
In these cases, the Ombudsman can currently order the firm to pay 8 per cent interest on top of the compensation for the period their customer was out of pocket.
It can also tell a business to pay 8 per cent interest if it doesn’t pay compensation on time.
However, for new complaints submitted to the service, the Financial Ombudsman is recommending changing the interest rate so it tracks the Bank of England’s base rate plus 1 per cent.
The base rate currently stands at 4.25 per cent, the lowest level in two years, and markets are pricing in three more cuts before the end of the year.
With the base rate at its current level, they amount of interest firms could be ordered to pay if it is 5.25 per cent. This would fall if the base rate continues to drop.
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 Financial Services Ombudsman said: ‘Feedback from the Call for Input suggested that this interest rate could be better aligned with, and reflect, market conditions.’
It comes as The Financial Ombudsman has been facing increasing demand for its service in recent years. Last year it resolved more than 200,000 complaints.
James Dipple-Johnstone, interim chief ombudsman at the Financial Ombudsman Service, said: ‘We think 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.’
The consultation will run until 2 July 2025.
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