FOS consults on interest levels on compensation payments

The FOS is consulting on how it should be calculating the interest it orders firms to pay on compensation awards. It has been criticised for its current stance, which is to order businesses to pay 8% interest on top of any compensation for issues that have resulted in customers being deprived of money (pre-determination interest), or where they don’t pay the compensation on time (post-determination interest).

Feedback to the call for input on modernising the dispute resolution system generally has suggested it could be better if the interest rate were aligned with market conditions. So the FOS is now recommending changing the rate to the BoE base rate +1% for all new complaints, with the base rate calculated as an average rate over the period that the money way due until the date the redress payment is made.

The proposals will apply to pre-determination interest – the FOS gives an example of if an insurer undervalued the write off value of a car by �1,000, then the interest would be awarded from the date the complainant should have got that amount until the date they receive it, and to post-determination interest. But changing the approach to any interest that may be payable as part of a money award is not covered as these calculations have as their aim to ensure the complainant recovers their actual loss.

While the “tracker at average rate +1%” is the FOS’s preferred option, it also seeks views on whether it should

• keep the current fixed rate
• move to a lower fixed rate or
• track base rate +1% but use the prevailing base rate at the time the complaint is determined.

It also seeks views on how to manage the transition to the new calculation. While its preferred option is to apply it to complaints it receives after the date it implements the new rate, the other options are:

• apply to all existing cases as at the date of implementation
• apply only where the act or omission complained about is after the implementation date or
• apply only to customer losses that occur after the implementation date.

It also welcomes views on any challenges firms will face making the changes, when it might be appropriate not to apply interest and how often the FOS should review its approach to interest.

Consultation closes on 2 July.