The Financial Ombudsman Service (FOS) has launched a consultation proposing a major revision to its longstanding 8% simple interest rate applied to compensation payments. The move seeks to better reflect current market conditions, align with fairness expectations under the FCA’s Consumer Duty, and encourage more balanced redress for consumers and firms alike.
Background
Historically, the FOS has awarded compensation interest at a standard 8% simple interest rate, intended to fairly compensate consumers for being deprived of their money due to financial misconduct. However, responses to a joint Call for Input with the FCA indicated that this fixed rate no longer reflects economic conditions and may result in overcompensation in certain cases.
This position sits within the wider regulatory expectations of PRIN 2.1.1R (Principles for Businesses), particularly:
- Principle 6: A firm must pay due regard to the interests of its customers and treat them fairly.
- Principle 12: A firm must act to deliver good outcomes for retail customers (Consumer Duty).
Proposed Changes
In response to stakeholder feedback, the FOS is consulting on three options:
- Maintain the current 8% rate – Retain the existing fixed rate for simplicity and continuity.
- Lower fixed rate – Set a new fixed rate below 8%, with suggestions welcomed.
- Variable rate linked to the Bank of England (BoE) base rate plus 1% – A dynamic rate that reflects economic shifts, which is the FOS’s preferred option (Option C).
Implications of a Variable Rate
Tying interest rates to the BoE base rate +1% offers:
- Accuracy: A closer reflection of actual financial loss.
- Fairness: Redress outcomes that mirror court-based compensation norms.
- Predictability: Reduced volatility in compensation calculations.
- Regulatory alignment: Supports Consumer Duty Outcome 4: fair value for consumers.
However, this approach introduces operational complexity, as firms will need to:
- Calculate precise interest periods, and
- Apply a rate that evolves in line with the BoE base rate.
Balancing Simplicity, Fairness and Proportionality
The tracker rate approach (BoE base rate +1%) ensures that compensation evolves with market conditions, reducing the need for regular review and aligning more closely with commercial court practice (e.g. CPR Part 36 or restitution interest).
The consultation’s Initial Equality Impact Assessment concludes there is no direct discrimination. However, concern remains that lower rates could under-compensate financially vulnerable individuals, especially those using high-cost credit. To mitigate this, flexible measures, such as allowing claimants to evidence actual losses, are proposed.
This reflects the FCA’s guidance on treating vulnerable customers fairly (see FG21/1).
Industry Support
The FCA Smaller Business Practitioner Panel supports Option C, citing:
- Greater fairness and transparency,
- Responsiveness to macroeconomic changes, and
- A logical implementation threshold: applying the rate only to new complaints received after the change.
Next Steps
A Policy Statement is expected in September 2025, with implementation shortly after. Timing will depend on final transitional arrangements and any carve-outs.
How Complyport Can Help
- Regulatory Gap Analysis: Assess your current complaints-handling and redress frameworks to identify gaps in interest calculation, disclosure and fairness under the proposed FOS changes.
- Complaints Handling Service: Provide a fully outsourced or co-sourced complaints handling service: ensuring timely, fair and compliant resolution of complaints in line with DISP rules and evolving FOS expectations.
- Operational Readiness Planning: Support implementation of systems and controls to calculate and apply variable interest rates accurately, including rate tracking, evidence collation and documentation standards.
- Policy and Procedure Updates: Assist in drafting or revising complaints policies and consumer communication templates to reflect the new redress calculation methodology.
- Vulnerability Mitigation Guidance: Help develop processes that identify, record and accommodate vulnerable customers, aligned with FG21/1 and Consumer Duty outcome requirements.
Book a meeting with one of our Subject Matter Experts today to start preparing for the FOS’s proposed changes to compensation interest.
Ask ViCA, your Virtual Compliance Assistant. Claim your complimentary 20 queries today! Register here: https://vica.chat/
