The Financial Ombudsman Service (FOS) has launched a consultation on the interest rates applied to compensation awards.

This follows feedback from a joint Call for Input with the Financial Conduct Authority (FCA) on how both organisations should collaborate to improve their services and modernise the current redress framework effectively and a review announced by HM Treasury of the FOS.

The consultation paper proposes transitioning from the longstanding standard of 8 per cent simple interest to a rate that aligns more closely with current economic conditions.

The paper outlined four proposals for calculating interest on compensation awards, these included maintaining the current 8 per cent rate and adopting a fixed rate lower than 8 per cent.

It also included tying the interest rate to the Bank of England's base rate plus one percentage point (where the base rate is calculated as an average rate over the period that the money was due until the date redress payment is made) or linking the interest rate to the Bank of England's base rate plus one percentage point (where the base rate is calculated as the rate at the point of determination of the complaint).

The FOS highlighted the tying the interest rate to the Bank of England's base rate plus one percentage point (where the base rate is calculated as an average rate over the period that the money was due until the date redress payment is made) as its recommended option.

Additionally, the consultation set out four options for implementation including applying the change to all existing cases, applying it to complaints referred to the FOS from the date the new rate is implemented, applying it to future acts/omissions or applying it only to customer losses occurring after the implementation date.

The FOS said its recommended option was applying the change to complaints referred to the Financial Ombudsman Service from the date the new rate is implemented.

The changes are aimed at balancing fairness, simplicity, and market relevance in compensating consumers for financial harm.

The consultation is open to feedback until 2 July 2025, with stakeholders, including consumers, financial firms and industry bodies encouraged to share their views on the proposals.

The FOS will then consider feedback and aim to publish a policy statement in September 2025.

In response to the consultation, First Actuarial called for a “simple and transparent” solution, intending to respond to the consultation in what it considers “the fairest option proposed”. 

First Actuarial associate partner, Sarah Abraham, said: “What our clients are looking for, above all, is interest calculations that are simple, transparent, and fair to all parties.

“So, we welcome the consultation. It’s good to see the Financial Ombudsman responding constructively to last year’s feedback from industry.”

She noted that respondents believed that the current rate of interest applied was “too high and unfair to firms” in addition to raising concerns about the period over which interest was incurred, particularly in cases where complaints were delayed.

“We believe that the current application of 8 per cent interest is unfair to advising firms and we support a reduction,” Abraham said.

“We’d also like to see a single rate of simple interest, which would be easier for both firms and consumers.”

Abraham said First Actuarial to avoid the need for regular reviews, supports linking the interest rate to the Bank of England base rate.

She added that due to delays rarely being the fault of advising firms, she said it is “unfair and unnecessary to penalise them when they occur”.

This is part of the broader effort by the FOS and the FCA to modernise the redress system to ensure it remains fair and effective in today’s financial landscape.

First Actuarial previously called for for 'fairer' FOS as pension redress remains at ‘historic low’.

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