A HUGE change to compensation rules is being plotted by the financial ombudsman after a spike in complaints.
The Financial Ombudsman Service (FOS) is proposing to change the interest rate applied to the compensation awarded to consumers and tie it to the Bank of England (BoE) base rate.
It comes after a rise in the number of complaints to the FOS, with more than 140,000 registered in the second half of 2024 – a 49% hike on the same time period in 2023.
If someone is found to have lost out because of their financial firm’s errors, the 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 (not having it available to use) such as when it finds a claim has been wrongly turned down by a financial firm.
The ombudsman can currently direct businesses 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 does not pay compensation on time.
But the service said feedback suggests the interest rate “could be better aligned with, and reflect, market conditions”.
For new complaints submitted to the service, it is recommending changing the interest rate so it tracks against the Bank of England’s average base rate plus one percentage point.
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 is gathering feedback on this recommendation as well as other potential options and proposals for implementation.
The BoE base rate currently sits at 4.25%, its lowest level in two years.
Economists have speculated that two more reductions could happen this year.
James Dipple-Johnstone, interim chief ombudsman at the FOS, said the service welcomes feedback “on whether our proposed new interest rate strikes the right balance between simplicity, fairness and proportionality”.
The consultation will run until July 2 and the service said further proposals around its service will be brought forward in the summer.
What the base rate affects
The base rate is the rate charged by the BoE to smaller high street banks.
How to complain to the FOS
If you have a complaint about your service, contact the company involved first and make a formal complaint.
Keep a note of names, dates and times of any correspondence you have with the company and try to put everything in writing, or make notes of anything discussed over the phone.
If the company makes any promises over the phone, follow up in writing as soon as possible confirming what was said.
If the company does not resolve your issue, you’re not happy with the outcome or if they don’t respond within eight weeks, you can complain to the FOS.
Start a complaint by visiting financial-ombudsman.org.uk/make-complaint.
You may need to provide copies of evidence to support your claim, so make sure you have those to hand.
The FOS may ask you for further evidence or for more information – it’s a good idea to provide everything you are asked for if you can.
If the ombudsman upholds your complaint, it will tell the company how it needs to put it right. You can then accept or reject this outcome.
If it rises or falls, it has a knock-on effect on a host of other things, including mortgage rates and savings rates.
For example, a host of banks and building societies have been slashing interest rates on their saving accounts in recent months following a number of BoE base rate falls.
This includes Newcastle Building Society, NatWest and Nationwide.
But the lower base rate has also seen interest rates drop for mortgage holders as well.
According to moneyfactscompare.co.uk, the average two-year fixed residential mortgage rate today is 5.13%, down from 5.93% a year ago.
Meanwhile, the average five-year fixed residential mortgage rate today is 5.10%, down from 5.50% a year ago.
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