FOS begins reform process by targeting interest

The FOS has issued a consultation on proposals to reduce the rate of interest it pays on awards to consumers it concludes have been treated unfairly. This is the first concrete reform proposal arising out of the joint FCA/FOS Call for Input on reform issued last November. 

The FOS currently applies a standard 8% interest rate on its compensation awards. In response to feedback to the Call for Input, it is proposing moving to a new standard interest rate calculation that specifically tracks the Bank of England base rate. The FOS is looking for an amended rate that strikes the correct balance between simplicity, fairness and proportionality. The proposed new rate would only apply to pre- and post-determination interest.

The specific proposals

The FOS has set out four options for both the interest rate it uses and the date from which it will apply.

• Fixed 8% rate (no change). 
• Fixed at a lower rate. The standard interest rate is still fixed, but at a rate less than 8%. 
• Tracker rate (average rate) plus 1% (This is the FOS's recommended option). The standard rate would be linked at 1% above the Bank of England base rate (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). 
• Tracker rate (prevailing rate) plus 1%. The standard rate would be linked at 1% above the Bank of England base rate (where the base rate is calculated as the rate at the point of determination of the complaint).

The consultation notes that, whilst a fixed rate is more efficient to apply, stakeholders have argued that the current 8% rate is too high and/or should be better aligned with evolving market conditions. 

In terms of implementation, the options are:

• Apply to all complaints upheld by the FOS from the date that the new rate is implemented. 
• Apply to complaints referred to the FOS from the date that the new rate is implemented (this is the FOS's recommended option). 
• Apply the new rate only where the act/omission complained about occurred after the date that the new rate is implemented. 
• Apply the new rate only to complainant losses which were incurred after the date that the new rate is implemented.

Reflections

This is an interesting season for the FOS. It is without a permanent CEO, its Chair is departing in the Summer, responses to its CFI have challenged the very basis on which it operates and the results of a separate review of its operations by HM Treasury are expected shortly. Change is most certainly afoot. 

Changing the interest it applies to its awards was suggested by several respondents to the CFI as a ‘quick win’ for the FOS. It is perhaps somewhat surprising to see this proposal issued in isolation, rather than as part of a larger package for reform. Perhaps the FOS is taking the ‘quick’ in ‘quick win’ seriously. 

Broader questions remain about the role of the FOS in the regulatory landscape moving forward, in particular its relationship with the FCA and the extent to which - if at all - it is operating as a quasi-regulator and break on growth. In the meantime, firms are likely to welcome these proposals as a measured way of redressing the balance between their interests and those of consumers. 

The consultation closes on 2 July 2025.