Financial Ombudsman Service consultation on interest on compensation awards - Which? response

Which? welcomes the opportunity to respond to this consultation. As the UK’s consumer champion, we work hard to ensure that consumers who have experienced harm in the financial services system are well-supported to receive fair, adequate and timely redress. The Financial Ombudsman Service (FOS) provides a vital option for consumers to receive redress and avoid the likely expense and difficulty associated with trying to enforce their rights through the courts. 

As we have stated in response to previous consultations, we do see the opportunity for greater efficiency in how the current financial redress regime and legislative framework are executed. However, we want to ensure that any changes to the redress system, and to the FOS, are fair, well-evidenced, in line with the statutory purpose of the FOS scheme, and consider any unintended consequences. 

We do not believe that the information presented in this consultation sufficiently makes the case for changing the current interest award regime, nor does it sufficiently explore and justify the alternative and recommended approaches. 

We believe the four proposed alternatives to alter the interest rate disproportionately prioritise the concerns of industry over the needs of consumers, by delivering a lower, or effectively lower, interest award rate for consumers. 

Specifically, we have concerns that:

• The recommended rate does not take into account the true costs facing consumers of being deprived of their money.
• Altering the post-determination interest rate is particularly unnecessary and unjustifiable as part of its purpose is to encourage timely compliance.
• Introducing a system of variable rates may cause confusion and place an unnecessary administrative burden on the FOS. 
• Moving to a rate that is effectively lower than 8% increases the potential for a disproportionate undercompensation for individuals with low financial resilience. 

We believe further consideration needs to be given to evidencing the move away from an 8% simple interest rate for pre- and post-determination awards. In addition, if developing a new approach to interest, we think further alternatives than those listed in the consultation paper should be explored. These may include:

• Tying the interest award to the Bank of England base (average) rate plus a higher percentage than 1% (such as 3%) as this would more accurately reflect the cost of being deprived of money for a consumer, while allowing for some moderation for market factors.
• Maintaining the 8% simple interest for post-determination awards (similar to judgment debts) as the purpose of this is also to encourage timely compliance, not to just to compensate for money deprived.
• Ensuring claimants have a clear and simple avenue to receive a higher rate of interest if they can demonstrate that they had to borrow at higher rates while being deprived of their money. 

In any event, it would be critical that any new rules only apply to cases lodged with the FOS after an announced implementation date (That is, such as Option B, C or D). It would be a breach of natural justice to apply any new rules to cases that have already been lodged at FOS (such as is articulated in Option A).