The Financial Ombudsman Service has opened a consultation on lowering the payouts it directs firms to hand over to consumers.    

The study will look at cutting the interest rate applied to compensation handed down against firms who have lost cases to customers. 

A typical form of interest FoS uses directs firms to pay to compensate consumers who have been ‘deprived’ of money – that is, not having it available to use – such as where an insurance claim has been wrongly turned down.

In these cases, the ombudsman can currently direct the business 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 doesn’t pay compensation on time.    

However, following an earlier Call for Input carried out with the Financial Conduct Authority, FoS now proposes changes to its interest charges. 

FoS now recommends charging an interest rate that tracks the Bank of England’s base rate plus-1%. 

It says: “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 body’s consultation document also details “a number of other interest rate options and proposals” that are open for comments until 2 July.

Financial Ombudsman Service interim chief ombudsman James Dipple-Johnstone says: “We think that reform of the dispute resolution system is crucial to make it fit for the future.  

That is why we are acting on feedback from our Call for Input and reviewing a range of our processes to ensure that they work for a modern economy.  

“We welcome feedback from stakeholders on whether our proposed new interest rate strikes the right balance between simplicity, fairness and proportionality.” 

Economic Secretary to the Treasury Emma Reynolds is currently carrying out a review of FOS to see if it remains “a simple, impartial dispute resolution service”. 

Her study will include looking at the body’s compensation structure and whether it acts “as a quasi-regulator”. 

In February, the Financial Ombudsman Service chief executive and chief ombudsman Abby Thomas stepped down unexpectedly without notice after joining the body in October 2022.