The Financial Ombudsman Service has proposed to change the interest applied to any awards it directs financial firms to make.

The Ombudsman’s consultation on the interest rate applied to compensation awarded to consumers has proposed changing the rate from a fixed level of 8% to one tracking against the Bank of England base rate plus 1%.

The consultation will run until 2 July.

Where a consumer has been “deprived” of money, that is not having it available to use, such as where an insurance claim has been wrongly turned down, the Ombudsman can currently direct the business to pay up to 8% interest on top of the compensation for the period the consumer was out of pocket.

This rate can also be charged if a financial business does not pay compensation on time.

Following feedback from a joint Call for Input with the FCA, the Ombudsman has proposed that a new interest rate formula of base rate plus 1% is charged for new complaints submitted to the service.

The base rate would be calculated as an average rate over the period that the money was due until the date the redress payment is made.

James Dipple-Johnstone, interim Chief Ombudsman at the Financial Ombudsman Service, said:  “The decisions made by our vital service have this year helped thousands of consumers and businesses resolve disputes in sometimes very difficult and stressful circumstances.

“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.” 

The consultation is one of several due to come from the Ombudsman this year. Further proposals to modernise the dispute resolution system and better tackle mass redress events are due to be brought forward this summer.