FOS to revise compensation interest rate after 25 years

The Financial Ombudsman Service (FOS) has announced a significant update to the interest rate it applies to some consumer compensation awards, marking the first change in nearly 25 years.

From 1 January 2026, the rate will move from a fixed 8% to a variable rate tracking the Bank of England’s base (average) rate plus 1%, in a bid to better reflect today’s economic conditions and provide fairer outcomes for consumers and businesses.

The change follows a recent consultation launched in response to feedback from stakeholders and a joint Call for Input with the Financial Conduct Authority (FCA). The longstanding 8% rate, originally set decades ago, had come under scrutiny for failing to reflect current interest rate trends and the real cost to consumers of being denied access to their money.

A more realistic and proportional system

The revised rate will apply to situations where consumers are entitled to additional compensation because they were “deprived” of money — for instance, where a valid insurance claim was wrongly rejected, or where delayed action by a firm caused financial harm. The interest will now be calculated using a weighted average of the Bank of England base rate plus 1%, from the date the loss occurred until the compensation is paid.

The FOS clarified that the updated rate does not affect awards for actual financial losses, which will continue to be calculated based on the individual circumstances of each case.

8% rate to remain for late payments

While the general interest rate for deprivation of funds is being revised, the 8% interest rate will still apply in cases where firms fail to pay compensation on time. This aims to incentivise timely redress and discourage unnecessary delays by financial firms.

The FOS confirmed that the new interest rate structure will only apply to new complaints referred from 1 January 2026 onward, giving firms time to prepare for the change. Full implementation details are expected to be published in autumn 2025, alongside wider reforms to the financial redress system currently being developed by the FCA and the Ombudsman.

Modernising the redress landscape

The move forms part of a broader effort to modernise the UK’s financial redress framework and improve how compensation is awarded in financial services. The reforms seek to make the system more agile, transparent and fair — not only for consumers but also for firms navigating complex complaint environments.

The change is likely to be welcomed by financial businesses, which had argued that the outdated 8% rate was punitive, particularly during periods of low interest rates. However, consumer advocates will be watching closely to ensure the revised methodology still provides adequate compensation for real financial harm.

Further updates and consultation outcomes will be shared by the FOS later this year.