Financial advisers could be overpaying compensation due to interest rates that the Financial Ombudsman Service’s (Fos) applies to historic losses.
Currently, awards made by the Fos have interest added at 8 percentage points above the base rate, or 15 percentage points above base rate for claims relating to any period before 1 April 1993.
The Fos website explains that the rate is not as generous as it might appear because it is applied gross, it is applied to historic losses which happened at times when different base rates were applied and it takes account of interest rates charged on loans or overdrafts, which have not reduced in line with the base rate.
The section of the website titled ‘Compensation for being deprived of money and for investment loss’ also states that 8 per cent is “the rate generally used by the courts.”
Elsewhere, in the pages detailing compensation, the Fos states that, because the courts have not changed the equivalent interest rates that they apply, “there does not appear to be a case for changing this rate at present.”
However, a Court of Appeal ruling from March this year set compensation at 4 per cent above base rate – barely half the rate the Fos currently applies.
The case of Secretary of State for the Department of Energy and Climate Change and Coal Products Limited. v. Jeffrey Jones & others, which involved a group of Welsh workers challenging their employer, included the statement “the purpose of such an award is to compensate a party who has been deprived of the use of his money.”
The defendants accepted that 4 per cent above base rate was “not excessive or unreasonable.”
And in some Commercial Court cases, a rate of interest of only 1 per cent above base rate is set.
The Fos appears reluctant to change its terms just yet though. Spokesperson Katherine Liggatt said, “It is important that people get fair compensation when things go wrong and we usually tell businesses to pay interest at the statutory rate, which is currently 8 per cent above base rate.
“On occasions, the courts do award different rates of interest and we regularly review our position on this. We also consider what is right in the individual circumstances of each complaint, to ensure people are put back into the position they were in before the problems arose.”
But, according to Alan Parkinson, an adviser at Liverpool-based CP Dunne, the ruling should already have set a legal precedent, especially as the basis of interest due for being ‘deprived of money’ is exactly the same vindication used by the Fos.
“Failure by the Fos to properly consider and implement this ruling may invite claims from regulated firms who have been instructed to pay interest redress at excessive and perhaps illegal levels,” Mr Parkinson added.
jon.cudby@ft.com
