skip tocontent

ombudsman news

issue 96

September / October 2011

ombudsman news "Q&A" page

when does the ombudsman tell businesses to add interest to compensation paid to consumers - and why at the rate of 8%?

Where a consumer has been wrongly deprived of a sum of money in the past - for example, where an insurance claim was wrongly rejected - we usually require the financial business to add interest, from the date when the consumer should have had the money until the date the money is actually paid.

In some cases, the consumer will have incurred an identifiable cost, as a result of having to borrow money in the meantime. In other cases, there will be an identifiable loss of income on other funds that the consumer had to use instead.

But in many cases, the effect on the consumer's finances could only be discovered by making speculative assumptions. So unless it is apparent what the consumer's borrowing cost (or investment loss) actually was, we are likely to award interest at 8% a year simple.

Most consumers will have to pay lower-rate income tax on this (which the law may require the financial business to deduct). And some consumers may also have to pay higher-rate tax - even if they had to pay non-tax-deductible interest on borrowing in the meantime.

The current low rates paid on deposit accounts are not an appropriate yardstick. The rates of interest consumers have to pay in order to borrow are much higher. So the 8% interest rate (which is also the rate generally used by the courts) reflects the fact that the rate:

    • is gross before tax is deducted;
    • often applies to historic losses at times when different base-rates applied; and
    • takes account of current interest rates being charged on overdrafts and loans - which have not reduced in line with the base rate.

I've heard you've changed the ombudsman leaflet that the rules say we must send to consumers who complain. How does it differ from earlier versions?

As we outlined in issue 92 of ombudsman news (February/March 2011), we recently re-designed our consumer leaflet, your complaint and the ombudsman, reflecting feedback from both businesses and consumers. We've reduced the number of words, so that there are now fewer pages. We've introduced more graphics and colour. And we've updated the reference to the maximum compensation available from the ombudsman service ( £150,000 for complaints we receive from 1 January 2012).

If you need supplies of our consumer leaflet, you can order them from us online.

Copies are available free of charge for public libraries and consumer advice agencies such as trading standards and citizens advice bureaux.

image of ombudsman news

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.