New FOS compensatory interest rate in effect from 1 January 2026

The Financial Ombudsman Service (FOS) has confirmed that a new compensatory interest rate will apply to redress payments it directs financial businesses to make in cases it receives on or after 1 January 2026.

For cases received before 1 January 2026, the FOS will generally continue its previous approach of applying 8% simple interest per year.

How is compensatory interest calculated?

Following a consultation that ran from 4 June 2025 until 2 July 2025, the FOS confirmed that the default compensatory interest rate for relevant cases would track the Bank of England’s base rate plus one percentage point. The base rate is applied as a time-weighted average rate over the period the money was due until the date the compensation is paid, so where the base rate changes during that period the calculation reflects those changes rather than applying a single fixed rate throughout. This is the interest the FOS typically uses when it decides a consumer has been deprived of money, rather than interest being added automatically in every case.

The FOS has also provided a calculator tool to support firms in applying the methodology consistently, with interest calculated on a simple basis.

Its announcement also emphasised that compensation awards will still reflect consumers’ actual losses.

How does the FOS work?

If the FOS finds that a consumer has suffered financial loss due to the actions of a financial business, it can direct the firm to pay the consumer compensation, plus interest. The FOS aims to put the consumer back in the position they would have been in, so far as is fair and reasonable, had the issue not occurred.

The FOS can also direct businesses to pay different types of interest, including in cases where consumers have been deprived of money and therefore were not able to use it. This interest payment is subsequently made in addition to the redress payment for actual money lost.

FOS retains 8% option

The FOS also stated that if a business is late paying compensation, it may require the firm to pay 8% per year simple interest on the overdue amount. This is a separate late-payment rate and is distinct from the new default compensatory interest methodology.

Why this matters for motor finance claims

There has been significant debate around the proposed level of compensatory interest to be paid on motor finance compensation as part of the Financial Conduct Authority’s (FCA) planned redress scheme.

The FOS approach is directionally consistent with the benchmark the FCA has proposed in its scheme modelling, although the regulator will confirm its position when it publishes its final redress rules, which it says it will do before the end of March 2026.

However, depending on the facts of their case, some consumers may be able to argue for a higher rate to be applied to their redress award if they can evidence that they had to borrow at a higher cost because they did not have the funds they should have had.

Register your car finance claim with Harcus Parker

Investigating whether you have grounds to seek a higher compensatory interest rate is one of the many potential benefits of instructing a solicitor in relation to your motor finance claim.

You can register your claim with Harcus Parker here.