how we use 'interest' to calculate financial awards

Our rules indicate how we make financial awards and refer to the ‘reasonable’ interest that we may require firms to pay in certain cases. This article outlines our approach to this issue. It also explains some changes we intend to introduce from 1 January 2004.

In all cases we will continue to assess each complaint on its own merits. Where we have established that a firm is liable to pay redress, our overriding objective continues to be to try – as far as possible – to put the consumer back in the position they would have been in, had it not been for the firm’s actions. We aim, too, to ensure we use a consistent process across the full range of the complaints we deal with where redress is payable – from motor insurance disputes and complaints about banking errors to cases involving unsuitable investment advice.

In many types of cases, we intend to continue calculating redress in exactly the same way as now. In particular, we consider it appropriate, in many cases, to continue to follow the procedure adopted by many courts – and to award simple interest on the award made, at the rate of 8% per year from the date, in our view, when the firm’s actions caused the problem until the date when payment is made (or, for most insurance claims, from the date of the incident until the date when payment is made).

In all cases firms are required to comply with our money awards promptly. Where firms delay their payment of redress for more than 28 days, we will continue to require them to pay simple interest at 8% per year, from the date when we made the award to the date when they pay it.

However, we believe some modifications are needed where we can make a reasonable assumption about what the consumer would otherwise have done with their money, had they not been given wrong advice. In such cases we will assume – in the absence of information to indicate what the consumer would actually have done – that if the firm had given the customer appropriate advice, then the customer would have earned a reasonable rate of return on their money. From 1 January 2004, we will calculate the redress for these cases in a slightly different way, requiring firms to return the amount originally invested, together with compound interest on that amount, calculated using the Bank of England base rate plus 1% per year. (Details of Bank of England rates can be obtained at www.bankofengland.co.uk/mfsd/rates/baserates.xls)

The following examples illustrate how our approach works in practice in different types of cases, and clarify where things will change slightly.  

a) complaints about the late payment by firms of claims, proceeds of maturing policies etc EXAMPLE an insurer disputes a claim made under an insurance policy and fails to pay it. In cases like this, if we conclude that the firm should compensate the customer, we would award the value of the claim, plus simple interest at 8% per year (the same rate as that used by many courts), from the date of the incident to the date when the firm settles the claim. EXAMPLE an investment firm delays payment of a maturing policy because it has lost the relevant papers. In cases like this, if we conclude that the firm should compensate the customer for the delay, we will award simple interest at 8% per year, from the date the payment was first due to the date when the payment is actually made. b) complaints – other than those in a) – where it is relatively easy to establish what position the customer would now be in, if the firm had not taken the action that led to the loss EXAMPLE an investment firm inappropriately advises a customer to put their life savings, held in a deposit account, into an unsuitably risky investment. In cases like this, we would probably decide that the customer would have left their money on deposit, if the firm had not advised them to move it. So, typically, we would tell the firm to return the original sum invested, less the current value of the investment and any income received from it. We would also tell the firm to pay the customer an additional sum, equivalent to the interest they would have earned if they had left the money in their deposit account. EXAMPLE an investment firm buys shares for a customer that are higher-risk than the customer requested. We may decide that the firm should compensate its customer on the basis that the customer would, nevertheless, still have invested the money in the stock market, although in shares with a lower risk. So we will calculate redress by reference to an appropriate stock market index rather than by reference to the amount the consumer would have received if they had put the money in a deposit account instead. In complaints relating to banking and loans, it is often clear that to put consumers back in the position they would otherwise have been in, we will need to take into consideration specific issues such as: the amount the consumer was wrongly charged as a result of a banking error the interest rate that the consumer would have received if the firm had not deposited funds in the wrong account some other interest rate that we can establish by reference to where the money was previously, and the rate of interest it was getting then. c) complaints – other than those in a) – where it is more difficult to establish what position the consumer would otherwise have been in EXAMPLE an investment firm gives inappropriate advice to a customer who seeks help about how to invest a sum of money, where there are a number of possible options. In these cases it is difficult for us to know what the consumer would subsequently have done if they had not been given bad advice. However, we do know that the consumer was looking to make an investment – it is simply the precise return they might have achieved from that investment that we cannot know with certainty. We will therefore assume that if the consumer had received reasonable advice, they would have received a reasonable rate of return. So we will expect the firm to return the amount invested, together with compound interest calculated using the Bank of England base rate, plus 1% per annum – and less any income received.