New Interest Rate and Calculator for Compensation Awards — What Firms Need to Know
As we enter 2026, one of the most significant shifts in redress practice for financial services firms has quietly taken effect. The Financial Ombudsman Service has introduced a revised way of calculating the interest applied to compensation awards in complaint decisions — and it’s a change that matters for directors, compliance teams and risk professionals across the sector.
The update, effective 1 January 2026, responds to industry feedback and must now be factored into how firms anticipate and calculate potential costs from Ombudsman decisions. Alongside this comes a new online interest calculator designed to help businesses estimate interest payments under the new regime.
What’s changed — and why it matters
For many years, the default rate of interest the Ombudsman applied to compensation awards was a simple 8% per year. That figure served as a long-standing benchmark — but it was static and increasingly out of step with real-term economic conditions.
Following a consultation process during 2025, involving both the Ombudsman and the Financial Conduct Authority, the policy has shifted to a more dynamic approach. For complaints referred to the Ombudsman from 1 January 2026 onwards, firms are now generally directed to apply:
A time-weighted average of the Bank of England base (average) rate plus 1 percentage point, calculated from when the loss occurred until the compensation is paid.
This means compensation interest more closely reflects prevailing market conditions — benefiting fairness and proportionality. Firms should note that this only applies to interest intended to compensate consumers for being “deprived” of money.
How the updated interest calculation works
Rather than applying a flat rate regardless of economic conditions, the new method calculates interest over the period from when the customer was put out of pocket to the date of payment, using the Bank of England’s base rate plus one percentage point as the underlying benchmark.
For practical purposes, this means:
- When interest rates rise or fall, the rate used in compensation calculations will reflect those movements over time.
- Firms benefit from a more economically sensible approach that aligns with broader monetary policy.
- The new mechanism aims to balance simplicity with fairness — both for consumers and for businesses.
Importantly, the 8% simple interest rate remains in place for late payment penalties — ensuring firms continue to have an incentive to pay redress promptly.
Introducing the Ombudsman interest calculator
To support firms in adapting to this change, the Ombudsman has published an interest calculator on its website. This tool allows businesses to enter relevant dates and sums to estimate how much interest might be due under the new rate.
This is particularly useful for compliance functions and finance teams when:
- estimating potential contingent liabilities from existing complaints,
- stress-testing reserves and forecasts,
- and preparing for possible liabilities where complaints are expected to be upheld.
Having a transparent, publicly available calculator also enhances predictability — a clear benefit for firms seeking to manage their redress risk with confidence.
Compliance implications and best practice
For compliance and risk leaders, this change underscores a simple but important point: redress expectations are evolving, and firms need to stay ahead of them.
Key takeaways include:
- Review and update redress models to reflect the new interest basis for new complaints.
- Re-baseline forecast scenarios where potential Ombudsman awards (including interest) feature in capital planning or MI.
- Ensure finance and legal teams understand how the calculator works and how assumptions may differ from historic practice.
By doing this promptly, firms can reduce surprises, enhance governance around complaints forecasting, and integrate Ombudsman outcomes more seamlessly into risk management frameworks.
Final thoughts
While not headline-grabbing, this change represents a meaningful evolution in how redress costs are quantified. By aligning interest with the Bank of England base rate plus one percentage point, the Ombudsman has struck a sensible balance between fairness and practicality — a shift that directors and compliance professionals should welcome for its predictability and transparency.
If your firm has an active complaints portfolio or significant historic liabilities, now is a good moment to revisit your redress assumptions and ensure your forecasts reflect this new regime.
How ALPH Legal & Compliance Can Support Your Firm
Changes to how compensation interest is calculated may look technical, but their impact on complaints exposure, provisioning and regulatory scrutiny can be material — particularly for firms with historic complaints or higher Ombudsman referral volumes.
ALPH Legal & Compliance supports consumer credit lenders, brokers and financial services firms with practical, regulator-focused advice across the full complaints lifecycle, including:
- Complaints policy design and review, ensuring alignment with FCA DISP requirements, Ombudsman expectations and Consumer Duty
- Operational complaints handling reviews, testing how complaints are managed in practice, not just on paper
- Independent complaints audits and file reviews, identifying root causes, redress risk and areas for improvement before issues escalate
- Redress and interest modelling support, helping firms understand and forecast compensation exposure under the Ombudsman’s updated approach
- Governance, MI and oversight reviews, supporting Boards and senior management in evidencing effective control and learning
Whether you are updating your complaints framework, responding to Ombudsman scrutiny, or seeking independent assurance that your current arrangements remain robust, ALPH provides clear, proportionate and outcome-focused support.
To discuss how we can support your business, get in touch directly.