HM Treasury announces review of the Financial Ombudsman Service

The Economic Secretary to the Treasury will conduct a review of the Financial Ombudsman Service, HM Treasury announced on 17 March 2025¹. The review forms part of a wider initiative to modernise the UK's financial services regulatory sector, examining how well the service collaborates with the Financial Conduct Authority and whether it continues to fulfil its role as a simple, impartial dispute resolution service. The announcement states that the review is also exploring current compensation practices¹.

The Financial Ombudsman Service says it has decided to consult on the interest applied to compensation awards in response to feedback from a joint call for input it ran with the FCA, and to the Treasury review¹. That call for input launched in November 2024 and closed on 30 January 2025, receiving over 140 responses from firms, industry bodies, consumers, consumer groups and professional representatives¹. Some firms and trade bodies raised concerns about the redress framework's impact on competition and growth, citing high costs, unpredictable outcomes and the threat of mass redress events. Many firms also said the discretionary 8% interest rate on top of compensation awards was excessively high, and some questioned the period over which interest is applied¹.

The service has applied a standard 8% simple interest on compensation awards for many years¹. Its consultation, launched on 4 June 2025 and closing on 2 July 2025, sets out four options for the rate¹:

The consultation covers pre-determination interest, awarded on money a complainant was deprived of before their complaint was determined, and post-determination interest, applied if a firm fails to pay by the specified deadline. It does not cover interest that forms part of a money award, such as interest overpaid on a loan, and that approach will remain unchanged¹. Four implementation options are also proposed, with the recommended option applying a new rate to complaints referred to the service from the date it is implemented¹.

The consultation includes an initial equality impact assessment drawing on the FCA's Financial Lives May 2024 survey. It reports that 18% of 18 to 24 and 25 to 34 age groups have low financial resilience, falling to 9% for the 75+ group; 16% of female respondents compared with 12% of male respondents; and 39% of those single with dependent children compared with 14% of couples with dependent children and 8% of couples with no dependent children¹.

Why it matters for households

The Financial Ombudsman Service decides complaints between consumers and financial businesses, and its service is free to consumers, with well over one million people contacting it each year¹. Where it upholds a complaint, the interest element of an award is currently calculated at 8% simple. If the rate changes, the amount added to compensation could be lower or higher depending on prevailing Bank of England base rates, and the implementation option chosen determines which complaints are affected. Under the recommended implementation option, complaints already referred to the service before any new rate takes effect would keep the existing treatment¹. The award limit the service can require firms to pay is set by the FCA and reviewed annually¹. The Treasury review covers how the service works with the FCA and its compensation practices, so any changes could affect how complaints are handled and paid, not only the interest calculation¹.

What happens next

The consultation closes on 2 July 2025. The service says it will consider feedback and aims to publish a policy statement in September 2025¹. The Treasury review announced on 17 March 2025 is separate, and no timetable for its conclusions has been reported¹.