Understanding compensation

If your business has got it wrong and a consumer has lost out as a result, we can tell you to put things right.

Usually, we’ll tell you to put your customer back in the position they’d be in if things hadn’t gone wrong.

That can mean awarding money to your customer– for example, refunding a charge. Or we may also tell you to do something that doesn’t involve money, such as keeping your customer updated on an ongoing claim.

And in some cases, we’ll award compensation for the distress or inconvenience an issue has caused your customer.

The Financial Conduct Authority (FCA) rules say we can make any or all of the following types of awards:

• money awards
• interest awards
• costs awards
• directions

Money awards

If your customer has lost out financially, we can tell your business to compensate them for the loss you caused.

Where it’s clear how much your customer lost, we’ll specify the amount of money you need to pay.

Where it’s not clear, we’ll usually set out the basis on which your business should compensate a customer, rather than a specific amount.

In cases where we think your customer is due more than our award limit  we’ll recommend the additional amount we think you should pay. But we’ll talk to you both about what this means at the time.

Distress or inconvenience

It’s important to address the emotional and practical impact of a business’s mistake. So we might also make an award for any of the following:

• distress
• inconvenience
• pain and suffering
• damage to reputation

We might award these if we feel your customer faced obstacles or difficulties that could have been avoided if you’d handled things differently.

Find out more about our approach to paying compensation for distress or inconvenience.

Interest awards

Interest on an award is usually calculated from the date your customer should have had the money until the date it was actually paid.

We can award interest in three ways:

• As part of the award itself. For example, where we tell you to pay back interest you’ve already charged.
• On top of a financial award. For example, if someone was ‘deprived’ of money – meaning they didn’t have it available to use – we can tell your business to pay interest on top of the money award at an appropriate rate.
• After the financial award has been calculated. For example, if there’s an unreasonable delay in settling a complaint following an ombudsman’s decision. We can decide that 8% simple interest should start to accrue until the award is paid.

In most cases, we think a rate of 8% simple per year is appropriate to reflect the cost of being deprived of money in the past. We wouldn’t normally use the current rates paid on deposit accounts as a benchmark. This is because the rates of interest customers have to pay in order to borrow are usually much higher.

8% is also the same interest rate that the courts would normally award, but we can use a different rate if it’s fair to do so. The 8% interest rate takes into account that:

• the rate is gross before tax is deducted
• it often applies to losses at times when different base rates applied
• current interest rates charged on overdrafts and loans may not have reduced in line with the base rate

But if we think the money your customer was deprived of might have been used to pay for a credit card bill, for example, we might use the interest rate the customer was charged instead.

Most customers will have to pay basic rate income tax on this interest, which the law may require your business to deduct.

Costs awards

Occasionally, we might tell a business to reimburse some or all of the costs a customer reasonably incurred. Costs awards aren’t common, but we need to think about what’s fair in each individual case.

Costs awards can also include interest.

Directions

We might decide your business needs to put things right in a way that doesn’t involve paying money. For example, your customer complains to us that you haven’t kept them updated on an ongoing claim. If we agree, we may direct you to provide regular updates from now on.

Sometimes we’ll recommend that you follow a formula to work out the right amount of money to pay your customer.

We wouldn’t usually check the individual calculations unless your customer has a specific concern about them.

In most cases, you should pay the compensation amount we tell you directly to your customer. But if we don’t think that’s appropriate, we’ll explain why.

In some cases a business may be required by the FCA to enter a consumer redress scheme. This will include a set of rules that the business has to follow when compensating its customers for a specific issue.

If there’s a redress scheme in place, we’ll usually be bound by the rules for that particular issue. However, this only affects complaints about the specific issue, so we’ll deal with any other complaints about your business as normal.