Decisions about interest
Paragraph 9.5a) of the Terms of Reference (TOR) provides that if FOS decides a financial services provider (FSP) is required to pay compensation to an applicant, then FOS has the discretion to require the FSP to also pay interest on that compensation.
Applicant's claim is $280,000
FOS determines the FSP should pay compensation to the applicant of $280,000 plus interest for 2 years at 8% which is $44,800
FOS could determine the FSP should pay $324,800 to the applicant.
FOS will consider:
- the interest rate that should apply, and
- the period for which interest should be paid.
We have developed operational guidelines (OGs) about how FOS will make decisions to require payment of interest will operate.
We are receiving a number of queries about how interest payments are calculated by FOS. Further discussion is set out below about how FOS calculates the interest payable on a compensation amount. Where we are reference parts of the OGs, we have colour coded the text.
Factors FOS takes into account in decisions about interest include:
- The type of financial service that is the subject of the dispute;
- Whether any legislation could be used as guidance on interest rates and periods;
- Whether a contract provides for interest;
- What would be fair in all the circumstances; and
- If time has elapsed, how to maintain the real value of the compensation.
In general insurance cases, FOS may determine that interest should be paid on money the applicant has spent restoring the subject matter in dispute. Examples when this may occur in general insurance disputes include:
- payment made for repairs to a motor vehicle, or
- payment made for repairs to damaged property.
If the applicant has spent money on the subject matter in dispute, FOS may determine that interest is payable because the cost of restoration or repairs, which the FSP is liable for, may have increased due to the passage of time.
In life insurance claims, FOS may determine that interest should accrue on a benefit that was or should be paid under a life insurance policy, from the date by which FOS is satisfied the benefit should have been paid.
FOS will not impose a standard rate when making interest awards and will not have one rate for all cases. FOS will try to impose a rate that will maintain the real value over time of any award of compensation. FOS has discretion to apply a rate that best fits the circumstances and may apply a rate that replicates what a court might do or align with a statutory rate (where such a rate exists).
If, in a dispute relating to a contract of insurance as defined in section 10 of the Insurance Contracts Act 1984, FOS decides that the FSP should pay interest on compensation, FOS will use section 57 of that Act to determine the interest rate and the period for which interest should be paid.
Interest rates applicable to insurance disputes
Below is a table setting out applicable interest rates:
Note: If the interest period included two or more six monthly intervals, the applicable rate is the mean or average for the total period rounded down to the nearest lower quarter of 1%.
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FOS will also take into account the following:
- If another legislative provision applies to the issues in dispute and specifies a particular rate of interest, FOS may award interest at that rate.
- If the contract to which the dispute relates sets out a particular rate of interest, FOS may award interest at that rate.
- If there is no legislative or similar requirement that should be taken into account in the calculation, FOS will consider what interest rate would be fair in all the circumstances of the dispute and particularly what rate would maintain the real value of the compensation awarded to the applicant.
For example, in banking cases, the usual measure of damages adopted for loss of use of funds is the term deposit rate for the amount of money which the applicant has been denied access to for the period in relation to which they were denied access.
FOS will calculate the time period over which interest should be paid by taking into account factors such as:
- When the applicant lodged the dispute;
- Any delays caused by the parties;
- The extent to which the conduct of either party contributed to a delay in resolving the dispute; and
- The parties' conduct in the course of FOS dealing with the dispute to arrive at a position that would be fair in all the circumstances.
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Interest is usually awarded from the date when the FSP 'first denies the claim'. However, if there is a significant delay between the date when the claim is made and the FSP's initial decision on the claim, a date pre-dating the first denial letter may be elected.
In some cases, interest may be awarded for a shorter period of time when an applicant has failed to reasonably progress their claim without good reason.