FOS and Compound Interest

[borgbaiter]

Hi

was browsing some stuff in my claims folders and came across this;

http://www.financial-ombudsman.org.u.../awards-33.htm

it mentions that the FOS can award compund interest in certain cases. the rate they apply is bank of england base rate plus 1% how would you calculate this? i recon my case may be suitable for it but need some idea how to work it out

any clues would be helpfull.



Borgbaiter

[Budgie]

Re: FOS and Compound Interest

Current Bank base rate is 5% so even if you were successfully generate a financial award of compound interest from the FOS, it would likely only be at a rate of 6% per annum.

It of course would depend on the age of the charges you are seeking to reclaim but generally an award of compound interest at this rate would actually be very similar in amount to an award of simple interest at an equivalent rate of 8% per annum using the calculation method suggested by a Court.

It does not appear that the FOS would take into account the rate at which the offending Bank would actually have charged you interest or at what rate they might have been unjustly enrcihed by their subsequant actions.

Still no harm in trying. You could use my compound interest spreadsheet to calculate what you might receive on a claim based on a compound interest award at 6% per annum and use my statutory interest spreadsheet to compare against statutory court interest at 8% PA.

Budgie

[borgbaiter]

Re: FOS and Compound Interest

hi

charges date back to 2001 to 2003. (maybe 1999 if they accept that statue of limitation doesnt apply)

id like to do the calc as i like to do that sort of thing

just dont know how to calculate it. i assume it changes evertime bank of england rate changes? is there a formula someplace?



Borgbaiter

[Budgie]

Re: FOS and Compound Interest

You can use the spreadsheets here

SPREADSHEETS and CALCULATORS - Legal Beagles

[TANZARELLI]

Re: FOS and Compound Interest

Thanks for that link I must have missed that one.

Yep Budgie is right in his post, there might not be too much of a difference in the actual levels. I alway feel Compund Interest should be at a similar rate as Budgie pointed out and not one determined by the FOS, its a priciple thing IMO.

[borgbaiter]

Re: FOS and Compound Interest

hi

i like the principle of things even if it meant i lost money. if you dont have principles what do you have ?


Borgbaiter
------------------------------- merged -------------------------------
hi


the speadsheet there only allows one interest rate. it would need to change as the BOE rate changes to give the figure i need i think.

Note added by Budgie : Use the compound interest spreadsheet to calculate what you might receive on a claim based on a compound interest award at 6% per annum, you can change the 6% to whatever % you like on the spreadsheet and the interest will recalculate.
Use the statutory interest spreadsheet to compare against statutory court interest at 8% PA.

Borgbaiter

[TANZARELLI]

Re: FOS and Compound Interest

Thats one for Budgie.

However why not add charges up to the date the base rate changed into one spreaddie then subsequent ones into a seperate sheet. Then just combine the totals. I have a spreaddie which has 2 coloumns for differnent compound rates as well as a simple 8% stat column. There may be one on here though so check with Bud first.

[borgbaiter]

Re: FOS and Compound Interest

good point

will take awhile but ill get the result i want


Borgbaiter

[Budgie]

Re: FOS and Compound Interest

Morning Borbaiter,

I understand exactly what you are trying to do but I don't understand why you would want to try and do it.

The base rate changes regularly and has changed many times throughout the period of your claim. http://www.moneyextra.com/dictionary...ory-003455.php

It would of course be possible to construct a spreadsheet that would calculate the exact amount of interest, down to the exact penny that you would be entitled to if you were to be awarded compensation that was actually historically linked to track the movement of the base rate.

However, I would expect that FOS would just use the base rate in place at the time they make their decision, add 1% and then apply that rate throughout the period of your claim.

At these low interest rates I am sure that the end results by either method will be so close to each other as to be pretty neglibable. Especially when taking into account how the base rate has actually changed ( very little ) since 1999.

To be honest I am pretty sure that you would actually be better off with statutory 8% instead of 1% above base rate compound in this situation.

Regards Budgie

[laurenwalker]

Re: FOS and Compound Interest

Compound interest was such a bitch to work out when I was in grade 8. Indeed, not everyone is good at math. Several of us were vexed by the difficulty of those crucial abstractions since school days. Yet adults we have to develop certain math skills if we want to make balanced financial choices.

[Mic]

Re: FOS and Compound Interest

It is only the FOS who applies a relatively low interest calculation. I think it is 8% at present, however that does not stop you from charging more interest if you are doing this privately, as long as you can justify the interest. Normally you would charge an equivalent interest to taking out a loan for that amount. This could be as high as a credit card interest rate of 35% or a loan agreement interest rate. It is up to you and how you would justify it.

Compound interest calculations are pretty easy it is just the rest amounts that must be taken into consideration.
If you rest amount is on a 12 month basis, in other words a payment is made every 12 months, then the calculation is as follows.

P = Principle, r = interest rate expressed as a decimal, t = the number of years
for r you just take whatever the interest rate is and divide it by 100 to get the decimal. ergo 8% = 0.08
if we have the following P = 100, r = 8% t = 10 years

Compounded interest = £100 x (1.08 ^ 10),
1,08 ^10 = 2.16 x £100 = £215.89

However most calculations are done on a monthly accrual basis. so the formulae changes slightly, but it makes a big difference to the final amount. You have to divide the annual interest by 12 to give you the monthly interest rate.


so this comes to 1 + (r/n) where n is the amount of times in a year interest is calculated. In most cases this is 12.
this becomes 8% x 100 = 0.08 / 12 = 0.007 + 1 = 1.007 per month.
Again you take the number of years t = 10 and multiply it by the amount of times interest is calculated. 1 year = 12 in this case. this equals 120 over 10 years. 10 x 12

Follow the same calculation again with the new figures
P = 100, r = 1.007 / month, t = 120

All figure shown are for easy reading only, just use the calculated figures and don't round up or down any where until you come to the final amount, then round up to the nearest penny.

Amount = £221.96 based on £100 over a ten year period, with interest accrued on a monthly basis.

[Mic]

Re: FOS and Compound Interest

One point I failed to mention.
When the amounts of interests are calculated from different time periods, where normally a loan would not be taken out, then you are justified in charging equivalents to credit card interest charges. Whether or not this is accepted or not is up to debate.