issue 23 - varying interest on savings accounts

banking: varying interest on savings accounts

The complaints we receive about savings accounts tend to relate to firms having varied their interest rates. These cases raise questions such as:

Can the firm reduce the interest rate by more than a fall in the Bank of England base rate?

Can the firm leave the interest rate where it is if the Bank of England base rate goes up?

How will the customer know if either of these has happened?

Can the customer withdraw the money if dissatisfied?

The Unfair Terms in Consumer Contracts Regulations (the ‘Regulations’) are often relevant to the individual complaints we deal with. The Financial Services Authority (FSA) and the Office of Fair Trading, amongst others, have the power to take firms to court for breaches of these regulations. The FSA has recently been consulting about its approach to that power, in the context of interest-rate-variation provisions, and about its view of what good practice might require.

As the Regulations have been in force since 1 July 1995, firms should already have reviewed the terms of their contracts. However, it may be timely to provide a reminder about the potential impact of these Regulations on variations in interest rate for savings accounts. In some circumstances, the Regulations may require firms to send personal notification of interest rate changes to customers where, currently, the Banking Code (the ‘code’) does not. However, the industry has promised to update this part of the Code once the FSA publishes its guidance.

The Regulations are relevant to what the contractual terms require the firm to do, rather than to what the firm voluntarily does in practice, or what the Code requires. If the contractual terms do not comply with the Regulations, the firm may find that it is unable to vary interest rates – even if, in practice, the firm follows, or goes beyond, the Code requirements.

Firms need to consider a number of points before they vary the interest rate on savings accounts. For example:

Do the contractual terms only allow an interest-rate change for a valid reason?

Are particular valid reasons specified in the contractual terms?

Does the interest-rate-variation provision create a significant imbalance in favour of the firm?

Do the contractual provisions require the firm to send customers personal notification?

To illustrate this, we look here at three of the most typical situations surrounding interest-rate changes.

where the change is for a valid reason and that reason is specified in the contractual terms:

Power to change: The fact that the valid reason is specified in the contract does not automatically guarantee that the interest-rate-variation provision will be fair. It might still be unfair - if it creates a significant imbalance in favour of the firm. That might be so, for example, where the customer is locked in and has to accept the new rate.

Requirement to notify: The Regulations are unlikely to require personal notification to customers of an interest-rate change (for a specified valid reason) in all cases. Fairness might require personal notification in some cases, depending on the other terms of the account. But it is unlikely that a requirement for personal notification alone will render fair an otherwise unfair interest-rate-variation provision, particularly in relation to a customer who is locked in.

where the change is for a valid reason but that reason is not specified in the contractual terms:

Power to change: The power to change interest rates may still be unfair – if it creates a significant imbalance in favour of the firm.

Requirement to notify: The Regulations are likely to require the contractual terms to say either: the firm will give customers prompt personal notice once the change takes place and customers can, at that time, close their account freely; or the firm will give customers sufficient advance personal notice to enable them to close their account without becoming affected by the change.

Where the change is not for a valid reason, even if it is for a reason specified in the contract:

The power to change interest rates is likely to be unfair unless:

the account is not a term account; and
the contractual terms require the firm to give customers sufficient advance personal notice to enable them to close their account without becoming affected by the change.

Arguably, it is unlikely that making special provision for accounts with little money in them (a de minimis provision) could turn an invalid reason for an interest-rate change into a valid one. But it might be possible for a reasonable de minimis provision, incorporated in the contractual terms, to modify the firm’s obligation to give customers personal notice – if this were confined to circumstances where there is no possibility of material detriment to the customers.