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ombudsman news

issue 57

October/November 2006

interest-rate complaints

The complaints we see about interest rates tend to fall into two main categories - complaints about the interest rates that businesses providing financial services charge on borrowings, and complaints about the rates that these businesses offer on savings.

Although interest-rate complaints form a relatively small proportion of our overall caseload, they raise a variety of different issues from which some useful common themes can be drawn. We have summarised these themes in the series of questions below. Businesses providing financial services may like to keep these in mind when considering complaints about interest rates.

As our case studies show, we are often able to resolve interest-rate complaints by informal mediation. Our approach will depend very much on the circumstances of the individual case. However, the set of questions below, together with our case studies, give a broad indication of how we are likely to look at different types of interest-rate complaints and - where appropriate - of what might constitute a fair settlement.

  • Was all the written or spoken information given to the customer about the interest rate clear and accurate-
  • Is any change in the interest-rate charging structure a fair reflection of a change in the underlying lending risk-
  • If an interest rate has been varied, has the law (and any relevant code of practice) been complied with-
  • If the interest rate was individually set for the customer, is there proper written evidence of how the rate was arrived at-

case studies

interest-rate complaints

57/1
whether interest charged on a mortgage loan constituted an "extortionate credit bargain"

Mr J was in his sixties and ran a small chain of dry cleaners. He had taken a "roll-up" mortgage after experiencing a substantial business failure and being threatened with bankruptcy by a creditor.

With a "roll-up" mortgage, the customer does not have to make any monthly repayments. The interest on the mortgage is rolled up into a debt to be repaid when the mortgaged property changes ownership or the customer dies, whichever happens first.

Several years after taking out the mortgage, Mr J complained to the mortgage lender. He said he had recently calculated the level the debt was likely to reach over his lifetime. He had compared this with the original amount he had borrowed. And he had then calculated what the total cost of the loan might equate to, if it was expressed as an annual percentage interest rate.

Mr J felt the resultant "true" rate would be "unenforceable". So he asked the mortgage lender to write off the debt and remove the legal charge over his house. When the mortgage lender refused, Mr J referred the complaint to us.

complaint rejected
We were satisfied that Mr J had fully understood the mortgage terms, when he took out the mortgage. And Mr J accepted that - at the time - the loan had been just what he needed to enable him to retain the home he had lived in for many years.

We were also satisfied that the interest rate Mr J was charged - the lender's standard mortgage rate plus one percent - was in accordance with the mortgage agreement he had signed. We did not agree with Mr J's interpretation of the "true" rate of interest.

It was clear that Mr J had been under considerable financial pressure at the time he took the loan. However, the mortgage lender hadn't been responsible for this pressure. And we did not agree with Mr J's assertion that the lender had taken unfair advantage of Mr J's position. Mr J had sought advice from his own solicitor before agreeing to the mortgage terms.

The lender had sent Mr J annual statements which showed the new balance and how it had accrued. The statements also included words to the effect that he was free to alter his loan to a repayment basis at any time, should he wish to do so.

We could not see any reason why the loan was "unenforceable" and we rejected the complaint.

57/2
interest rate on card account downgraded after bank introduced a new savings product

Mr D had a sizeable amount of money in a card account with the bank. The bank had marketed this account as "a good place for savings" as it paid interest if the account was in credit - although there was a credit limit for any borrowing on the card.

Initially, the account paid a good rate of interest for credit balances. But a couple of years later, after introducing a new savings product, the bank substantially reduced the interest rate it paid on the card account.

It was some while before Mr D realised what had happened. But he then changed accounts and complained to the bank. He said it had not given him proper information about the change in the rate and that, as a result, he had lost out on a significant amount of interest.

complaint resolved informally
We looked at how the bank had communicated with Mr D about the changes to the card account. In our view, it had not followed the relevant provisions of the Banking Code. And it had failed to make Mr D fully aware of the implications for credit balances kept in the card account.

After we explained our views to the bank, it agreed to our suggestion that it should pay Mr D £2,200. This was the total amount of interest he would have received if he had transferred his money to the new savings account as soon as it was introduced.

57/3
lender gives confusing and unclear information about interest rate on a loan

A school caretaker, Mr B, had debts totalling around £2,350. The lender encouraged him to take out a loan to re-finance the debt. But once the new loan had gone through, Mr B found he was being charged a very high rate of interest. And he was concerned to learn that the repayments would be much higher than he had expected.

After complaining unsuccessfully to the lender, Mr B came to us. He said the lender had assured him the new arrangement would be to his advantage. However, he was now committed to a level of repayment that he couldn't afford.

complaint resolved informally
We were satisfied that Mr B was financially unsophisticated, and had relied heavily on the lender's advice to take the loan. The interest rate, at 49%, was very high - much more than the highest rate he had been paying before. It was difficult to see how the re-finance could ever have been to Mr B's advantage, as the lender had claimed.

The lender could provide no evidence about how it had arrived at the interest rate it was charging on the new loan. And we thought the description in the loan agreement about what Mr B would have to pay in interest was misleading.

As soon as we explained to the lender our concerns about the serious shortcomings we had identified, the lender offered to write-off the debt. So the complaint was resolved informally, to Mr B's satisfaction.

57/4
customer complains after discovering the bank offered her neighbour a better rate of interest than she had obtained, for a similar loan

Mrs G arranged a personal loan through the local branch of her bank. A few weeks later she discovered that her neighbour, Miss D, had also just taken out a personal loan through that same branch. However, Miss D had been given a cheaper rate.

When the bank rejected Mrs G's complaint about this, she came to us.

complaint dismissed
Mrs G agreed that the rate on her loan had been clearly set out in the loan agreement, and that she had been happy with it at the time. But she said she felt she had been unfairly discriminated against now she knew the bank had charged her a higher rate than it had charged Miss D.

We accepted that, because of the duty of confidentiality the bank owed to Miss D, it was not possible for it to explain to Mrs G how it had arrived at the rate it offered Miss D (whose overall financial situation may well have presented a lower lending risk).

There was no evidence of any maladministration. Mrs G confirmed that the information the bank sent us about her loan application was correct. And the bank was able to satisfy us that it had applied its normal criteria when calculating the rate of interest it was prepared to offer.

So we explained to Mrs G that, in deciding the rate it would charge her, the bank had been legitimately exercising its commercial judgement. We do not get involved in such matters and (as our rules permit in such cases) we dismissed the complaint without considering its merits.

57/5
whether lender took unfair advantage of a business customer's situation

A clothing importer, Mr K, had already borrowed substantially from the bank. So when his main customer sought to re-negotiate its terms in a way that would have made the business unprofitable, Mr K decided to bring forward his retirement and wind up the business.

He planned to repay his debt to the bank by selling his main business asset. This was a warehouse - over which the bank already had a legal charge. To allow time for the sale of the warehouse, Mr K asked the bank if it would leave the debt outstanding, with interest to be rolled up, for a further period. The bank agreed, saying it would charge Mr K the same rate of interest as before, but would increase its monthly service fee. The bank told Mr K it would review the terms again after six months, if the sale had not gone through by then.

Six months later, with the warehouse still unsold, the bank again agreed to extend the arrangement. But it imposed a charge of 15% a year, pro-rata, on the average monthly balance, in place of the previous interest rate and monthly charge.

Three months after the warehouse was eventually sold and the balance had been repaid in full, Mr K complained to the bank. He said the changes it had made to the borrowing costs were unfair, as its own risk and exposure had not been materially affected by the delay in the sale.

The bank argued that, without its assistance, Mr K would have had to agree to a forced sale of the warehouse at a much reduced price. So it said he was better off overall, in spite of the much larger charge for credit.

complaint upheld in part
We looked at the bank's internal notes about its arrangements for the extended borrowing. Although the borrowing remained secured at all times, we accepted that - at the first review - the bank had been entitled to ask for the increased monthly fee. In return, it had allowed the borrowing to increase (without requiring any interim payments) in order to help facilitate a good sale.

Given Mr K's decision to wind down the business and sell off its assets, the essential nature of the lending had changed and become inherently more risky. So the changes made at the first review seemed fair to us, and appeared to provide a broadly equivalent benefit to both sides. We decided that those changes should stand.

However, we were concerned that the rate substituted at the second review did not appear justified on any proper commercial ground. It was clear from its internal notes that - by then - the bank knew the sale of the warehouse was assured. Another of its customers was buying it and had successfully completed all the business-borrowing formalities. So there was no real additional increase in risk, and the bank knew the debt was almost certain to be discharged very shortly.

We considered that - at the second review - the bank had taken unfair advantage of the situation. So we said it should refund the increased costs that it charged Mr K's business after that review.

57/6
whether lender took unfair advantage of a business customer's situation

Mr L was a partner in an interior design business that had a large 'on demand' borrowing facility with the bank.

The partnership had experienced financial difficulties and the size of its borrowing had been causing the bank concern for some time. The bank arranged a meeting with the partners, at which it asked them to repay the debt in full within six months, either by injecting funds from elsewhere or by re-financing to another bank.

Six months passed and the partnership had not been able to repay the debt. The bank agreed to renew their borrowing facility for a further two years at the same interest rate as before (2.5% above the base rate).

But at the end of that two-year period the bank told the partnership it wanted to increase the interest rate to 4% above base rate. Mr L argued that this increase was not in keeping with the duties the Banking Code imposed on the bank to take a "sympathetic and positive" approach to cases of financial hardship.

And he said that - by increasing the interest rate - the bank was unfairly forcing the partners to alter their "preferred approach" to the re-financing of their debts to an approach that "suited only the bank". When the bank rejected the complaint, Mr L came to us.

complaint rejected
We were satisfied that the bank had clearly communicated its requirement that the borrowing should be repaid in full.

We thought the bank had been very patient, in the circumstances. And we accepted that the bank faced an increased risk because of the reduced profitability of the partnership - together with its failure to take steps to re-pay or re-finance its borrowing. This justified the bank's review of the interest rate it charged.

The bank's internal notes showed it had made a proper commercial assessment before setting the new rate, taking into account all the relevant factors.

Mr L's response to our questions made it clear that, even though he and his partner knew the bank wanted the borrowing repaid as quickly as possible, they had made a conscious decision to proceed slowly with any re-financing or injection of cash.

We appreciated that, for various reasons, allowing matters to proceed slowly was more advantageous for the partners. They would have preferred their borrowing arrangements - and the interest they paid - to remain unchanged. But this did not mean the bank was obliged to agree with them.

We did not agree that the bank had taken any unfair advantage of the partnership's circumstances when it decided to increase the interest rate, and we rejected the complaint.

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ombudsman news issue 57 [PDF format]

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.